Filed electronically with the Securities and Exchange Commission
on June 23, 1999.
File No. 333-65661
File No. 811-09057
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. 2 / X /
And
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /___/
Amendment No. 3 / X /
---
KEMPER FUNDS TRUST
------------------
(Exact Name of Registrant as Specified in Charter)
222 South Riverside Plaza, Chicago, Illinois 60606
--------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (312) 537-7000
Philip J. Collora, Vice President and Secretary
-----------------------------------------------
Kemper Funds Trust
------------------
222 South Riverside Plaza
-------------------------
Chicago, Illinois 60606
-----------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
<TABLE>
<S> <C>
/___/ Immediately upon filing pursuant to paragraph ( b ) /___/ 60 days after filing pursuant to paragraph ( a ) ( 1 )
/___/ 75 days after filing pursuant to paragraph ( a ) ( 2 ) /___/ On ( date ) pursuant to paragraph ( b )
/ X / On ( September 7, 1999 ) pursuant to paragraph ( a ) ( 1 ) /___/ On (date) pursuant to paragraph (a)(2) of Rule 485.
/___/ If Appropriate, check the following box:
This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
</TABLE>
<PAGE>
LONG TERM
INVESTING
IN A
SHORT TERM
WORLD(SM)
September 7, 1999
Prospectus
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
5 Kemper Equity Funds
Kemper Large Company Growth Fund
Kemper Disciplined 1000 Growth Fund
Kemper Disciplined 1000 Value Fund
Kemper Research Fund
Kemper Small Cap Value+Growth Fund
The Securities and Exchange Commission has not approved
or disapproved these securities or passed upon
the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
THESE FUNDS ARE AVAILABLE ONLY TO SCUDDER KEMPER INVESTMENTS, INC. EMPLOYEES IN
THE FOLLOWING STATES: CALIFORNIA, CONNECTICUT, FLORIDA, ILLINOIS, KANSAS,
MASSACHUSETTS, MISSOURI, NEW HAMPSHIRE, NEW JERSEY AND NEW YORK.
<PAGE>
CONTENTS
ABOUT THE FUNDS...............................................................3
Kemper Large Company Growth Fund...........................................3
Kemper Disciplined 1000 Growth Fund........................................8
Kemper Disciplined 1000 Value Fund........................................13
Kemper Research Fund......................................................18
Kemper Small Cap Value+Growth Fund........................................24
Investment Manager......................................................31
ABOUT YOUR INVESTMENT........................................................36
Choosing a share class..................................................36
Special features........................................................37
Buying shares...........................................................39
Selling and exchanging shares...........................................43
Distributions and taxes.................................................46
Transaction information.................................................48
2
<PAGE>
ABOUT THE FUNDS
Kemper Large Company Growth Fund
Investment objective
Kemper Large Company Growth Fund seeks long-term growth of capital. Unless
otherwise indicated, the fund's investment objective and policies may be changed
without a vote of shareholders.
Main investment strategies
The fund pursues its objective by investing primarily in the equity securities
of seasoned, financially strong U.S. growth companies. Growth stocks are stocks
of companies with above-average earnings growth potential. The fund invests
primarily in equity securities issued by large-sized domestic companies (those
with a market value of $1 billion or more) that the fund's portfolio management
team believes offer above-average appreciation potential. The fund allocates its
investments among different industries and companies, and adjusts its portfolio
securities based on long-term investing considerations as opposed to short-term
trading considerations.
This fund invests primarily in common stocks of larger companies that, in the
opinion of the investment manager, have some or all of the following attributes:
o a record of above-average growth relative to the overall market (as
defined by the Standard & Poor's 500 Composite Price Index, a commonly
recognized unmanaged measure of 500 widely held U.S. common stocks
listed on the New York Stock Exchange, Inc., the American Stock
Exchange and the Nasdaq National Market System) with prospects for
above-average growth in earnings, cash flow or assets in the future
o important business franchises, leading products or dominant marketing
and distribution systems
o attractive prices relative to potential growth in earnings, cash flow
or assets
o sound finances, high credit standings and profitability
o experienced, motivated management
3
<PAGE>
Kemper Large Company Growth Fund
The fund's investment manager utilizes a combination of qualitative and
quantitative research techniques to identify companies that have above-average
quality and growth characteristics and that the investment manager considers to
be selling at attractive market valuations. The investment manager also utilizes
fundamental research to evaluate various aspects of a company's performance,
with a particular focus on consistency of results, long-term growth prospects
and financial strength.
The investment manager utilizes quantitative models to help determine which
growth companies offer the best values at a given point in time.
When assessing financial quality, the investment manager weighs four principal
elements of business risk:
o the investment manager's assessment of the company's balance sheet
o the accounting practices a company follows
o the volatility of a company's earnings over time
o the vulnerability of earnings to changes in external factors, such as
the general economy, the competitive environment, governmental action
and technological change.
Under normal market conditions, the fund invests at least 65% of its total
assets in the equity securities of large U.S. growth companies, i.e. those with
a market capitalization of $1 billion or more.
The fund typically sells a stock when the company's earnings growth potential
has become less favorable, the capitalization of the issuer ceases to qualify
the issuer's securities as an investment for the fund, if the stock fails to
meet the portfolio management team's expectations, or due to changes in the
market or investment environment.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, utilize other
investments and investment techniques that may impact fund performance,
including, but not limited to, options, futures and other derivatives (financial
instruments that derive their value from other securities or commodities, or
that are based on indices).
4
<PAGE>
Kemper Large Company Growth Fund
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the fund may invest without limit in cash and
cash equivalents. In such a case, the fund would not be pursuing, and may not
achieve, its objective.
Main risks
The primary factors affecting the fund's performance are stock market movements
and the investment strategies used by the portfolio management team.
An investment in common stock of a company represents a proportionate ownership
interest in that company. Therefore, the fund participates in the success of
failure of any company in which it holds stock. The fund's returns and net asset
value will go up and down. Stock market movements will affect the fund's share
prices on a daily basis. Declines are possible both in the overall stock market
and in the types of securities held by the fund.
The portfolio management team's skill in choosing appropriate investments for
the fund will determine in large part the fund's ability to achieve its
investment objective. In addition, the portfolio management team's choice of
market sectors or specific investments may not perform as well as expected.
The fund expects to trade securities actively. This strategy could increase
transaction costs and reduce performance. In addition, shareholders may incur
taxes on any realized capital gains.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
5
<PAGE>
Kemper Large Company Growth Fund
Fee and Expense Information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the "Buying shares" and "Choosing a
share class - Special features" sections of this prospectus.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Shareholder fees (Fees paid directly from your investment):
- --------------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as % 5.75% None None
of offering price)
- --------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of None(1) 4%(2) 1%(2)
redemption proceeds)
- --------------------------------------------------------------------------------------
Maximum Sales Charge (Load) on Reinvested None None None
Dividends/Distibutions
- --------------------------------------------------------------------------------------
Redemption Fee (as % of amount redeemed, if applicable) None None None
- --------------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------------
</TABLE>
(1) 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.
(2) The contingent deferred sales charges on Class B shares are as follows: 4%
in the first year, 3% in the second and third year, 2% in the fourth and
fifth year, 1% in the sixth year and eliminated thereafter. The contingent
deferred sales charge on Class C shares is 1% during the first year and
eliminated thereafter.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Annual fund operating expenses (Expenses that are deducted from fund assets):
- --------------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fee 0.70% 0.70% 0.70%
- --------------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------------
Other Expenses (1) 1.40% 1.57% 1.57%
----- ----- -----
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses (2) 2.10% 3.02% 3.02%
- --------------------------------------------------------------------------------------
</TABLE>
(1) Other expenses are based on estimated amounts for the fiscal year ending
August 31, 1999. Until further notice, an administrative services fee
("ASF"), which is reflected above in "Other Expenses", is currently
voluntarily waived.
6
<PAGE>
(2) After waiver of the ASF, total annual fund operating expenses for Class A,
Class B, and Class C would be 1.85%, 2.77%, and 2.77%, respectively.
Kemper Large Company Growth Fund
Example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fees and expenses if you sold shares Fees and expenses if you did not sell your
after: shares:
Class A Class B Class C Class A Class B Class C
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year $776 $704 $405 1 Year $776 $305 $305
- -------------------------------------------------------------------------------------
3 Years $1,195 $1,233 $933 3 Years $1,089 $933 $933
- -------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Kemper Disciplined 1000 Growth Fund
Investment objective
Kemper Disciplined 1000 Growth Fund seeks to provide long-term growth of capital
through investment in selected stocks of the Russell 1000(R) Growth Index.
Unless otherwise indicated, the fund's investment objective and policies may be
changed without a vote of shareholders.
Main investment strategies
The fund pursues its objective by investing at least 80% of its total assets in
the stocks of companies in the Russell 1000 Growth Index, an unmanaged index of
growth-oriented large company stocks.
The fund's portfolio management team will use a multi-step process to select
portfolio securities from its benchmark index. This process includes the
following:
o Ranking - using a proprietary computer model, the stocks of companies
in the Russell 1000 Growth Index are evaluated and ranked based on
their growth prospects, relative valuation and price momentum.
o Selection - the 20% lowest ranking stocks in the index will generally
be excluded from the portfolio.
o Portfolio Construction - the remaining stocks will be weighted to
ensure portfolio diversification in an attempt to create a portfolio
that is similar to the Russell 1000 Growth Index. Factors to be
considered in the allocation of the remaining stocks include: level of
exposure to specific industries, company specific financial data, price
volatility, and market capitalization.
o Ongoing Active Management - the fund's portfolio will be rebalanced on
an ongoing basis as the rankings of the stocks in the Russell 1000
Growth Index change over time.
The fund's sell criteria is based on an analysis of expected return and expected
risk. Securities which fall within the lowest 20% of the fund's benchmark index
will generally be sold unless the portfolio management team concludes that
retaining the security is in the best interest of the fund (i.e., the security's
expected return and risk characteristics warrant its inclusion).
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
8
<PAGE>
Kemper Disciplined 1000 Growth Fund
Other investments
The fund may, but is not required to, invest up to 20% of its total assets in
investment grade debt securities.
To a more limited extent, the fund may, but is not required to, utilize other
investments and investment techniques that may impact fund performance,
including, but not limited to, options, futures and other derivatives (financial
instruments that derive their value from other securities or commodities, or
that are based on indices).
Risk management strategies
The fund manages risk by diversifying its assets widely among industries and
companies, and using disciplined security selection.
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the fund may invest without limit in cash and
cash equivalents, U.S. Government securities, money market instruments and high
quality debt securities without equity features. In such a case, the fund would
not be pursuing, and may not achieve, its objective.
Main risks
The primary factors affecting the fund's performance are stock market movements
and the investment strategies used by the portfolio management team.
An investment in common stock of a company represents a proportionate ownership
interest in that company. Therefore, the fund participates in the success or
failure of any company in which it holds stock. The fund's returns and net asset
value will go up and down. Stock market movements will affect the fund's share
prices on a daily basis. Declines are possible both in the overall stock market
and in the types of securities held by the fund.
The portfolio management team's skill in choosing appropriate investments for
the fund will determine in large part the fund's ability to achieve its
investment objective. In addition, the portfolio management team's choice of
market sectors or specific investments may not perform as well as expected.
9
<PAGE>
Kemper Disciplined 1000 Growth Fund
While the fund invests primarily in the selected stocks of the companies that
are included in its benchmark index, the fund is not an index fund, and there is
no assurance that investment results of the fund will correspond to the price
and yield performance of its index.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
10
<PAGE>
Kemper Disciplined 1000 Growth Fund
Fee and Expense Information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the "Buying shares" and "Choosing a
share class - Special features" sections of this prospectus.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Shareholder fees (Fees paid directly from your investment):
- --------------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as % 5.75% None None
of offering price)
- --------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of None(1) 4%(2) 1%(2)
redemption proceeds)
- --------------------------------------------------------------------------------------
Maximum Sales Charge (Load) on Reinvested None None None
Dividends/Distibutions
- --------------------------------------------------------------------------------------
Redemption Fee (as % of amount redeemed, if applicable) None None None
- --------------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------------
</TABLE>
(1) 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.
(2) The contingent deferred sales charges on Class B shares are as follows: 4%
in the first year, 3% in the second and third year, 2% in the fourth and
fifth year, 1% in the sixth year and eliminated thereafter. The contingent
deferred sales charge on Class C shares is 1% during the first year and
eliminated thereafter.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Annual fund operating expenses (Expenses that are deducted from fund assets):
- --------------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fee 0.__% 0.__% 0.__%
- --------------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------------
Other Expenses (1) ___% ____% ____%
---- ----- -----
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses (2) ___% ___% ___%
- --------------------------------------------------------------------------------------
</TABLE>
(1) Other expenses are based on estimated amounts for the fiscal year ending
August 31, 2000. Until further notice, an administrative services fee
("ASF"), which is reflected above in "Other Expenses", is currently
voluntarily waived.
11
<PAGE>
(2) After waiver of the ASF, total annual fund operating expenses for Class A,
Class B, and Class C would be _____%, ____%, and ____%, respectively.
Kemper Disciplined 1000 Growth Fund
Example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fees and expenses if you sold shares Fees and expenses if you did not sell your
after: shares:
Class A Class B Class C Class A Class B Class C
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year $ $ $ 1 Year $ $ $
- -------------------------------------------------------------------------------------
3 Years $ $ $ 3 Years $ $ $
- -------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Kemper Disciplined 1000 Value Fund
Investment objective
Kemper Disciplined 1000 Value Fund seeks to provide long-term growth of capital
through investment in selected stocks of the Russell 1000(R) Value Index. Unless
otherwise indicated, the fund's investment objective and policies may be changed
without a vote of shareholders.
Main investment strategies
The fund pursues its objective by investing at least 80% of its total assets in
the stocks of companies in the Russell 1000 Value Index, an unmanaged index of
[securities with less than average growth orientation].
The fund's portfolio management team will use a multi-step process to select
portfolio securities from its benchmark index. This process includes the
following:
o Ranking - using a proprietary computer model, the stocks of
companies in the Russell 1000 Value Index are evaluated and
ranked based on their growth prospects, relative valuation and
price momentum.
o Selection - the 20% lowest ranking stocks in the index will
generally be excluded from the portfolio.
o Portfolio Construction - the remaining stocks will be weighted
to ensure portfolio diversification in an attempt to create a
portfolio that is similar to the Russell 1000 Value Index.
Factors to be considered in the allocation of the remaining
stocks include: level of exposure to specific industries,
company specific financial data, price volatility, and market
capitalization.
o Ongoing Active Management - the fund's portfolio will be
rebalanced on an ongoing basis as the rankings of the stocks
in the Russell 1000 Value Index change over time.
The fund's sell criteria is based on an analysis of expected return and expected
risk. Securities which fall within the lowest 20% of the fund's benchmark index
will generally be sold unless the portfolio management team concludes that
retaining the security is in the best interest of the fund (i.e., the security's
expected return and risk characteristics warrant its inclusion).
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
13
<PAGE>
Kemper Disciplined 1000 Value Fund
Other investments
The fund may, but is not required to, invest up to 20% of its total assets in
investment grade debt securities.
To a more limited extent, the fund may, but is not required to, utilize other
investments and investment techniques that may impact fund performance,
including, but not limited to, options, futures and other derivatives (financial
instruments that derive their value from other securities or commodities, or
that are based on indices).
Risk management strategies
The fund manages risk by diversifying its assets widely among industries and
companies, and using disciplined security selection.
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the fund may invest without limit in cash and
cash equivalents, U.S. Government securities, money market instruments and high
quality debt securities without equity features. In such a case, the fund would
not be pursuing, and may not achieve, its objective.
Main risks
The primary factors affecting the fund's performance are stock market movements
and the investment strategies used by the portfolio management team.
An investment in common stock of a company represents a proportionate ownership
interest in that company. Therefore, the fund participates in the success or
failure of any company in which it holds stock. The fund's returns and net asset
value will go up and down. Stock market movements will affect the fund's share
prices on a daily basis. Declines are possible both in the overall stock market
and in the types of securities held by the fund.
The portfolio management team's skill in choosing appropriate investments for
the fund will determine in large part the fund's ability to achieve its
investment objective. In addition, the portfolio management team's choice of
market sectors or specific investments may not perform as well as expected.
14
<PAGE>
Kemper Disciplined 1000 Value Fund
While the fund invests primarily in the selected stocks of the companies that
are included in its benchmark index, the fund is not an index fund, and there is
no assurance that investment results of the fund will correspond to the price
and yield performance of its index.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
15
<PAGE>
Kemper Disciplined 1000 Value Fund
Fee and Expense Information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the "Buying shares" and "Choosing a
share class - Special features" sections of this prospectus.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Shareholder fees (Fees paid directly from your investment):
--------------------------------------------------------------------------------------
Class A Class B Class C
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as % 5.75% None None
of offering price)
-------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of None(1) 4%(2) 1%(2)
redemption proceeds)
-------------------------------------------------------------------------------------
Maximum Sales Charge (Load) on Reinvested None None None
Dividends/Distibutions
-------------------------------------------------------------------------------------
Redemption Fee (as % of amount redeemed, if applicable) None None None
-------------------------------------------------------------------------------------
Exchange Fee None None None
-------------------------------------------------------------------------------------
</TABLE>
(1) 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.
(2) The contingent deferred sales charges on Class B shares are as follows: 4%
in the first year, 3% in the second and third year, 2% in the fourth and
fifth year, 1% in the sixth year and eliminated thereafter. The contingent
deferred sales charge on Class C shares is 1% during the first year and
eliminated thereafter.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Annual fund operating expenses (Expenses that are deducted from fund assets):
-------------------------------------------------------------------------------------
Class A Class B Class C
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fee 0.__% 0.__% 0.__%
-------------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
-------------------------------------------------------------------------------------
Other Expenses (1) ___% ____% ____%
-------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses (2) ___% ___% ___%
-------------------------------------------------------------------------------------
</TABLE>
(1) Other expenses are based on estimated amounts for the fiscal year ending
August 31, 2000. Until further notice, an administrative services fee
("ASF"), which is reflected above in "Other Expenses", is currently
voluntarily waived.
16
<PAGE>
(2) After waiver of the ASF, total annual fund operating expenses for Class A,
Class B, and Class C would be _____%, ____%, and ____%, respectively.
Kemper Disciplined 1000 Value Fund
Example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fees and expenses if you sold shares Fees and expenses if you did not sell your
after: shares:
Class A Class B Class C Class A Class B Class C
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year $ $ $ 1 Year $ $ $
- -------------------------------------------------------------------------------------
3 Years $ $ $ 3 Years $ $ $
- -------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Kemper Research Fund
Investment objective
Kemper Research Fund seeks long-term growth of capital. Unless otherwise
indicated, the fund's investment objective and policies may be changed without a
vote of shareholders.
Main investment strategies
The fund pursues its objective by investing primarily in a diversified portfolio
of common stocks. The investment manager generally diversifies among industry
sectors (i.e. energy, technology, financial, etc.) according to the weightings
of U.S. market benchmarks, such as the Standard & Poor's 500 Composite Price
Index or the Morgan Stanley Capital International Index. The investment manager
typically focuses on the common stocks of large U.S. growth companies, i.e.
those with market capitalizations of $1 billion or more. Growth companies are
those with above-average earnings growth potential.
The fund focuses on the top research recommendations of the investment manager.
Using in-depth, independent research, the investment manager assigns proprietary
ratings to securities, which the investment manager then selects for the fund's
portfolio based on sector weightings and industry and market forecasts.
The fund invests primarily in a diversified portfolio of common stocks.
Under normal market conditions, the fund invests at least 65% of its total
assets in common stocks of large U.S. growth companies, i.e. those with market
capitalizations of $1 billion or more.
Applying in-depth fundamental research, the fund is managed with a view to
achieving a high rate of total return on investors' capital primarily through
appreciation of the fund's common stock holdings and, to a lesser extent,
through dividend and interest income.
The fund leverages the investment manager's extensive resources by focusing on
the top stock recommendations identified by the investment manager's large staff
of industry research analysts and other investment specialists. While other
growth funds (i.e. funds that invest in companies with above-average earnings
growth potential) hold these securities as well, this fund focuses particularly
on their top recommendations across all sectors and investment disciplines.
18
<PAGE>
The fund typically sells a stock if its fundamental characteristics change, if
the stock fails to meet the portfolio management team's expectations, or due to
changes in the market or investment environment.
KEMPER RESEARCH FUND
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, utilize other
investments and investment techniques that may impact fund performance,
including, but not limited to, options, futures and other derivatives (financial
instruments that derive their value from other securities or commodities, or
that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the fund may invest without limit in cash and
cash equivalents. In such a case, the fund would not be pursuing, and may not
achieve, its objective.
Main risks
The primary factors affecting the fund's performance are stock market movements
and the investment strategies used by the portfolio management team.
An investment in common stock of a company represents a proportionate ownership
interest in that company. Therefore, the fund participates in the success or
failure of any company in which it holds stock. The fund's returns and net asset
value will go up and down. Stock market movements will affect the fund's share
prices on a daily basis. Declines are possible both in the overall stock market
and in the types of securities held by the fund.
The portfolio management team's skill in choosing appropriate investments for
the fund will determine in large part the fund's ability to achieve its
investment objective. In addition, the portfolio management team's choice of
market sectors or specific investments may not perform as well as expected.
19
<PAGE>
The fund expects to trade securities actively. This strategy could increase
transaction costs and reduce performance. In addition, shareholders may incur
taxes on any realized capital gains.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
20
<PAGE>
KEMPER RESEARCH FUND
Fee and Expense Information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the "Buying shares" and "Choosing a
share class - Special features" sections of this prospectus.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Shareholder fees (Fees paid directly from your investment):
-------------------------------------------------------------------------------------
Class A Class B Class C
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as % 5.75% None None
of offering price)
-------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of None(1) 4%(2) 1%(2)
redemption proceeds)
------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Reinvested None None None
Dividends/Distributions
-------------------------------------------------------------------------------------
Redemption Fee (as % of amount redeemed, if applicable) None None None
-------------------------------------------------------------------------------------
Exchange Fee None None None
-------------------------------------------------------------------------------------
</TABLE>
(1) 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.
(2) The contingent deferred sales charges on Class B shares are as follows: 4%
in the first year, 3% in the second and third year, 2% in the fourth and
fifth year, and 1% in the sixth year. The contingent deferred sales charge
on Class C shares is 1% during the first year.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Annual fund operating expenses (Expenses that are deducted from fund assets):
-------------------------------------------------------------------------------------
Class A Class B Class C
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fee 0.70% 0.70% 0.70%
-------------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
-------------------------------------------------------------------------------------
Other Expenses (1) 1.03% 1.22% 1.22%
----- ----- -----
-------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses (2) 1.73% 2.67% 2.67%
-------------------------------------------------------------------------------------
</TABLE>
(1) Other expenses are based on estimated amounts for the fiscal year ending
August 31, 1999. Until further notice, an administrative services fee
("ASF"), which is reflected above in "Other Expenses", is currently
voluntarily waived.
21
<PAGE>
(2) After waiver of the ASF, total annual fund operating expenses for Class A,
Class B, and Class C would be 1.48%, 2.42%, and 2.42%, respectively.
KEMPER RESEARCH FUND
Example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Fees and expenses if you sold shares Fees and expenses if you did not sell your
after: shares:
Class A Class B Class C Class A Class B Class C
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year $741 $670 $370 1 Year $741 $270 $270
- ----------------------------------------------------------------------------------------
3 Years $1,089 $1,129 $829 3 Years $1,089 $829 $829
- ----------------------------------------------------------------------------------------
</TABLE>
PRIOR PERFORMANCE OF THE PORTFOLIO MANAGER
Provided below are historical performance figures reflecting the total returns
of the Research Portfolio, a private account managed by Elizabeth Smith that has
investment objectives, policies and strategies identical to those of the Kemper
Research Fund. The data presented are unaudited and represent the performance of
the Research Portfolio while Ms. Smith was employed by the investment manager
(see Investment Manager and Portfolio Management on page __). At the investment
manager, Elizabeth Smith and William Truscott share in the role of coordinating
the management of the Kemper Research Fund. The Research Portfolio information
is provided merely to illustrate the past performance of the portfolio manager
in managing identical accounts, as measured against a specified market index,
and does not represent the performance of the Kemper Research Fund, which does
not yet have a substantial performance record of its own. Investors should not
consider this performance data as an indication of future performance of the
Kemper Research Fund, the portfolio managers or the investment manager.
22
<PAGE>
KEMPER RESEARCH FUND
The performance information for the Research Portfolio has not been adjusted to
reflect the fees and expenses to which the Kemper Research Fund is subject, and
would have been lower had such adjustments been made. In addition, the Research
Portfolio is not subject to the diversification requirements, specific tax
restrictions and investment limitations imposed on the Fund by the Investment
Company Act of 1940 and Subchapter M of the Internal Revenue Code. Consequently,
the performance results for Research Portfolio could have been lower than what
is shown had the Research Portfolio been regulated as a registered investment
company under the federal securities laws.
The following table summarizes the calculation of the annualized total return
for the Research Portfolio compared with the performance of the S&P 500 Index
for the periods indicated.
Annualized Total Return as of 6/30/99
- -------------------------------------
One Three Since
Year Years Inception
8/1/95
Research Portfolio ^(1) ---% ---% ---%
S & P Index ^(2) ---% ---% ---%
^(1) The Research Portfolio is a private account with investment objectives,
policies and strategies identical to those to be employed in managing the Kemper
Research Fund. The data shown consist of the annualized total return (net of all
fees and expenses) for the years 1995 through June 30, 1999 of Research
Portfolio. Ms. Smith coordinates the management of the Research Portfolio for
the Investment Manager. The data for 1995 through 1999 are not, and should not
be construed as, the performance data of the Investment Manager.
^(2) The S & P 500 Index is an unmanaged index of common stocks that includes
common stocks of 500 companies from several industrial sectors most of which are
listed on the New York Stock Exchange representing a significant portion of the
market value of all common stocks publicly traded in the United States. The
Index is adjusted to reflect the reinvestment of dividends, but does not reflect
fees, brokerage commissions, or other expenses of investing.
23
<PAGE>
KEMPER SMALL CAP VALUE+GROWTH FUND
Investment objectives
Kemper Small Cap Value+Growth Fund seeks long-term capital appreciation. Unless
otherwise indicated, the fund's investment objective and policies may be changed
without a vote of shareholders.
Main investment strategies
The fund pursues its objective by investing in a diversified portfolio of
domestic small company value and growth stocks. Value stocks are stocks which
tend to have low price to earnings ratios. The fund invests in those value
stocks which the investment manager believes are undervalued in relation to
their earnings potential. Growth stocks are stocks of companies with
above-average earnings growth potential. Growth stocks in which the fund invests
tend to have high price to earnings ratios but have an earnings potential which
the investment manager believes more than justifies the price.
In considering whether or not to invest in a value or growth stock, the
investment manager considers a number of primarily quantitative factors,
including:
o the company's prospects for growth in sales and earnings in the future
o the company's current prices relative to sales, earnings, cash flow or
assets
o the company's financial strength
The fund invests principally in a diversified portfolio of domestic small
company value and small company growth stocks. The investment manager utilizes
quantitative research to identify small companies with above-average return
potential and to determine the allocation between value and growth stocks in the
fund's portfolio. The quantitative research focuses on valuations, earnings
trends, future earnings potential, and a company's financial strength in
determining which securities may be attractive investments. Under normal
circumstances, no more than 75% of the portfolio will be invested in either of
small company value stocks or small company growth stocks. Generally, small
companies are those with market capitalizations of less than $1.5 billion.
24
<PAGE>
Kemper Small Cap Value+GROWTH Fund
Under normal market conditions, the fund invests at least 65% of its total
assets in securities of companies that are similar in size to those comprising
the Russell 2000 Index, an unmanaged capitalization-weighted measure of
approximately 2000 small U.S. stocks. The fund sells securities of companies
that have grown in market capitalization above the maximum of the Russell 2000
Index, as necessary, to keep focused on smaller companies.
The fund typically sells a security if it believes the security has become
unattractive on a valuation basis, earnings trends have deteriorated, the
outlook for future earnings is uncertain, the issuers have grown beyond the
capitalization size in which the fund invests, or the security has not met the
portfolio management team's expectations.
Value stocks in which the fund invests tend to have low prices relative to
sales, earnings, cash flow or assets and, in the opinion of the investment
manager, are undervalued relative to their earnings potential. Securities 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, or actual or anticipated unfavorable
developments affecting the company. Growth stocks in which the fund invests are
those which the investment manager believes have sustainable, above-average
earnings growth potential.
The fund's principal investments are common stocks traded on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market System.
The fund expects to trade securities actively. This strategy could increase
transaction costs and reduce performance. In addition, shareholders may incur
taxes on any realized capital gains.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, utilize other
investments and investment techniques that may impact fund performance,
including, but not limited to, options, futures and other derivatives (financial
instruments that derive their value from other securities or commodities, or
that are based on indices).
25
<PAGE>
KEMPER SMALL CAP VALUE+GROWTH FUND
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the fund may invest without limit in cash and
cash equivalents. In such a case, the fund would not be pursuing, and may not
achieve, its objective.
Main risks
The primary factor affecting the fund's performance is stock market movements.
Small companies can be especially sensitive to market shifts and isolated
business difficulties. This is because small companies often serve niche markets
and have limited product lines. They also generally lack cash reserves and
access to capital that allow larger companies to weather difficult financial
times.
Small companies as a group, or individual small companies, may not perform as
well as expected. Securities of small companies are often thinly traded and
could be harder to value or sell at a fair price. If certain sectors or
investments don't perform as the portfolio management team expects, the fund
could underperform other small company stock mutual funds or lose money.
Share prices of growth funds fluctuate with changes in the stock market. This
characteristic makes growth funds most suitable for the long-term portion of
your portfolio. Investing in value stocks involves the subjective determination
that a stock is undervalued; the market may not agree, and a stock's price may
not rise to what the portfolio management team believes is its full value. It
may even decrease in value. The fund's policy of investing in both value and
growth stocks of small capitalization companies may lead it to underperform in a
market that particularly favors value, growth or large capitalization stocks.
An investment in common stock of a company represents a proportionate ownership
interest in that company. Therefore, the fund participates in the success or
failure of any company in which it holds stock. The fund's returns and net asset
value will go up and down. Stock market movements will affect the fund's share
prices on a daily basis. Declines are possible both in the overall stock market
and in the types of securities held by the fund.
Since many of the securities in the fund may be considered speculative in nature
by traditional investment standards, substantially greater than average market
volatility and investment risk may be involved.
26
<PAGE>
The fund expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
27
<PAGE>
KEMPER SMALL CAP VALUE+GROWTH FUND
Fee and Expense Information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the "Buying shares" and "Choosing a
share class - Special features" sections of this prospectus.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Shareholder fees (Fees paid directly from your investment):
-------------------------------------------------------------------------------------
Class A Class B Class C
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as % 5.75% None None
of offering price)
-------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of None(1) 4%(2) 1%(2)
redemption proceeds)
------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Reinvested None None None
Dividends/Distributions
-------------------------------------------------------------------------------------
Redemption Fee (as % of amount redeemed, if applicable) None None None
-------------------------------------------------------------------------------------
Exchange Fee None None None
-------------------------------------------------------------------------------------
</TABLE>
(1) 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 .50% during the second year.
(2) The contingent deferred sales charges on Class B shares are as follows: 4%
in the first year, 3% in the second and third year, 2% in the fourth and
fifth year, and 1% in the sixth year. The contingent deferred sales charge
on Class C shares is 1% during the first year.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Annual fund operating expenses (Expenses that are deducted from fund assets):
-------------------------------------------------------------------------------------
Class A Class B Class C
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fee (1) 0.75% 0.75% 0.75%
-------------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
------------------------------------------------------------------------------------
Other Expenses (2) 2.48% 2.62% 2.62%
----- ----- -----
-------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses (3) 3.23% 4.12% 4.12%
-------------------------------------------------------------------------------------
</TABLE>
(1) Until further notice, the Adviser has voluntarily agreed to waive 0.35% of
its Investment Management Fee. The fees reflected above do not reflect this
waiver.
(2) Other expenses are based on estimated amounts for the fiscal year ending
August 31, 1999. Until further notice, Scudder Kemper Investments, Inc.,
has agreed to temporarily waive 1.00% of other expenses, and an
administrative services fee ("ASF"), which is reflected above in "Other
Expenses", is currently voluntarily waived. The fees reflected above do not
reflect either waiver.
28
<PAGE>
(3) After waiver of the management fee, the ASF and other expenses, total
annual fund operating expenses for Class A, Class B, and Class C would be
1.63%, 2.52%, and 2.52%, respectively.
29
<PAGE>
KEMPER SMALL CAP VALUE+GROWTH FUND
Example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Fees and expenses if you sold shares Fees and expenses if you did not sell your
after: shares:
Class A Class B Class C Class A Class B Class C
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year $882 $814 $513 1 Year $882 $414 $414
- ----------------------------------------------------------------------------------------
3 Years $1,513 $1,552 $1,252 3 Years $1,513 $1,252 $1,252
- ----------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
Investment Manager
Each fund retains the investment management firm of Scudder Kemper Investments,
Inc., 345 Park Avenue, New York, New York, to manage its daily investment and
business affairs subject to the policies established by the funds' Board.
Scudder Kemper Investments, Inc. actively manages your investment in the funds.
Professional management can be an important advantage for investors who do not
have the time or expertise to invest directly in individual securities. Scudder
Kemper Investments, Inc. is one of the largest and most experienced investment
management organizations worldwide managing more than $280 billion in assets
globally for mutual fund investors, retirement and pension plans, institutional
and corporate clients, and private family and individual accounts.
Kemper Research Fund and Kemper Large Company Growth Fund each pays the
investment manager an annual fee as a percentage of the fund's average daily net
assets for providing investment management services, as described in the
following table:
Applicable Assets ($) Annual Fee Rate
--------------------- ---------------
0 - 250,000,000 0.70%
250,000,000 - 1,000,000,000 0.67%
1,000,000,000 - 2,500,000,000 0.65%
More than 2,500,000,000 0.63%
Kemper Small Cap Value+Growth Fund pays the investment manager an annual fee as
a percentage of the fund's average daily net assets for providing investment
management services, as described in the following table:
Applicable Assets ($) Annual Fee Rate
--------------------- ---------------
0 - 250,000,000 0.75%
250,000,000 - 1,000,000,000 0.72%
1,000,000,000 - 2,500,000,000 0.70%
More than 2,500,000,000 0.68%
[INSERT MGT FEE INFO FOR 2 NEW FUNDS]
31
<PAGE>
Portfolio management
The following investment professionals are associated with the funds as
indicated:
Kemper Large Company Growth Fund
Name & Title Joined the Fund Background
- --------------------------------------------------------------------------------
Valerie Malter, December 1998 Joined Scudder Kemper Investments in 1995
Lead Manager as Product Leader of Quality Growth
Equity. From 1993 to 1995, Ms. Malter
served as a portfolio manager for
Chancellor Capital Management. Ms. Malter,
who began her investment career in 1985,
also has experience as an analyst and
portfolio manager covering a wide range of
industries and, more recently, the stocks
of companies with medium- to large-sized
market capitalizations.
George P. Fraise, December 1998 Joined Scudder Kemper Investments in 1997.
Portfolio Manager Between 1993 and 1997, Mr. Fraise served as
an analyst for Smith Barney and Chancellor
Capital Management. Mr. Fraise began his
investment career in 1987 and has
experience as an equity analyst covering a
broad range of industries, most recently
including capital goods and electrical
equipment.
Kemper Disciplined 1000 Growth Fund
Name & Title Joined the Fund Background
- --------------------------------------------------------------------------------
Rob Tymoczko, August 1999 Joined Scudder Kemper Investments in 1997
Lead Manager as a quantitative research analyst. Since
1998, Mr. Tymoczko has been working as a
portfolio manager for the Adviser. From
1994 to 1995, Mr. Tymoczko worked as an
economic consultant. From 1995 until he
joined the Adviser, Mr. Tymoczko attended
business school. He began his investment
career in 1992.
Philip Fortuna, August 1999 Joined Scudder Kemper Investments in 1986
Portfolio Manager as a manager of institutional equity
accounts, and served as director of
quantitative services from 1987 to 1993
and director of investment operations
from 1993 to 1995. From 1995 to 1997 Mr.
Fortuna was involved in global planning
and new product development in
32
<PAGE>
addition to his portfolio management
responsibilities. Since 1998 Mr. Fortuna has
been director of the Adviser's quantitative
group, responsible for the firm's
quantitative research and all quantitative
products.
Kemper Disciplined 1000 Value Fund
Name & Title Joined the Fund Background
- --------------------------------------------------------------------------------
Rob Tymoczko, August 1999 Joined Scudder Kemper Investments in 1997
Lead Manager as a quantitative research analyst. Since
1998, Mr. Tymoczko has been working as a
portfolio manager for the Adviser. From
1994 to 1995, Mr. Tymoczko worked as an
economic consultant. From 1995 until he
joined the Adviser, Mr. Tymoczko attended
business school. He began his investment
career in 1992.
Philip Fortuna, August 1999 Joined Scudder Kemper Investments in 1986
Portfolio Manager as a manager of institutional equity
accounts, and served as director of
quantitative services from 1987 to 1993
and director of investment operations
from 1993 to 1995. From 1995 to 1997 Mr.
Fortuna was involved in global planning
and new product development in addition
to his portfolio management
responsibilities. Since 1998 Mr. Fortuna
has been director of the Adviser's
quantitative group, responsible for the
firm's quantitative research and all
quantitative products.
33
<PAGE>
Kemper Research Fund
Name & Title Joined the Fund Background
- --------------------------------------------------------------------------------
Elizabeth D. Smith, December 1998 Joined Scudder Kemper Investments in 1973.
Co-Lead Manager Ms. Smith has been the product leader for
the investment manager's Research
Portfolio product since 1995 and has
served as the sector specialist for
electrical equipment, machinery and
multi-industry firms since 1993. Ms.
Smith, who began her investment career in
1969, also has experience as a research
analyst covering computers, household
products, software, aerospace and capital
goods companies.
William Truscott, December 1998 Joined Scudder Kemper Investments in 1992.
Co-Lead Manager Between 1993 and 1996, Mr. Truscott served
as a portfolio manager and research analyst
focusing on Latin American countries and
securities, and, since 1996, he has served
as a portfolio manager and as the director
of Global Equity Research. Mr. Truscott
began his investment career in 1983.
- --------------------------------------------------------------------------------
Kemper Small Cap Value+Growth Fund
Name & Title Joined the Fund Responsibilities & Background
- --------------------------------------------------------------------------------
James M. Eysenbach, December 1998 Joined Scudder Kemper Investments in 1991.
Lead Manager Mr. Eysenbach, who began his investment
career in 1984, has more than 14 years
investment management experience,
specializing in quantitative research,
analysis and portfolio management. Mr.
Eysenbach also served as Director of
Quantitative Services from 1993 to 1997.
Calvin Young, December 1998 Joined Scudder Kemper Investments in 1990.
Portfolio Manager From 1993 to 1998, Mr. Young served in the
Quantitative Services Group and as a
Quantitative Analyst. Mr. Young, who began
his investment career in 1988, has
experience providing analytical support to
the investment manager's equity products,
and his investment industry experience has
focused on small companies.
- --------------------------------------------------------------------------------
34
<PAGE>
Year 2000 Readiness
Like other mutual funds and financial and business organizations worldwide, the
funds could be adversely affected if computer systems on which a fund relies,
which primarily include those used by the investment manager, its affiliates or
other service providers, are unable to correctly process date-related
information on and after January 1, 2000. This risk is commonly called the Year
2000 Issue. Failure to successfully address the Year 2000 Issue could result in
interruptions to and other material adverse effects on the funds' business and
operations. The investment manager has commenced a review of the Year 2000 Issue
as it may affect the funds and is taking steps it believes are reasonably
designed to address the Year 2000 Issue, although there can be no assurances
that these steps will be sufficient. In addition, there can be no assurances
that the Year 2000 Issue will not have an adverse effect on the companies whose
securities are held by a fund or on global markets or economies generally.
35
<PAGE>
ABOUT YOUR INVESTMENT
These funds are available only to Scudder Kemper Investments, Inc. employees in
the following states: California, Connecticut, Florida, Illinois, Kansas,
Massachusetts, Missouri, New Hampshire, New Jersey and New York. It is
contemplated that, in the future, a fund's shares may be sold to the public, in
which case the inflow of additional capital may make it more difficult for the
fund's management to implement the fund's investment strategies and for the fund
to maintain its level of performance.
Choosing a share class
Each fund is composed of three classes of shares. All classes of a fund have a
common investment objective and investment portfolio. Each 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 during the
second year after purchase.
Class B Shares Offered at net asset value without an initial
sales charge, but subject to a 0.75% 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 0.75% Rule 12b-1
distribution fee and a 1% contingent deferred sales
charge on redemptions made within one year of purchase.
Class C shares do not convert into another class.
When placing purchase orders, investors must specify whether the order is for
Class A, Class B or Class C shares. Each class of shares represents interests in
the same portfolio of investments of a fund.
The decision as to which class to choose depends on a number of factors,
including the amount and intended length of the investment. Investors that
qualify for reduced
36
<PAGE>
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. For more information about the three sales arrangements, consult
your financial representative or Kemper at the address or phone number as
indicated on the back cover of this prospectus. Be aware that financial services
firms may receive different compensation depending upon which class of shares
they sell.
Rule 12b-1 plan
Each fund has adopted a plan under Rule 12b-1 that provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by Kemper
Distributors, Inc., as principal underwriter, to pay for distribution and other
services provided to shareholders of those classes. Because 12b-1 fees are paid
out of fund assets on an ongoing basis, they will, over time, increase the cost
of investment and may cost more than other types of sales charges. Long-term
Class B and Class C shareholders may pay more than the economic equivalent of
the maximum initial sales charges permitted by the National Association of
Securities Dealers, although Kemper Distributors, Inc. believes that it is
unlikely, in the case of Class B shares, because of the automatic conversion
feature of those shares.
Special features
Class A Shares -- Combined Purchases. Each fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of most Kemper
Funds.
Class A Shares -- Letter of Intent. The same reduced sales charges for Class A
shares also apply to the aggregate amount of purchases made by any purchaser
within a 24-month period under a written Letter of Intent ("Letter") provided by
Kemper Distributors, Inc. 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.
Class A Shares -- Cumulative Discount. Class A shares of a fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a fund being purchased, the value of all Class A shares of
most Kemper Funds (computed at the maximum offering price at the time of the
purchase for which the discount is applicable) already owned by the investor.
Class A Shares -- Large Order NAV Purchase Privilege. Class A shares of a fund
may also be purchased at net asset value by any purchaser provided that the
amount invested in such fund or other Kemper Funds totals at least $1,000,000
including
37
<PAGE>
purchases of Class A shares pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features described above (the "Large Order NAV
Purchase Privilege").
Exchange Privilege -- General. Shareholders of Class A, Class B and Class C
shares may exchange their shares for shares of the corresponding class of Kemper
Funds. Shares of a Kemper Fund with a value in excess of $1,000,000 (except
Kemper Cash Reserves Fund) acquired by exchange from another Kemper Fund, or
from a Money Market Fund, may not be exchanged thereafter until they have been
owned for 15 days (the "15 Day Hold Policy"). Shares of a Kemper Fund with a
value of $1,000,000 or less (except Kemper Cash Reserves Fund) acquired by
exchange from another Kemper Fund, or from a Money Market Fund, may not be
exchanged thereafter until they have been owned for 15 days if, in the
investment manager's judgment, the exchange activity may have an adverse effect
on the fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to the Fund and therefore may be subject to
the 15-Day Hold Policy. For purposes of determining whether the 15-Day Hold
Policy applies to a particular exchange, the value of the shares to be exchanged
shall be computed by aggregating the value of shares being exchanged for all
accounts under common control, direction or advice, including without limitation
accounts administered by a financial services firm offering market timing, asset
allocation or similar services.
For purposes of determining any contingent deferred sales charge that may be
imposed upon the redemption of the shares received on exchange, amounts
exchanged retain their original cost and purchase date.
38
<PAGE>
Buying shares
You may purchase shares of the funds by contacting the securities dealer or
other financial services firm from whom you received this prospectus.
These funds are currently available only to employees of Scudder Kemper
Investments, Inc. in the following states: California, Connecticut, Florida,
Illinois, Kansas, Massachusetts, Missouri, New Hampshire, New Jersey and New
York.
<TABLE>
<CAPTION>
Class A Shares
Public Amount of Purchase Sales Charge Sales Charge as a
Offering Price as a % of % of Net
Including Sales Offering Price* Asset Value**
Charge --------------- -------------
<S> <C> <C>
Less than $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.50 4.71
$100,000 but less than $250,000 3.50 3.63
$250,000 but less than $500,000 2.60 2.67
$500,000 but less than
$1 million 2.00 2.04
$1 million and over 0.00*** 0.00***
*Includes front-end sales load.
**Rounded to the nearest one-hundredth percent.
***Redemption of shares may be subject to a contingent deferred
sales charge as discussed below.
</TABLE>
NAV Class A shares of a fund may be purchased at net asset value by:
Purchases
o shareholders in connection with the investment or reinvestment
of income and capital gain dividends;
o any purchaser with Kemper Funds investment totals of at least
$1,000,000;
o unitholders of unit investment trusts sponsored by Ranson &
Associates, Inc. or its predecessors through reinvestment
programs described in the prospectuses of such trusts that
have such programs;
o officers, trustees, directors, employees (including retirees)
and sales representatives of a fund, its investment manager,
its principal underwriter or certain affiliated companies, for
themselves or members of their families, any trust, pension,
profit-sharing or other benefit plan for such persons;
o persons who purchase shares through bank trust departments
that process such trades through an automated, integrated
mutual fund clearing program provided by a third party
clearing firm;
o registered representatives and employees of broker-dealers
having selling group agreements with Kemper Distributors, Inc.
or any trust, pension, profit-sharing or other benefit plan
for such persons;
o officers, directors, and employees of service agents of the
funds;
39
<PAGE>
Class A Shares (cont.)
o 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);
o selected employees (including their spouses and dependent
children) of banks and other financial services firms that
provide administrative services related to the funds pursuant
to an agreement with Kemper Distributors, Inc. or one of its
affiliates;
o certain professionals who assist in the promotion of Kemper
Funds pursuant to personal services contracts with Kemper
Distributors, for themselves or members of their families;
o in connection with the acquisition of the assets of or merger
or consolidation with another investment company;
o shareholders who owned shares of Kemper Value Series, Inc.
("KVS") on September 8, 1995, and have continuously owned
shares of KVS (or a Kemper Fund acquired by exchange of KVS
shares) since that date, for themselves or members of their
families or any trust, pension, profit-sharing or other
benefit plan for only such persons;
o persons who purchase shares of the fund through Kemper
Distributors, Inc. as part of an automated billing and wage
deduction program administered by RewardsPlus of America;
o through certain investment advisers registered under the
Investment Advisers Act of 1940 and other financial services
firms, acting solely as agents for their clients, that adhere
to certain standards established by Kemper Distributors, Inc.,
including a requirement that such shares be purchased for the
benefit of their clients participating in an investment
advisory program or agency commission program under which such
clients pay a fee to the investment adviser or other firm for
portfolio management or agency brokerage services.
40
<PAGE>
Class A Shares (cont.)
Contingent A contingent deferred sales charge may be imposed upon
Deferred Sales redemption of Class A shares purchased under the Large Order
Charge NAV Purchase Privilege as follows: 1% if they are redeemed
within one year of purchase and 0.50% if redeemed during the
second year following purchase. The charge will not be imposed
upon redemption of reinvested dividends or share appreciation.
The contingent deferred sales charge will be waived in the
event of:
o redemptions under a fund's Systematic Withdrawal Plan
at a maximum of 10% per year of the net asset value
of the account;
o redemption of shares of a shareholder (including a
registered joint owner) who has died;
o 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);
o redemptions of shares whose dealer of record at the
time of the investment notifies Kemper Distributors,
Inc., that the dealer waives the commission
applicable to such Large Order NAV Purchase.
Rule 12b-1 Fee None
Exchange Class A shares may be exchanged for each other at their
Privilege relative net asset values. Shares of Money Market Funds and
Kemper Cash Reserves Fund acquired by purchase (not including
shares acquired by dividend reinvestment) are subject to the
applicable sales charge on exchange.
Class A shares purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of any Kemper
Fund or a Money Market Fund without paying any contingent
deferred sales charge. If the Class A shares received on
exchange are redeemed thereafter, a contingent deferred sales
charge may be imposed.
41
<PAGE>
Class B Shares
Public Offering Net asset value per share without any sales charge at the time
Price of purchase
Contingent A contingent deferred sales charge may be imposed upon
Deferred Sales redemption of Class B shares. There is no such charge upon
Charge redemption of any share appreciation or reinvested dividends.
The charge is computed at the following rates applied to the
value of the shares redeemed excluding amounts not subject to
the charge.
<TABLE>
<CAPTION>
Year of Redemption First Second Third Fourth Fifth Sixth
After Purchase:
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contingent Deferred 4% 3% 3% 2% 2% 1%
Sales Charge:
------------------------------------------------------------------
</TABLE>
The contingent deferred sales charge will be waived:
o 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);
o 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 Code Section
72(t)(2)(A)(iv) prior to age 59 1/2;
o for redemptions made pursuant to a systematic
withdrawal plan;
o 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;
o in the event of the death of the shareholder
(including a registered joint owner).
Rule 12b-1 Fee 0.75%
Conversion Class B shares of a fund will automatically convert to Class A
Feature shares of the same fund six years after issuance on the basis
of the relative net asset value per share. 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.
Exchange Class B shares of a fund and Class B shares of most Kemper
Privilege Funds may be exchanged for each other at their relative net
asset values without a contingent deferred sales charge.
42
<PAGE>
Class C Shares
Public Offering Net asset value per share without any sales charge at the time
Price of purchase
Contingent A contingent deferred sales charge of 1% may be imposed upon
Deferred redemption of Class C shares redeemed within one year of
Sales Charge purchase. The charge will not be imposed upon redemption of
reinvested dividends or share appreciation. The contingent
deferred sales charge will be waived in the event of:
o redemption of shares of a shareholder (including a
registered joint owner) who has died;
o 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);
o redemptions under a fund's Systematic Withdrawal Plan
at a maximum of 10% per year of the net asset value
of the account;
o redemption of shares purchased through a
dealer-sponsored asset allocation program maintained
on an omnibus record-keeping system provided the
dealer of record has waived the advance of the first
year administrative services and distribution fees
applicable to such shares and has agreed to receive
such fees quarterly.
Rule 12b-1 Fee 0.75%
Conversion Feature None
Exchange Privilege Class C shares of a fund and Class C shares of most
Kemper Funds may be exchanged for each other at their
relative net asset values. Class C shares may be
exchanged without a contingent deferred sales charge.
Selling and exchanging shares
General
Contact your securities dealer or other financial services firm to arrange for
share redemptions or exchanges.
Any shareholder may require a fund to redeem his or her shares. When shares are
held for the account of a shareholder by the funds' transfer agent, the
shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557.
43
<PAGE>
An exchange of shares entails the sale of fund shares and subsequent purchase of
shares of another Kemper Mutual Fund.
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, 1997 will be eligible for the second year's charge if redeemed on or
after December 1, 1998. 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. Kemper Distributors, Inc., receives any
contingent deferred sales charge directly.
Share certificates
When certificates for shares have been issued, they must be mailed to or
deposited with Kemper Service Company, 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.
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.
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, 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 Kemper Service Company with signatures guaranteed.
Telephone requests may be made by calling 1-800-621-1048. Shares purchased by
44
<PAGE>
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 Kemper Service Company
by telephone, it may be difficult to use the telephone redemption privilege,
although investors can still redeem by mail. The Funds reserve the right to
terminate or modify this privilege at any time.
Repurchases
A request for repurchase may be communicated by a shareholder through a
securities dealer or other financial services firm to Kemper Distributors, Inc.,
which each fund has authorized to act as its agent. There is no charge by Kemper
Distributors, Inc., with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. The offer to repurchase may
be suspended at any time. Requirements as to stock powers, certificates,
payments and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions
If the account holder has given authorization for expedited wire redemption to
the account holder's brokerage or bank account, shares of a Fund can be redeemed
and proceeds sent by federal wire transfer to a single previously designated
account. Requests received by Kemper Service Company prior to the determination
of net asset value will result in shares being redeemed that day at the net
asset value of a class of a Fund effective on that day and normally the proceeds
will be sent to the designated account the following business day, subject to a
fund's redemption policy set forth in "Redemption-in-Kind." Once authorization
is on file, Kemper Service Company will honor requests by telephone at
1-800-621-1048 or in writing, subject to the limitations on liability described
under "General" above. The Funds are not responsible for the efficiency of the
federal wire system or the account holder's financial services firm or bank. The
Funds currently do not charge the account holder for wire transfers. The account
holder is responsible for any charges imposed by the account holder's firm or
bank. There is a $1,000 wire redemption minimum (including any contingent
deferred sales charge). To change the designated account to receive wire
redemption proceeds, send a written request to Kemper Service Company 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
45
<PAGE>
certificated form. During periods when it is difficult to contact Kemper Service
Company by telephone, it may be difficult to use the expedited redemption
privilege. The Funds reserve the right to terminate or modify this privilege at
any time.
Reinvestment privilege
Under certain circumstances, a shareholder who has redeemed Class A shares may
reinvest up to the full amount redeemed at net asset value at the time of the
reinvestment. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares. The reinvestment privilege may be terminated or modified at any
time. The reinvestment privilege can be used only once as to any specific shares
and reinvestment must be effected within six months of the redemption.
Distributions and taxes
Dividends and capital gains distributions
Each fund normally distributes annual dividends of net investment income. Each
fund distributes any net realized short-term and long-term capital gains at
least annually.
Income and capital gains dividends, if any, of a fund will be credited to
shareholder accounts in full and fractional shares of the same class of that
fund at net asset value on the reinvestment date, except that, upon written
request to the Shareholder Service Agent, Kemper Service Company, a shareholder
may select one of the following options:
(1) To receive income and short-term capital gains dividends in cash and
long-term capital gains dividends in shares of the same class at net asset
value; or
(2) To receive income and capital gains dividends in cash.
Any dividends of a fund that are reinvested will normally be reinvested in
shares of the same class of that same fund. However, by writing to Kemper
Service Company, you may choose to have dividends of a fund invested in shares
of the same class of another Kemper fund at the net asset value of that class
and fund. To use this privilege, you must maintain a minimum account value of
$1,000 in the fund distributing the dividends. The funds will reinvest dividend
checks (and future dividends) in shares of that same fund and class if checks
are returned as undeliverable. Dividends and other distributions in the
aggregate amount of $10 or
46
<PAGE>
less are automatically reinvested in shares of the same fund unless you request
that such policy not be applied to your account.
Distributions are generally taxable, whether received in cash or reinvested.
Taxes
Dividends representing net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable to
individual shareholders as long-term capital gains, regardless of the length of
time shareholders have owned shares. Short-term capital gains and any other
taxable income distributions are taxable to you as ordinary income. A portion of
dividends from ordinary income may qualify for the dividends-received deduction
for corporations.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
are taxable to you as if paid on December 31 of the calendar year in which they
were declared.
A sale or exchange of your shares is a taxable event and may result in a capital
gain or loss which may be long-term or short-term, generally depending on how
long you owned the shares. Shareholders of a fund may be subject to state, local
and foreign taxes on fund distributions and dispositions of fund shares. You
should consult your tax advisor regarding the particular tax consequences of an
investment in a fund.
A dividend received by you 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, is taxable to you.
Each fund sends you detailed tax information about the amount and type of its
distributions by January 31 of the following year.
Each fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to you if you fail to provide the fund with
your correct taxpayer identification number or to make required certifications,
or if you have been notified by the Internal Revenue Service that you are
subject to backup withholding. Any such withheld amounts may be credited against
your U.S. federal income tax liability.
47
<PAGE>
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the funds as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading.
Net asset value per share is calculated by dividing the value of total fund
assets, less all liabilities, by the total number of shares outstanding. Market
prices are used to determine the value of the funds' assets. If market prices
are not readily available for a security or if a security's price is not
considered to be market indicative, that security may be valued by another
method that the Board or its delegate believes accurately reflects fair value.
In those circumstances where a security's price is not considered to be market
indicative, the security's valuation may differ from an available market
quotation.
The net asset value per share of each fund is the value of one share and is
determined separately for each class by dividing the value of a fund's net
assets attributable to that class, less all liabilities of 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 a fund will generally be lower than that of the
Class A shares of the fund because of the higher annual expenses borne by the
Class B and Class C shares.
To the extent that the funds invest in foreign securities, these securities may
be listed on foreign exchanges that trade on days when the funds do not price
their shares. As a result, the net asset value per share of the funds may change
at a time when shareholders are not able to purchase or redeem their shares.
Processing time
All requests to buy and sell shares that are received in good order by the
funds' transfer agent by the close of regular trading on the New York Stock
Exchange are executed at the net asset value per share calculated at the close
of trading that day (subject to any applicable sales load or contingent deferred
sales charge). Orders received by dealers or other financial services firms
prior to the determination of net asset value and received by the funds'
transfer agent prior to the close of its business day will be confirmed at a
price based on the net asset value effective on that day. If an order is
accompanied by a check drawn on a foreign bank, funds must normally be collected
before shares will be purchased.
Payment for shares you sell will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request.
If you have share certificates, these must accompany your order in proper form
for transfer. When
48
<PAGE>
you place an order to sell shares for which the fund may not yet have received
good payment (i.e., purchases by check, EXPRESS-Transfer or Bank Direct
Deposit), the fund may delay transmittal of the proceeds until it has determined
that collected funds have been received for the purchase of such shares. This
may be up to 10 days from receipt by a fund of the purchase amount. The
redemption of shares within certain time periods may be subject to contingent
deferred sales charges, as noted above.
Signature guarantees
A signature guarantee is required unless you sell $50,000 or less worth of
shares or when the proceeds are to be payable to or sent to someone other than
the shareholder of record at the address of record. You can obtain a guarantee
from most brokerage houses and financial institutions, although not from a
notary public. The funds will normally send you the proceeds within one business
day following your request, but may take up to seven business days (or longer in
the case of shares recently purchased by check).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
funds and their transfer agent each reserves the right to reject purchases of
fund shares (including exchanges) for any reason, including when there is
evidence of a pattern of frequent purchases and sales made in response to
short-term fluctuations in a fund's share price. Each fund reserve the right to
withdraw all or any part of the offering made by this prospectus and to reject
purchase orders. Also, from time to time, each fund may temporarily suspend the
offering of its shares or a class of its shares to new investors. During the
period of such suspension, persons who are already shareholders normally are
permitted to continue to purchase additional shares and to have dividends
reinvested.
Minimum balances
The minimum initial investment for each fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $250 and the minimum subsequent investment is $50. Under
an automatic investment plan, such as Bank Direct Deposit, Payroll Direct
Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion.
Because of the high cost of maintaining small accounts, the funds may assess a
quarterly fee of $9 on an account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the
49
<PAGE>
subaccount record keeping system made available through the Shareholder Service
Agent.
Third party transactions
If you buy and sell shares of a fund through a member of the National
Association of Securities Dealers, Inc. (other than the funds' distributor,
Kemper Distributors, Inc.), that member may charge a fee for that service. This
prospectus should be read in connection with such firms' material regarding
their fees and services.
Redemption-in-kind
The funds reserve the right to honor any request for redemption or repurchase
order by making payment in whole or in part in readily marketable securities
("redemptions in kind"). These securities will be chosen by the fund and valued
as they are for purposes of computing the fund's net asset value. A shareholder
may incur transaction expenses in converting these securities to cash.
50
<PAGE>
Additional information about the funds may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries can be made by calling the toll-free telephone
number listed below. The Statement of Additional Information contains more
information on fund investments and operations. The Shareholder Services Guide
contains more information about purchases and sales of fund shares. The
semiannual and annual shareholder reports, when available, will contain a
discussion of the market conditions and the investment strategies that
significantly affected the funds' performance during the last fiscal year, as
well as a listing of portfolio holdings and financial statements. These and
other fund documents may be obtained without charge from the following sources:
---------------------------------------------------------------------------
By Phone: In Person:
---------------------------------------------------------------------------
Call Kemper at: Public Reference Room
Securities and Exchange Commission,
1-800-621-1048 Washington, D.C.
(Call 1-800-SEC-0330
for more information).
---------------------------------------------------------------------------
By Mail: By Internet:
---------------------------------------------------------------------------
Kemper Distributors, Inc. http://www.sec.gov
222 South Riverside Plaza http://www.kemper.com
Chicago, IL 60606-5808
Or
Public Reference Section, Securities
and Exchange Commission, Washington,
D.C. 20549-6009
(a duplication fee is charged)
---------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number: 811-09057
Printed with SOYINK Printed on recycled paper
xx-xx-xx
(codes)
51
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
September 7, 1999
Kemper Large Company Growth Fund
Kemper Disciplined 1000 Growth Fund
Kemper Disciplined 1000 Value Fund
Kemper Research Fund
Kemper Small Cap Value+Growth Fund
each a series of
Kemper Funds Trust
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 the funds listed above (the "Funds"). It
should be read in conjunction with the prospectus of the Funds dated September
7, 1999. The prospectus may be obtained without charge from the Funds at the
address or telephone number on this cover or from the firm from which this
Statement of Additional Information was obtained.
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS.................................................2
INVESTMENT POLICIES AND TECHNIQUES......................................3
BROKERAGE COMMISSIONS..................................................14
INVESTMENT MANAGER AND UNDERWRITER.....................................15
PURCHASE AND REDEMPTION OF SHARES......................................18
ADDITIONAL TRANSACTION INFORMATION.....................................19
DIVIDENDS AND TAXES....................................................21
NET ASSET VALUE........................................................26
PERFORMANCE............................................................27
OFFICERS AND TRUSTEES..................................................29
SHAREHOLDER RIGHTS.....................................................31
Scudder Kemper Investments, Inc. acts as the Funds' investment manager.
THESE FUNDS ARE AVAILABLE ONLY TO SCUDDER KEMPER INVESTMENTS, INC. EMPLOYEES IN
THE FOLLOWING STATES: CALIFORNIA, CONNECTICUT, FLORIDA, ILLINOIS, KANSAS,
MASSACHUSETTS, MISSOURI, NEW HAMPSHIRE, NEW JERSEY AND NEW YORK.
KFIF-13 12/97 printed on recycled paper
1
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental investment restrictions which cannot
be changed without approval of a majority of the Fund's outstanding voting
shares. As defined in the Investment Company Act of 1940 (the "1940 Act"), this
means the lesser of the vote of (a) 67% of the shares of a 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.
Except as otherwise indicated, each Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment objective, shareholders should consider whether the
particular Fund remains an appropriate investment in light of their then current
financial position and needs. There can be no assurance that each Fund's
objective will be met.
As a matter of fundamental policy, each Fund has elected to be classified as a
diversified series of a registered open-end management investment company.
Each Fund may not, as a fundamental policy:
(a) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction from time to time;
(b) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, 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 the 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 the 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 except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
and
(g) concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
The Board of Trustees has voluntarily adopted certain policies and restrictions
which are observed in the conduct of the Funds' affairs. These represent
intentions of the Trustees based upon current circumstances. They differ from
fundamental investment policies in that they may be changed or amended by action
of the Trustees without requiring prior notice to or approval of shareholders.
As a matter of non-fundamental policy, each Fund may not:
(1) invest more than 15% of the value of its net assets in
illiquid securities.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation.
2
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
These Funds are available only to Scudder Kemper Investments, Inc. employees in
the following states: California, Connecticut, Florida, Illinois, Kansas,
Massachusetts, Missouri, New Hampshire, New Jersey and New York. It is
contemplated that, in the future, a Fund's shares may be sold to the public, in
which case the inflow of additional capital may make it more difficult for the
Fund's management to implement the Fund's investment strategies and for the fund
to maintain its level of performance.
General. Each Fund is a diversified series of shares of beneficial interest of
Kemper Funds Trust (the "Trust"), an open-end, registered management investment
company.
There is no assurance that the investment objective of any Fund will be achieved
and investment in each Fund includes risks that vary in kind and degree
depending upon the investment policies of that Fund. The returns and net asset
value of each Fund will fluctuate.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which a Fund may engage (such as hedging,
etc.) or a financial instrument which a Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. (the "Adviser"), in its
discretion, might, but is not required to, use in managing the Fund's portfolio
assets. The Adviser may, in its discretion, at any time employ such practice,
technique or instrument for one or more funds but not for all funds advised by
it. Furthermore, it is possible that certain types of financial instruments or
investment techniques described herein may not be available, permissible,
economically feasible or effective for their intended purposes in all markets.
Certain practices, techniques, or instruments may not be principal activities of
a Fund but, to the extent employed, could from time to time have a material
impact on the Fund's performance.
Common Stocks. Under normal circumstances, each Fund invests primarily in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore,
each 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 and financial market movements. Despite the risk of price
volatility, however, common stocks have traditionally offered a greater
potential for gain on investment, compared to other classes of financial assets
such as bonds or cash equivalents.
Warrants. Each Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by a Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
Convertible Securities. Each of the Funds may invest in convertible securities,
that is, bonds, notes, debentures, preferred stocks and other securities which
are convertible into common stock. Investments in convertible securities can
provide an opportunity for capital appreciation and/or income through interest
and dividend payments by virtue of their conversion or exchange features.
The convertible securities in which a Fund may invest are either fixed income or
zero coupon debt securities which may be converted or exchanged at a stated or
determinable exchange ratio into underlying shares of common stock. The exchange
ratio for any particular convertible security may be adjusted from time to time
due to stock splits, dividends, spin-offs, other corporate distributions or
scheduled changes in the exchange ratio. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market
3
<PAGE>
value of convertible securities typically changes as the market value of the
underlying common stocks changes, and, therefore, also tends to follow movements
in the general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock, although typically not as much as the underlying
common stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Of course, like all debt
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion or exchange features.
Repurchase Agreements. Each of the Funds may enter into repurchase agreements
with member banks of the Federal Reserve System, any foreign bank, if the
repurchase agreement is fully secured by government securities of the particular
foreign jurisdiction, or with any domestic or foreign broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Adviser to be at least
as high as that of other obligations the relevant Fund may purchase, or to be at
least equal to that of issuers of commercial paper rated within the two highest
grades assigned by Moody's or S&P.
A repurchase agreement provides a means for a Fund to earn income on assets for
periods as short as overnight. It is an arrangement under which the purchaser
(i.e., the Fund) acquires a security ("Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price.
Securities subject to a repurchase agreement are held in a segregated account
and the value of such securities kept at least equal to the repurchase price on
a daily basis. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund together with the
repurchase price upon repurchase. In either case, the income to a Fund is
unrelated to the interest rate on the Obligation itself. Obligations will be
held by the Custodian or in the Federal Reserve Book Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from
a Fund to the seller of the Obligation subject to the repurchase agreement and
is therefore subject to that Fund's investment restriction applicable to loans.
It is not clear whether a court would consider the Obligation purchased by a
Fund subject to a repurchase agreement as being owned by a Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the Obligation before repurchase of the Obligation under a repurchase
agreement, a Fund may encounter delay and incur costs before being able to sell
the security. Delays may involve loss of interest or decline in price of the
Obligation. If the court characterizes the transaction as a loan and the Fund
has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund would be at
risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for a Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the Obligation, in which
case a Fund may incur a loss if the proceeds to a Fund of the sale to a third
party are less than the repurchase price. However, if the market value of the
Obligation subject to the repurchase agreement becomes less than the repurchase
price (including interest), a Fund will direct the seller of the Obligation to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement will equal or exceed the repurchase price. It is
possible that a Fund will be unsuccessful in seeking to impose on the seller a
contractual obligation to deliver additional securities.
Foreign Securities. Each of the Funds may invest in foreign securities. The
Adviser believes that diversification of assets on an international basis may
decrease the degree to which events in any one country, including the U.S., will
affect an investor's entire investment holdings. In certain periods since World
War II, many leading foreign economies and foreign
4
<PAGE>
stock market indices have grown more rapidly than the U.S. economy and leading
U.S. stock market indices, although there can be no assurance that this will be
true in the future. Investors should recognize that investing in foreign
securities involves certain special considerations, including those set forth
below, which are not typically associated with investing in U.S. securities and
which may favorably or unfavorably affect a Fund's performance. As foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
securities markets, while growing in volume of trading activity, have
substantially less volume than the U.S. market, and securities of some foreign
issuers are less liquid and more volatile than securities of domestic issuers.
Similarly, volume and liquidity in most foreign bond markets is less than in the
U.S. and, at times, volatility of price can be greater than in the U.S. Fixed
commissions on some foreign securities exchanges and bid to asked spreads in
foreign bond markets are generally higher than commissions or bid to asked
spreads on U.S. markets, although a Fund will endeavor to achieve the most
favorable net results on its portfolio transactions. There is generally less
governmental supervision and regulation of securities exchanges, brokers and
listed companies in foreign countries than in the U.S. It may be more difficult
for a Fund's agents to keep currently informed about corporate actions in
foreign countries 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., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. Payment for
securities without delivery may be required in certain foreign markets. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. The management of a Fund seeks to mitigate the risks
associated with the foregoing considerations through continuous professional
management.
The introduction of a new European currency, the Euro, may result in
uncertainties for European securities and the operation of the portfolios. The
Euro was introduced on January 1, 1999 by eleven members countries of the
European Economic and Monetary Union (EMU). The introduction of the Euro
requires the redenomination of European debt and equity securities over a period
of time, which may result in various accounting differences and/or tax
treatments which would not otherwise occur. Additional questions are raised by
the fact that certain other European Community members, including the United
Kingdom, did not officially implement the Euro on January 1, 1999.
Foreign Currencies. Because investments in foreign securities usually will
involve currencies of foreign countries, and because the Funds may hold foreign
currencies and forward contracts, futures contracts and options on foreign
currencies and foreign currency futures contracts, the value of the assets of a
Fund as measured in U.S. dollars may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations, and
a Fund may incur costs in connection with conversions between various
currencies. Although a Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one
rate, while offering a lesser rate of exchange should a Fund desire to resell
that currency to the dealer. A Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into options or
forward or futures contracts to purchase or sell foreign currencies.
Borrowing. As a matter of fundamental policy, the Funds will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Funds do not currently intend to borrow for investment leveraging purposes,
if such a strategy were implemented in the future it would increase a Fund's
volatility and the risk of loss in a declining market. Borrowing by the Funds
will involve special risk considerations. Although the principal of a Fund's
borrowing will be fixed, a Fund's assets may change in value during the time a
borrowing is outstanding, thus increasing exposure to capital risk.
Reverse Repurchase Agreements. Each Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. Each Fund
maintains a segregated account in connection with outstanding reverse repurchase
agreements. A Fund will enter into
5
<PAGE>
reverse repurchase agreements only when the Adviser believes that the interest
income to be earned from the investment of the proceeds of the transaction will
be greater than the interest expense of the transaction.
Lending of Portfolio Securities. Each Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers, and are required to be secured continuously by collateral in
cash, U.S. Government securities and high grade debt obligations, maintained on
a current basis at an amount at least equal to the market value and accrued
interest of the securities loaned. A Fund has the right to call a loan and
obtain the securities loaned on no more than five days' notice. During the
existence of a loan, a Fund continues to receive the equivalent of any
distributions paid by the issuer on the securities loaned and also receives
compensation based on investment of the collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans may be made only to firms deemed by the Adviser to be of good standing and
will not be made unless, in the judgment of the Adviser, the consideration to be
earned from such loans would justify the risk.
Indexed Securities. The Funds may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). Most indexed securities have
maturities of three years or less.
Indexed securities differ from other types of debt securities in which a Fund
may invest in several respects. First, the interest rate or, unlike other debt
securities, the principal amount payable at maturity of an indexed security may
vary based on changes in one or more specified reference instruments, such as an
interest rate compared with a fixed interest rate or the currency exchange rates
between two currencies (neither of which need be the currency in which the
instrument is denominated). The reference instrument need not be related to the
terms of the indexed security. For example, the principal amount of a U.S.
dollar denominated indexed security may vary based on the exchange rate of two
foreign currencies. An indexed security may be positively or negatively indexed;
that is, its value may increase or decrease if the value of the reference
instrument increases. Further, the change in the principal amount payable or the
interest rate of an indexed security may be a multiple of the percentage change
(positive or negative) in the value of the underlying reference instrument(s).
Investment in indexed securities involves certain risks. In addition to the
credit risk of the security's issuer and the normal risks of price changes in
response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying the indexed
securities.
Real Estate Investment Trusts ("REITs"). Each of the Funds may invest in REITs.
REITs are sometimes informally characterized as equity REITs, mortgage REITs and
hybrid REITs. Investment in REITs may subject a Fund to risks associated with
the direct ownership of real estate, such as decreases in real estate values,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Equity REITs generally experience these risks directly through fee or leasehold
interests, whereas mortgage REITs generally experience these risks indirectly
through mortgage interests, unless the mortgage REIT forecloses on the
underlying real estate. Changes in interest rates may also affect the value of a
Fund's investment in REITs. For instance, during periods of declining interest
rates, certain mortgage REITs may hold mortgages that the mortgagors elect to
prepay, which prepayment may diminish the yield on securities issued by those
REITs.
Certain REITs have relatively small market capitalizations, which may tend to
increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended, and to maintain exemption from the registration requirements of the
1940 Act. By investing in REITs indirectly through a Fund, a shareholder will
bear not only his or her proportionate share of
6
<PAGE>
the expenses of a Fund's, but also, indirectly, similar expenses of the REITs.
In addition, REITs depend generally on their ability to generate cash flow to
make distributions to shareholders.
Illiquid Securities. Each Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. The absence of a
trading market can make it difficult to ascertain a market value for these
investments. This investment practice, therefore, could have the effect of
increasing the level of illiquidity of a Fund. It is each Fund's policy that
illiquid securities (including repurchase agreements of more than seven days
duration, certain restricted securities, and other securities which are not
readily marketable) may not constitute, at the time of purchase, more than 15%
of the value of the Fund's net assets. A security is deemed illiquid if so
determined pursuant to procedures adopted by the Board of Trustees.
Generally speaking, restricted securities may be sold (i) only to qualified
institutional buyers; (ii) in a privately negotiated transaction to a limited
number of purchasers; (iii) in limited quantities after they have been held for
a specified period of time and other conditions are met pursuant to an exemption
from registration; or (iv) in a public offering for which a registration
statement is in effect under the 1933 Act. Issuers of restricted securities may
not be subject to the disclosure and other investor protection requirements that
would be applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between a Fund's decision to sell a
restricted or illiquid security and the point at which the Fund is permitted or
able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, a Fund may be required to
bear all or part of the registration expenses. A Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Adviser will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Adviser may consider in reaching
liquidity decisions relating to Rule 144A securities are: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the market for the security (i.e., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
the transfer).
Strategic Transactions and Derivatives. Each of the Funds may, but is not
required to, utilize various other investment strategies as described below for
a variety of purposes, such as hedging various market risks, managing the
effective maturity or duration of fixed-income securities in a Fund's portfolio,
or enhancing potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors.
In the course of pursuing these investment strategies, a Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other instruments, purchase and sell futures
contracts and options thereon, enter into various transactions such as swaps,
caps, floors, collars, currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures and various other
currency transactions (collectively, all the above are called "Strategic
Transactions"). In addition, Strategic Transactions may also include new
techniques, investments or strategies that are permitted as regulatory changes
occur. Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for a
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect a 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 a
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 a Fund's assets will be committed to Strategic Transactions
entered into for this purpose. Any or all of these investment techniques may be
used at any time and there is no particular strategy that dictates the use of
7
<PAGE>
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of a
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Funds will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter the fundamental investment purposes and
characteristics of a Fund and each Fund will segregate assets (or as provided by
applicable regulations, enter into certain offsetting positions) to cover its
obligations under options, futures and swaps to limit leveraging of the Fund.
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 Adviser'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 a 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 a Fund can realize on its investments or cause
a Fund to hold a security it might otherwise sell. The use of currency
transactions can result in a 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 a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a 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, a
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 to create leveraged exposure in the Fund.
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, a Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving a 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. A Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect a 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. A 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
8
<PAGE>
the time the option is exercised. Frequently, rather than taking or making
delivery of the underlying instrument through the process of exercising the
option, listed options are closed by entering into offsetting purchase or sale
transactions that do not result in ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of an OCC or
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. Among the possible reasons for the absence of a liquid option
market on an exchange are: (i) insufficient trading interest in certain options;
(ii) restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities including reaching daily price
limits; (iv) interruption of the normal operations of the OCC or an exchange;
(v) inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in which event the
relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable
in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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 of 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.
A Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting a Fund to require the Counterparty to
sell the option back to a Fund at a formula price within seven days. A Fund
expects generally to enter into OTC options that have cash settlement
provisions, although 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 a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser 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. A 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 Adviser. The staff of the
SEC currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a 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 a Fund's limitation on investing no
more than 10% of its assets in illiquid securities.
If a 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 a Fund's income. The sale of put options can also provide income.
A 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 a Fund must be "covered" (i.e., a 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 a Fund will receive the option premium to help protect it against
loss, a call sold by a Fund exposes a 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 a Fund to hold a security or
instrument which it might otherwise have sold.
9
<PAGE>
A 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. A
Fund will not sell put options if, as a result, more than 50% of a 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 a Fund may be required to buy the
underlying security at a disadvantageous price above the market price.
General Characteristics of Futures. Each of the Funds 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 a 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.
A Fund's use of futures and options thereon will in all cases be consistent with
applicable regulatory requirements and in particular the rules and regulations
of the Commodity Futures Trading Commission and will be entered into for bona
fide hedging, risk management (including duration management) or other portfolio
management and return enhancement purposes. Typically, maintaining a futures
contract or selling an option thereon requires a 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 a Fund. If
a 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.
A Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of a 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. Each of the Funds
also may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Standard & Poor's Depositary Receipts ("SPDRs"). Each of the Funds may also
invest in SPDRs. SPDRs typically trade like a share of common stock and provide
investment results that generally correspond to the price and yield performance
of the component common stocks of the S&P 500 Index. There can be no assurance
that this can be accomplished as it may not
10
<PAGE>
be possible for the trust to replicate and maintain exactly the composition and
relative weightings of the S&P 500 Index securities. SPDRs are subject to the
risks of an investment in a broadly based portfolio of common stocks, including
the risk that the general level of stock prices may decline, thereby adversely
affecting the value of such investment. SPDRs are also subject to risks other
than those associated with an investment in a broadly based portfolio of common
stocks in that the selection of the stocks included in the trust may affect
trading in SPDRs, as compared with trading in a broadly based portfolio of
common stocks.
Currency Transactions. Each of the Funds may engage in currency transactions
with Counterparties in order to hedge or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. A Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations of 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 Adviser.
A Fund's dealings in forward currency contracts and other currency transactions
such as futures, options, options on futures and swaps generally will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of a 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.
A Fund generally will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended wholly or partially
to offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging or cross hedging as described below.
A 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 a Fund has or in which a Fund expects to have
portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, a Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which a Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of a Fund's securities denominated in linked
currencies. For example, if the Adviser considers that the Austrian schilling is
linked to the German deutschemark (the "D-mark"), a Fund holds securities
denominated in schillings and the Adviser believes that the value of schillings
will decline against the U.S. dollar, the Adviser may enter into a contract 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 a 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 linkage between various currencies
may not be present or may not be present during the particular time that a Fund
is engaging in proxy hedging. If a Fund enters into a currency hedging
transaction, a 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 a
11
<PAGE>
Fund if it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions. Each of the Funds 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 Adviser, it is in the best interests of a 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 Adviser'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
Funds may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Funds expect to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. The Funds will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream a Fund may be
obligated to pay. Interest rate swaps involve the exchange by a 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.
A 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 a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as a Fund will segregate
assets (or enter into any offsetting position) to cover obligations under swaps,
the Adviser and the Fund 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. A Fund will not enter into any swap, cap,
floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from another NRSRO or is determined to be of equivalent credit quality by
the Adviser. If there is a default by the Counterparty, a 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. Each of the Funds 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. A 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.
12
<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 a 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 a Fund segregate liquid assets with
its custodian to the extent a Fund's 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 a 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 securities 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 a Fund will require a Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid securities
sufficient to purchase and deliver the securities if the call is exercised. A
call option sold by a Fund on an index will require a Fund to own portfolio
securities which correlate with the index or to segregate liquid assets equal to
the excess of the index value over the exercise price on a current basis. A put
option written by a Fund requires a Fund to segregate liquid assets equal to the
exercise price.
Except when a 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 a Fund to buy or sell currency will generally
require a Fund to hold an amount of that currency or liquid securities
denominated in that currency equal to a Fund's obligations or to segregate
liquid assets equal to the amount of a Fund's obligation.
OTC options entered into by a 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 a 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 a 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 a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, a 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 a Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and, in connection with such options, a
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, a 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, a 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 securities having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. A 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, a 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 a Fund. Moreover, instead of segregating assets if a Fund held a futures
or forward contract, it could purchase a put option on the same futures or
forward contract
13
<PAGE>
with a strike price as high or higher than the price of the contract held. Other
Strategic Transactions may also be offset in combinations. If the offsetting
transaction terminates at the time of or after the primary transaction no
segregation is required, but if it terminates prior to such time, assets equal
to any remaining obligation would need to be segregated.
Small Company Risk. Each fund, particularly Kemper Small Cap Value+Growth Fund,
may purchase the securities of small companies. The Adviser believes that small
companies often have sales and earnings growth rates which exceed those of
larger companies, and that such growth rates may in turn be reflected in more
rapid share price appreciation over time. However, investing in smaller company
stocks involves greater risk than is customarily associated with investing in
larger, more established companies. For example, smaller companies can have
limited product lines, markets, or financial and managerial resources. Smaller
companies may also be dependent on one or a few key persons, and may be more
susceptible to losses and risks of bankruptcy. Also, the securities of the
smaller companies in which certain Funds may invest, may be thinly traded (and
therefore have to be sold at a discount from current market prices or sold in
small lots over an extended period of time). Transaction costs in smaller
company stocks may be higher than those of larger companies.
Temporary Defensive Positions. From time to time, a fund may invest a portion of
its assets in cash and cash equivalents for temporary defensive or emergency
purposes. Defensive investments should serve to lessen volatility in an adverse
stock market, although they also generate lower returns than stocks in most
markets. Because this defensive policy differs from the fund's investment
objective, a fund may not achieve its goals during a defensive period.
Master/Feeder Fund Structure. The Board of Trustees may determine, without
further shareholder approval, in the future that the objective of a Fund would
be achieved more effectively by investing in a master fund in a master/feeder
fund structure. A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds in the master fund in an effort to achieve possible economies of
scale and efficiencies in portfolio management, while preserving separate
identities, management or distribution channels at the feeder fund level. An
existing investment company is able to convert to a feeder fund by selling all
of its investments, which involves brokerage and other transaction costs and the
realization of taxable gain or loss, or by contributing its assets to the master
fund and avoiding transaction costs and the realization of taxable gain or loss.
BROKERAGE COMMISSIONS
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by a Fund to reported commissions paid by others.
The Adviser routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
The Funds' purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by a Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or a
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for a
Fund to pay a brokerage commission in excess of that
14
<PAGE>
which another broker might charge for executing the same transaction on account
of execution services and the receipt of research services. The Adviser has
negotiated arrangements, which are not applicable to most fixed-income
transactions, with certain broker/dealers pursuant to which a broker/dealer will
provide research services, to the Adviser or a Fund in exchange for the
direction by the Adviser of brokerage transactions to the broker/dealer. These
arrangements regarding receipt of research services generally apply to equity
security transactions. The Adviser may place orders with a broker/dealer on the
basis that the broker/dealer has or has not sold shares of a Fund. In effecting
transactions in over-the-counter securities, orders are placed with the
principal market makers for the security being traded unless, after exercising
care, it appears that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Funds with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Funds for this service.
Although certain research services from broker/dealers may be useful to
a Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than a Fund, and not all such information is used by the Adviser
in connection with a Fund. Conversely, such information provided to the Adviser
by broker/dealers through whom other clients of the Adviser effect securities
transactions may be useful to the Adviser in providing services to a Fund.
The Trustees review, from time to time, whether the recapture for the
benefit of the Funds of some portion of the brokerage commissions or similar
fees paid by the Funds on portfolio transactions is legally permissible and
advisable.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Scudder Kemper Investments, Inc. ("Scudder Kemper"), 345
Park Avenue, New York, New York, is each Fund's investment manager. Scudder
Kemper is approximately 70% owned by Zurich Financial Services, Inc. a newly
formed global insurance and financial services company. The balance of the
Adviser is owned by its officers and employees. Pursuant to investment
management agreements, Scudder Kemper acts as each Fund's investment adviser,
manages its investments, administers its business affairs, furnishes office
facilities and equipment, provides clerical and administrative services, and
permits any of its officers or employees to serve without compensation as
trustees or officers of a Fund if elected to such positions. Each investment
management agreement provides that each Fund pays the charges and expenses of
its operations, including the fees and expenses of the trustees (except those
who are affiliated with officers or employees of Scudder Kemper), independent
auditors, counsel, custodian and transfer agent and the cost of share
certificates, reports and notices to shareholders, brokerage commissions or
transaction costs, costs of calculating net asset value and maintaining all
accounting records related thereto, taxes and membership dues. Each Fund bears
the expenses of registration of its shares with the Securities and Exchange
Commission, while Kemper Distributors, Inc., as principal underwriter, pays the
cost of qualifying and maintaining the qualification of each Fund's shares for
sale under the securities laws of the various states.
The investment management agreements provide that Scudder Kemper shall not be
liable for any error of judgment or of law, or for any loss suffered by a Fund
in connection with the matters to which the agreements relate, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Scudder Kemper in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under each agreement.
Each Fund's investment management agreement continues in effect from year to
year so long as its continuation is approved at least annually (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. Each Fund's investment
management agreement may be terminated at any time upon 60 days notice by either
party, or by a majority vote of the outstanding shares of the Fund, and will
terminate automatically upon assignment. If additional Funds become subject to
an investment management agreement, the provisions concerning continuation,
amendment and termination shall be on a Fund by Fund basis. Additional Funds may
be subject to a different agreement.
15
<PAGE>
In certain cases the investments for the Funds are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser
that have similar names, objectives and investment styles as a Fund. You should
be aware that the Funds are likely to differ from these other mutual funds in
size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of the Funds can be expected to vary from those of the other mutual
funds.
At December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder") and Zurich Insurance Company ("Zurich") formed a new
global organization by combining Scudder with Zurich Kemper Investments, Inc., a
former subsidiary of Zurich, and Scudder changed its name to Scudder Kemper
Investments, Inc. As a result of the transaction, Zurich owned approximately 70%
of the Adviser, with the balance owned by the Adviser's officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in Scudder Kemper) and the financial services businesses of B.A.T Industries
p.l.c. ("B.A.T") were combined to form a new global insurance and financial
services company known as Zurich Financial Services, Inc. By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Kemper Research Fund and Kemper Large Company Growth Fund each pays the Adviser
an annual fee as a percentage of the fund's average daily net assets for
providing investment management services, as described in the following table:
Applicable Assets ($) Annual Fee Rate
--------------------- ---------------
0 - 250,000,000 0.70%
250,000,000 - 1,000,000,000 0.67%
1,000,000,000 - 2,500,000,000 0.65%
More than 2,500,000,000 0.63%
Kemper Small Cap Value+Growth Fund pays the Adviser an annual fee as a
percentage of the fund's average daily net assets for providing investment
management services, as described in the following table:
Applicable Assets ($) Annual Fee Rate
--------------------- ---------------
0 - 250,000,000 0.75%
250,000,000 - 1,000,000,000 0.72%
1,000,000,000 - 2,500,000,000 0.70%
More than 2,500,000,000 0.68%
[Tables for Disciplined 1000 Growth and Disciplined 1000 Value to be included]
FUND ACCOUNTING AGENT. Scudder Fund Accounting Corporation ("SFAC"), a
subsidiary of Scudder Kemper, is responsible for determining the daily net asset
value per share of the Funds and maintaining all accounting records related
thereto. Currently, SFAC receives an annual fee of 2.50% of 1% of average daily
net assets for the first $150 million of fund net assets, 0.75 of 1% of average
daily net assets for the next $850 million of fund net assets, and 0.45 of 1% of
average daily net assets for the excess over $1 billion of fund net assets for
its services to the Funds.
PRINCIPAL UNDERWRITER. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois, a wholly owned subsidiary
of Scudder Kemper, is the principal underwriter and distributor for the shares
of each Fund and acts as agent of each Fund in the continuous offering of its
shares. KDI bears all of its expenses of providing services pursuant to the
distribution agreement, including the payment of any commissions. Each Fund pays
the cost for the prospectus and shareholder reports
16
<PAGE>
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.
Each distribution agreement continues in effect from year to year so long as
such continuance is approved for each class at least annually by a vote of the
Board of Trustees of the Fund, including the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
agreement. The agreement automatically terminates in the event of its assignment
and may be terminated for a class at any time without penalty by a Fund or by
KDI upon 60 days' notice. Termination by a Fund with respect to a class may be
by vote of a majority of the Board of Trustees, or a majority of the Trustees
who are not interested persons of the Fund and who have no direct or indirect
financial interest in the agreement, or a "majority of the outstanding voting
securities" of the class of the Fund, as defined under the 1940 Act. The
agreement may not be amended for a class to increase the fee to be paid by a
Fund with respect to such class without approval by a majority of the
outstanding voting securities of such class of the Fund and all material
amendments must in any event be approved by the Board of Trustees in the manner
described above with respect to the continuation of the agreement. The
provisions concerning the continuation, amendment and termination of the
distribution agreement are on a Fund by Fund basis and for each Fund on a class
by class basis.
RULE 12B-1 PLANS. The Trust has adopted on behalf of the Funds, in accordance
with Rule 12b-1 under the 1940 Act, separate Rule 12b-1 distribution plans
pertaining to each Fund's Class B and Class C shares (each a "Plan"). Under each
Plan, the Fund pays KDI a distribution fee, payable monthly, at the annual rate
of 0.75% of the average daily net assets attributable to its Class B or Class C
shares. Under each Plan, KDI may compensate various financial services firms
("Firms") for sales of Fund shares and may pay other commissions, fees and
concessions to such Firms. The distribution fee compensates KDI for expenses
incurred in connection with activities primarily intended to result in the sale
of a Fund's Class B or Class C shares, including the printing of prospectuses
and reports for persons other than existing shareholders and the preparation,
printing and distribution of sales literature and advertising materials.
Among other things, each Plan provides that KDI will prepare reports for the
Board on a quarterly basis for each class showing amounts paid to the various
Firms and such other information as the Board may reasonably request. Each Plan
will continue in effect indefinitely, provided that such continuance is approved
at least annually by vote of a majority of the Board of Trustees, and a majority
of the Trustees who are not "interested persons" (as defined in the 1940 Act) of
the Funds and who have no direct or indirect financial interest in the operation
of the Plan ("Qualified Board Members"), cast at an in-person meeting called for
such purpose, or by vote of at least a majority of the outstanding voting
securities of the applicable class. Any material amendment to a Plan must be
approved by vote of a majority of the Board of Trustees, and of the Qualified
Board Members. An amendment to a Plan to increase materially the amount to be
paid to KDI by a Fund for distribution services with respect to the applicable
class must be approved by a majority of the outstanding voting securities of
that class. While each Plan is in effect, the selection and nomination of
Trustees who are not "interested persons" of the Trust shall be committed to the
discretion of the Trustees who are not themselves "interested persons" of the
Trust. If a Plan is terminated (or not renewed) with respect to either class,
the Plan with respect to the other class may continue in effect unless it also
has been terminated (or not renewed).
ADMINISTRATIVE SERVICES. Administrative services are provided to each Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all of its expenses of providing services pursuant to the administrative
agreement between KDI and each Fund, including the payment of service fees. Each
Fund pays KDI an administrative services fee, payable monthly, at an annual rate
of up to 0.25% of average daily net assets of Class A, B and C shares of each
Fund.
KDI 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 shareholders of a Fund. The
firms provide such office space and equipment, telephone facilities and
personnel as is necessary or beneficial for providing information and services
to their clients. Such services and assistance may include, but are not limited
to, establishing and maintaining accounts and records, processing purchase and
redemption transactions, answering routine inquiries regarding the Fund,
assisting clients in changing dividend and investment options, account
designations and addresses and providing such other services as may be agreed
upon from time to time and permitted by applicable statute, rule or regulation.
For
17
<PAGE>
Class A shares, KDI pays each firm a service fee, normally payable quarterly, at
an annual rate of up to 0.25% of the net assets in Fund accounts that it
maintains and services attributable to Class A shares commencing with the month
after investment. With respect to Class B and Class C shares, KDI currently
advances to firms the first-year service fee at a rate of up to 0.25% of the
purchase price of such shares. For periods after the first year, KDI currently
intends to pay firms a service fee at an annual rate of up to 0.25% (calculated
monthly and normally paid quarterly) of the net assets attributable to Class B
and Class C shares maintained and serviced by the firm and the fee continues
until terminated by KDI or the Fund. Firms to which service fees may be paid
include broker-dealers affiliated with KDI.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for a Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which there is a firm listed on the Fund's records and it is
intended that KDI will pay all the administrative services fee that it receives
from a Fund to firms in the form of service fees. The effective administrative
services fee rate to be charged against all assets of a Fund while this
procedure is in effect will depend upon the proportion of Fund assets that is in
accounts for which there is a firm of record. The Board of Trustees of the
Trust, in its discretion, may, with respect to a Fund, approve basing the fee to
KDI on all Fund assets in the future.
Certain trustees or officers of the Trust are also directors or officers of
Scudder Kemper or KDI, as indicated under "Officers and Trustees."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. State Street Bank and
Trust Company, 225 Franklin Street, Boston, MA, as custodian, has custody of all
securities and cash of each Fund maintained in the United States. It attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by each Fund. Kemper Service Company
("KSvC"), 811 Main Street, Kansas City, MO, an affiliate of Scudder Kemper,
serves as transfer agent and dividend-paying agent and "Shareholder Service
Agent" of each Fund. KSvC receives as transfer agent annual account fees of $10
per account ($18 for retirement accounts) plus account set up, transaction,
maintenance charges, and annual fees associated with the contingent deferred
sales charges and an asset-based fee of 0.08% plus out-of-pocket expense
reimbursement. KSvC's fee is reduced by certain earnings credits in favor of
each Fund.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Funds' independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Funds' annual financial statements, review certain
regulatory reports and the Funds' federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Funds. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
LEGAL COUNSEL. Dechert Price & Rhoads serves as legal counsel to the Funds.
PURCHASE AND REDEMPTION OF SHARES
As described in the Funds' prospectus, shares of a Fund are sold at their public
offering price, which is the net asset value per share of the Fund next
determined after an order is received in proper form plus, with respect to Class
A shares, an initial sales charge. The minimum initial investment is $1,000 and
the minimum subsequent investment is $100 but such minimum amounts may be
changed at any time. See the prospectus for certain exceptions to these
minimums. An order for the purchase of shares that is accompanied by a check
drawn on a foreign bank (other than a check drawn on a Canadian bank in U.S.
Dollars) will not be considered in proper form and will not be processed unless
and until the Fund determines that it has received payment of the proceeds of
the check. The time required for such a determination will vary and cannot be
determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by the Fund at the applicable net asset value
per share of such Fund as described in the Funds' prospectus.
18
<PAGE>
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B or Class C shares, by certain classes of persons or
through certain types of transactions as described in the prospectus, are
provided because of anticipated economies in sales and sales related efforts.
A Fund may suspend the right of redemption or delay payment more than seven days
(a) during any period when the New York Stock Exchange, Inc. (the "Exchange") is
closed other than customary weekend and holiday closings or during any period in
which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of a Fund's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the value of its net assets, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection of
a Fund's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to each Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
ADDITIONAL TRANSACTION INFORMATION
Initial Sales Charge Alternative--Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed
to Dealers
As a As a as a
Percentage Percentage Percentage of
of of Net Offering
Amount of Purchase Offering Price Asset Value* Price
------------------ -------------- ------------ -----
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over 0.00** 0.00** ***
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
*** Commission is payable by KDI as discussed below.
</TABLE>
Each Fund receives the entire net asset value of all of its Class A shares sold.
KDI, the Funds' principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow up to the full applicable sales charge, as
shown in the above table, during periods and for transactions specified in such
notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the 1933
Act.
Class A shares of each Fund can be purchased at net asset value. (See the Funds'
prospectus for details)
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of a Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following
19
<PAGE>
amounts: 1.00% of the net asset value of shares sold on amounts up to $5
million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount recordkeeping system made available
through KSvC. For purposes of determining the appropriate commission percentage
to be applied to a particular sale, KDI will consider the cumulative amount
invested by the purchaser in a Fund and other Kemper Mutual Funds listed under
"Special Features--Class A Shares--Combined Purchases," including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features referred to above. The privilege of purchasing Class A shares
of a Fund at net asset value under the Large Order NAV Purchase Privilege is not
available if another net asset value purchase privilege also applies.
Deferred Sales Charge Alternative--Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Purchase of Class C Shares. The public offering price of the Class C shares of a
Fund is the next determined net asset value. No initial sales charge is imposed.
Since Class C shares are sold without an initial sales charge, the full amount
of the investor's purchase payment will be invested in Class C shares for his or
her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
C Shares." KDI currently advances to firms the first year distribution fee at a
rate of 0.75% of the purchase price of such shares. For periods after the first
year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Fund for their clients, and KDI may pay them a transaction fee up to
the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. KDI does not believe that termination of a
relationship with a bank would result in any material adverse consequences to a
Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold under the following conditions: (i) the purchased
shares are held in a Kemper IRA account, (ii) the shares are purchased as a
direct "roll over" of a distribution from a qualified retirement plan account
maintained on a participant subaccount record keeping system provided by KSvC,
(iii) the registered representative placing the trade is a member of ProStar, a
group of persons designated by KDI in acknowledgment of their dedication to the
employee benefit plan area; and (iv) the purchase is not otherwise subject to a
commission.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell shares
of the Funds. 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
Funds, or other funds underwritten by KDI.
20
<PAGE>
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day ("trade
date"). The Funds reserve the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly. Collection may take
significantly longer for a check drawn on a foreign bank than for a check drawn
on a domestic bank. Therefore, if an order is accompanied by a check drawn on a
foreign bank, funds must normally be collected before shares will be purchased.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Funds' shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Funds' shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Funds' transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Funds through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Funds through the Shareholder Service Agent for
these services. This Statement of Additional Information should be read in
connection with such firms' material regarding their fees and services.
The Funds reserve the right to withdraw all or any part of the offering made
pursuant to the prospectus and to reject purchase orders. Also, from time to
time, each Fund may temporarily suspend the offering of any class of its shares
to new investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
the prospectus.
DIVIDENDS AND TAXES
Dividends. Each Fund normally distributes annual dividends of net investment
income as follows. Each Fund distributes any net realized short-term and
long-term capital gains at least annually.
A Fund may at any time vary its foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and
long-term capital gains as the Board of Trustees of the Fund determines
appropriate under the then current circumstances. In particular, and without
limiting the foregoing, a Fund may make additional distributions of net
investment income or capital gain net income in order to satisfy the minimum
distribution requirements contained in the Internal Revenue Code (the "Code").
Dividends will be reinvested in shares of the Fund unless shareholders indicate
in writing that they wish to receive them in cash or in shares of other Kemper
Funds as described in the prospectus.
The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C shares than for Class A shares primarily
as a result of the distribution services fee applicable to Class B and Class C
shares. Distributions of capital gains, if any, will be paid in the same portion
for each class.
Taxes. Each Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute and has qualified as
such from inception. Each Fund intends to qualify for such treatement. Such
qualification does not involve governmental supervision of management or
investment practices or policies.
21
<PAGE>
A regulated investment company qualifying under Subchapter M of the Code is
required to distribute to its shareholders at least 90% of its investment
company taxable income (including net short-term capital gain in excess of net
long-term capital loss) and generally is not subject to federal income tax to
the extent that it distributes annually its investment company taxable income
and net realized capital gains in the manner required under the Code.
Investment company taxable income generally is made up of dividends, interest,
and net short-term capital gains in excess of net long-term capital losses, less
expenses. Net capital gains (the excess of net long-term capital gain over net
short-term capital loss) are computed by taking into account any capital loss
carryforward of the Fund. Presently, the Fund has no capital loss carryforward.
Each Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions at least equal to the sum
of 98% of the Fund's ordinary income for the calendar year, at least 98% of the
excess of its capital gains over capital losses (adjusted for certain ordinary
losses as prescribed in the Code) realized during the one-year period ending
October 31 during such year, and all ordinary income and capital gains for prior
years that were not previously distributed.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income.
Dividends from domestic corporations are expected to comprise a substantial part
of each Fund's gross income. To the extent that such dividends constitute a
portion of a Fund's gross income, a portion of the income distributions of the
Fund may be eligible for the dividends received deduction for corporations.
Shareholders will be informed of the portion of dividends which so qualify. The
dividends-received deduction is reduced to the extent the shares with respect to
which the dividends are received are treated as debt-financed under the federal
income tax law and is eliminated if either those share or the shares of the Fund
are deemed to have been held by the Fund or the shareholder, as the case may be,
for less than 46 days during the 90 day period beginning 45 days before the
shares become ex-dividend.
Properly designated distributions of net capital gains are taxable to
shareholders as long-term capital gain, regardless of the length of time the
shares of the Fund have been held by such shareholders. Such distributions are
not eligible for the dividends received deduction. Any loss realized upon the
redemption of shares held at the time of redemption for six months or less will
be treated as a long-term capital loss to the extent of any amounts treated as
long-term capital gain distributions during such six-month period.
If any net capital gains are retained by a Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a relative share of the federal income taxes paid
by the Fund on such gains as a credit against personal federal income tax
liabilities, and will be entitled to increase the adjusted tax basis on Fund
shares by the difference between such reported gains and the individual tax
credit. However, retention of such gains by the Fund may cause the Fund to be
liable for an excise tax on all or a portion of those gains.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether made in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gains, whether received in shares or cash, must be reported by each shareholder
on his or her federal income tax return. Dividends declared in October, November
or December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared. Redemptions of shares,
including exchanges for shares of another Kemper Mutual fund, may result in tax
consequences (gain or loss) to the shareholder and are also subject to these
reporting requirements.
22
<PAGE>
An individual may make a deductible IRA contribution for any taxable year only
if (i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,050 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,250 to IRAs for an individual and his or her nonearning spouse) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, contributions may be made to a spousal
IRA even if the spouse has earnings in a given year, if the spouse elects to be
treated as having no earnings (for IRA contribution purposes) for the year.
Distributions by a Fund result in a reduction in the net asset value of that
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a partial return of capital upon
the distribution, which will nevertheless be taxable to them.
If a Fund invests in stock of certain foreign investment companies, the Fund may
be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
Each Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U.S. federal income taxation.
At the end of each taxable year to which the election applies, the Fund would
report as ordinary income the amount by which the fair market value of the
foreign company's stock exceeds the Fund's adjusted basis in these shares. Any
mark-to-market losses and any loss from an actual disposition of shares would be
deductible as ordinary losses to the extent of any net mark-to-market gains
included in income in prior years. The effect of the election would be to treat
excess distributions and gain on dispositions as ordinary income which is not
subject to a fund level tax when distributed to shareholders as a dividend.
Alternatively, the Fund may elect to include as income and gain its share of the
ordinary earnings and net capital gain of certain foreign investment companies
in lieu of being taxed in the manner described above.
Equity options (including covered call options written on portfolio stock) and
over-the-counter options on debt securities written or purchased by a Fund will
be subject to tax under Section 1234 of the Code. In general, no loss will be
recognized by the Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
the exercise of a put option, on the Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in the Fund's
portfolio.
If a Fund writes a covered call option on portfolio stock, no gain is recognized
upon its receipt of a premium. If the option lapses or is closed out, any gain
or loss is treated as short-term capital gain or loss. If the option is
exercised, the character of the gain or loss depends on the holding period of
the underlying stock.
23
<PAGE>
Positions of a Fund which consist of at least one stock and at least one stock
option or other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stocks
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for certain "qualified
covered call options" on stock written by a Fund.
Many or all futures and forward contracts entered into by a Fund and many or all
listed nonequity options written or purchased by a Fund (including options on
debt securities, options on futures contracts, options on foreign currencies and
options on securities indices) will be governed by Section 1256 of the Code.
Absent a tax election to the contrary, gain or loss attributable to the lapse,
exercise or closing out of any such position generally will be treated as 60%
long-term and 40% short-term capital gain or loss, and on the last day of the
Funds' fiscal year (as well as on October 31 for purposes of the 4% excise tax),
all outstanding Section 1256 positions will be marked to market (i.e. treated as
if such positions were sold at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term capital
gain or loss. Under Section 988 of the Code, discussed below, foreign currency
gain or loss from foreign currency-related forward contracts, certain futures
and options, and similar financial instruments entered into or acquired by the
Fund will be treated as ordinary income. Under certain circumstances, entry into
a futures contract to sell a security may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in the Fund's
portfolio.
Positions of the Fund which consist of at least one position not governed by
Section 1256 and at least one futures or forward contract or nonequity option or
other position governed by Section 1256 which substantially diminishes the
Fund's risk of loss with respect to such other position may be treated as a
"mixed straddle." Mixed straddles are subject to the straddle rules of Section
1092 of the Code and may result in the deferral of losses if the non-Section
1256 position is in an unrealized gain at the end of a reporting period.
Notwithstanding any of the foregoing, recent tax law changes may require a Fund
to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
A portion of the difference between the issue price of zero coupon securities
and their face value ("original issue discount") is considered to be income to a
Fund each year, even though the Fund will not receive cash interest payments
from these securities. This original issue discount imputed income will comprise
a part of the investment company taxable income of the Fund which must be
distributed to shareholders in order to maintain the qualification of the Fund
as a regulated investment company and to avoid federal income tax at the Fund's
level.
Upon the sale or other disposition of shares of a Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as long-term capital loss to
the extent of any distributions of net capital gains received by the shareholder
with respect to such shares.
24
<PAGE>
A shareholder who has redeemed shares of a 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 any 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 purchased after October 3, 1989 and were
held less than 91 days, then the lesser of (a) the sales charge waived on the
reinvested shares, or (b) the sales charge incurred on the redeemed shares, is
included in the basis of the reinvested shares and is not included in the basis
of the redeemed shares. If a shareholder realized a loss on the redemption or
exchange of a Fund's shares and reinvests in shares of the same Fund 30 days
before or after the redemption or exchange, the transactions may be subject to
the wash sale rules resulting in a postponement of the recognition of such loss
for federal income tax purposes. An exchange of a Fund's shares for shares of
another fund is treated as a redemption and reinvestment for federal income tax
purposes upon which gain or loss may be recognized.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
Income received by a Fund from sources within a foreign country may be subject
to foreign and other withholding taxes imposed by that country.
Each Fund will be required to report to the IRS all distributions of taxable
income and capital gains as well as gross proceeds from the redemption or
exchange of Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code
distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
nonexempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if a
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Shareholders may be subject to state and local taxes on distributions received
from a Fund and on redemptions of the Fund's shares. Each distribution is
accompanied by a brief explanation of the form and character of the
distribution. By January 31 of each year each Fund issues to each shareholder a
statement of the federal income tax status of all distributions.
The Trust is organized as a Massachusetts business trust. Neither the Trust nor
any Fund is expected to be liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that each Fund qualifies as a regulated
investment company under the Code.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Shareholders should consult their tax advisers about the application of the
provisions of tax law described in this statement of additional information in
light of their particular tax situations.
25
<PAGE>
NET ASSET VALUE
The net asset value per share of a Fund is the value of one share and is
determined separately for each class by dividing the value of a Fund's net
assets attributable to the class by the number of shares of that class
outstanding. The per share net asset value of each of Class B and Class C shares
of the Fund will generally be lower than that of the Class A shares of a Fund
because of the higher expenses borne by the Class B and Class C shares. The net
asset value of shares of a Fund is computed as of the close of regular trading
(the "value time") on the 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, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.
With respect to the Funds with securities listed primarily on foreign exchanges,
such securities may trade on days when the Fund's net asset value is not
computed; and therefore, the net asset value of a Fund may be significantly
affected on days when the investor has no access to the Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market, Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the investment manager of the particular fund may calculate the price
of that debt security, subject to limitations established by the Board.
An exchange-traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate on the
valuation date.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board of Trustees, the
value of a portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the portfolio asset, the value of
the portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner which, in the discretion of the Valuation Committee, most fairly
reflects market value of the property on the valuation date.
26
<PAGE>
Following the valuations of securities or other portfolios assets in terms of
the currency in which the market quotation used is expressed ("Local Currency"),
the value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
PERFORMANCE
The Funds may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return." Performance
information will be computed separately for Class A, Class B and Class C shares
of a Fund. Each of these figures is based upon historical results and is not
representative of the future performance of any class of the Funds.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in a Fund
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter (or
if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Fund for performance purposes). Average annual
total return figures represent the average annual percentage change over the
period in question. Total return figures represent the aggregate percentage or
dollar value change over the period in question.
Each 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 a Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the Fund's shares on the first day of the period, adjusting to deduct the
maximum sales charge (in the case of Class A shares), and computing the
"redeemable value" of that investment at the end of the period. The redeemable
value in the case of Class B or Class C shares includes the effect of the
applicable contingent deferred sales charge that may be imposed at the end of
the period. The redeemable value is then divided by the initial investment, and
this quotient is taken to the Nth root (N representing the number of years in
the period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value on the reinvestment
dates during the period. Average annual total return may also be calculated
without deducting the maximum sales charge.
Calculation of a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the Fund's "Financial Highlights" table
in the Fund's financial statements and prospectus. Total return performance for
a specific period is calculated by first taking an investment (assumed below to
be $10,000) ("initial investment") in a Fund's shares on the first day of the
period, either adjusting or not adjusting to deduct the maximum sales charge (in
the case of Class A shares), and computing the "ending value" of that investment
at the end of the period. The total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The ending value in the case of Class B and Class C shares may or may not
include the effect of the applicable contingent deferred sales charge that may
be imposed at the end of the period. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Total return may also be shown as
the increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge for Class
A shares or the contingent deferred sales charge for Class B and Class C shares
would be reduced if such charge were included.
A Fund's performance figures are based upon historical results and are not
representative of future performance. Each Fund's Class A shares are sold at net
asset value plus a maximum sales charge of 5.75% of the offering price. While
the maximum sales charge is normally reflected in the Fund's Class A performance
figures, certain total return calculations may not include such charge and those
results would be reduced if it were included. Class B shares and Class C shares
are sold at net asset value. Redemptions of Class B shares within the first six
years after 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
27
<PAGE>
may be imposed at the end of the period in question. Performance figures for the
Class B shares and Class C shares not including the effect of the applicable
contingent deferred sales charge would be reduced if it were included. Returns
and net asset value will fluctuate. Factors affecting each Fund's performance
include general market conditions, operating expenses and investment management.
Any additional fees charged by a dealer or other financial services firm would
reduce the returns described in this section. Shares of each Fund are redeemable
at the then current net asset value, which may be more or less than original
cost.
A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged equity indexes including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock 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, the Standard & Poor's/Barra Growth Index, the Russell
1000(R) Value Index, the Russell 2000(R) Index, the Russell 2000(R) Value Index,
and the Russell 2000(R) Growth Index. The performance of a Fund may also be
compared to the performance of other mutual funds or mutual fund indexes with
similar objectives and policies as reported by independent mutual fund reporting
services such as Lipper Analytical Services, Inc. ("Lipper"). Lipper performance
calculations are based upon changes in net asset value with all dividends
reinvested and do not include the effect of any sales charges.
Information may be quoted from publications such as Morningstar, Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit, money market funds and U.S. Treasury
obligations. Bank product performance may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) or various certificate of deposit indexes.
Money market fund performance may be based upon, among other things, the
IBC/Donoghue's Money Fund Report(R) or Money Market Insight(R), reporting
services on money market funds. Performance of U.S. Treasury obligations may be
based upon, among other things, various U.S. Treasury bill indexes. Certain of
these alternative investments may offer fixed rates of return and guaranteed
principal and may be insured.
A Fund may depict the historical performance of the securities in which the Fund
may invest over periods reflecting a variety of market or economic conditions
either alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A Fund may also describe its
portfolio holdings and depict its size or relative size compared to other mutual
funds, the number and make-up of its shareholder base and other descriptive
factors concerning the Fund. The relative performance of growth stocks versus
value stocks may also be discussed.
Each Fund's returns and net asset value will fluctuate. Shares of a Fund are
redeemable by an investor at the then current net asset value, which may be more
or less than original cost. Redemption of Class B shares and Class C shares may
be subject to a contingent deferred sales charge as described above. Additional
information concerning each Fund's performance appears in the Statement of
Additional Information. Additional information about each Fund's performance
also appears in its Annual Report to Shareholders, which is available without
charge from the Fund.
Investors may want to compare the performance of a Fund to certificates of
deposit issued by banks and other depository institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of a Fund to that of U.S.
Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Information regarding the performance of Treasury obligations may be
based upon, among other things, the Towers Data Systems U.S. Treasury
28
<PAGE>
Bill index, which is an unmanaged index based on the average monthly yield of
treasury bills maturing in six months. Due to their short maturities, Treasury
bills generally experience very low market value volatility.
Investors may want to compare the performance of a Fund 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(R)
(all taxable) or Money Market Insight(R). 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.
Currently there are no performance figures available for Kemper Disciplined 1000
Growth Fund and Kemper Disciplined 1000 Value Fund as these are new funds that
expect to commence operations on or about September 1, 1999.
OFFICERS AND TRUSTEES
The officers and trustees of the Funds, their birthdates, their principal
occupations and their affiliations, if any, with the Adviser and KDI are listed
below:
JAMES E. AKINS (10/15/26), Trustee, 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs; formerly, a
career United States Foreign Service Officer, Energy Adviser for the White
House; United States Ambassador to Saudi Arabia, 1973-76.
JAMES R. EDGAR (DOB) [Biography to be included]
ARTHUR R. GOTTSCHALK (2/13/25), Trustee, 10642 Brookridge Drive, Frankfort,
Illinois, Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; formerly, Illinois State Senator;
formerly, Vice President, The Reuben H. Donnelly Corp.
FREDERICK T. KELSEY (4/25/27), Trustee, 4010 Arbor Lane, Unit 102, Northfield,
Illinois; Retired; formerly, consultant to Goldman, Sachs & Co.; formerly,
President, Treasurer and Trustee of Institutional Liquid Assets and its
affiliated mutual funds; Trustee of Northern Institutional; formerly, Trustee of
the Pilot Funds.
THOMAS W. LITTAUER (4/26/55), Trustee, Vice President and Chairman*, Two
International Place, Boston, Massachusetts; Managing Director, Adviser; Head of
Broker Dealer Division of an unaffiliated investment management firm during
1997; prior thereto, President of Client Management Services of an unaffiliated
investment management firm from 1991 to 1996.
DANIEL PIERCE (3/18/34), Trustee*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser.
KATHRYN L. QUIRK (12/3/52), Trustee and Vice President*, 345 Park Avenue, New
York, New York; Managing Director, Adviser.
FRED B. RENWICK (2/1/30), Trustee, 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director,
TIFF Investment Program, Inc.; Director, the Wartburg Home Foundation; Chairman,
Investment Committee of Morehouse College Board of Trustees; Chairman, American
Bible Society Investment Committee; formerly, member of the Investment Committee
of Atlanta University Board of Trustees; formerly, Director of Board of Pensions
Evangelical Lutheran Church of America.
JOHN G. WEITHERS (8/8/33), Trustee, 311 Spring Lake, Hinsdale, Illinois;
Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago
Stock Exchange; Director, Federal Life Insurance Company, President of the
Members of the Corporation and Trustee, DePaul University; Director, Systems
Imagineering, Inc.
MARK S. CASADY (9/21/60), President*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser; formerly, Institutional Sales Manager
of an unaffiliated mutual fund distributor.
29
<PAGE>
PHILIP J. COLLORA (11/15/45), Vice President and Secretary*, 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President and Assistant Secretary, Scudder
Kemper.
ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser.
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
JOHN R. HEBBLE (6/27/58), Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
BRENDA LYONS (2/21/63) Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Senior Vice President, Adviser; formerly, Associate,
Dechert Price & Rhoads (law firm) 1989 to 1997.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Adviser; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior thereto,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
VALERIE F. MALTER (7/25/58), Vice President*, 345 Park Avenue, New York, New
York; Senior Vice President, Adviser.
ELIZABETH D. SMITH (10/27/46), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
WILLIAM F. TRUSCOTT (9/14/60), Vice President*, 345 Park Avenue, New York, New
York; Senior Vice President, Adviser.
JAMES M. EYSENBACH (4/1/62), Vice President*, 101 California Street, San
Francisco, California; Senior Vice President, Adviser.
* "Interested persons" as defined in the 1940 Act.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Trust. The information in the last column is
for calendar year ended December 31, 1998. The Trust has not yet adopted a
Trustees compensation schedule.
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation Kemper Funds Paid
Name of Board Member from Each Fund to Board Members(2)
- -------------------- -------------- -------------------
<S> <C> <C>
James E. Akins $0 $
Arthur R. Gottschalk(1) $0 $
Frederick T. Kelsey $0 $
Fred B. Renwick $0 $
John B. Tingleff $0 $
John G. Weithers $0 $
</TABLE>
(1) Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with a Fund. Deferred amounts accrue interest
monthly at a rate equal to the yield of Zurich Money Funds -- Zurich
Money Market Fund.
(2) Includes compensation for service on the Boards of 13 Kemper funds,
with 36 fund portfolios. Each trustee currently serves as a board
member of 15 Kemper Funds with 51 fund portfolios. Total compensation
does not
30
<PAGE>
reflect amounts paid by Scudder Kemper Investments, Inc. to the board
members for meetings regarding the combination of Scudder and Zurich
Kemper Investments, Inc. Such amounts totaled $42,800, $40,100,
$39,000, $42,900, $42,900 and $42,900 for Messrs. Akins, Gorrschalk,
Kelsey, Renwick, Tingleff and Weithers, respectively.
The Board of Trustees is responsible for the general oversight of each Fund's
business. A majority of the Board's members are not affiliated with Scudder
Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees reviews the investment performance of the Funds and other
operational matters, including policies and procedures designed to ensure
compliance with various regulatory requirements. At least annually, the
Independent Trustees review the fees paid to the Adviser and its affiliates for
investment advisory services and other administrative and shareholder services.
In this regard, they evaluate, among other things, each Fund's investment
performance, the quality and efficiency of the various other services provided,
costs incurred by the Adviser and its affiliates and comparative information
regarding fees and expenses of competitive funds. They are assisted in this
process by the Funds' independent public accountants and by independent legal
counsel selected by the Independent Trustees.
Principal Holders of Securities
[As of July 31, 1999, the trustees and officers as a group, owned less than 1%
of the then outstanding shares of each Fund and no person owned of record 5% or
more of the outstanding shares of any class of any Fund. ]
SHAREHOLDER RIGHTS
Each Fund is a series of Kemper Funds Trust, a registered open-end management
investment company organized as a business trust under the laws of Massachusetts
on October 14, 1998.
The Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "funds," all having $.01 par value, which may be divided by
the Board of Trustees into classes of shares. The Board of Trustees of the Trust
may authorize the issuance of additional classes and additional funds if deemed
desirable, each with its own investment objective, policies and restrictions.
Since the Trust may offer multiple funds, it is known as a "series company."
Shares of a fund have equal noncumulative voting rights and equal rights with
respect to dividends, assets and liquidation of such fund and are subject to any
preferences, rights or privileges of any classes of shares of the Portfolio.
Currently, the Trust , on behalf of each Fund, offers three classes of shares.
These are Class A, Class B and Class C shares, which have different expenses,
that may affect performance, and are available for purchase exclusively by the
following investors: (a) tax-exempt retirement plans of the Adviser and its
affiliates; and (b) the following investment advisory clients of the Adviser and
its investment advisory affiliates that invest at least $1 million in a fund:
(1) unaffiliated benefit plans, such as qualified retirement plans (other than
individual retirement accounts and self-directed retirement plans); (2)
unaffiliated banks and insurance companies purchasing for their own accounts;
and (3) endowment funds of unaffiliated non-profit organizations. Shares of the
Fund have equal noncumulative voting rights except that Class B and Class C
shares have separate and exclusive voting rights with respect to the Funds' Rule
12b-1 Plans. Shares of each class also have equal rights with respect to
dividends, assets and liquidation subject to any preferences (such as resulting
from different Rule 12b-1 distribution fees), rights or privileges of any
classes of shares of the Funds. Shares of the Funds are fully paid and
nonassessable when issued, are transferable without restriction and have no
preemptive or conversion rights.
The Funds are not required to hold meetings of their shareholders and have no
current intention to do so. Under the Agreement and Declaration of Trust of the
Trust ("Declaration of Trust"), however, shareholder meetings will be held in
connection with the following matters: (a) the election or removal of trustees
if a meeting is called for such purpose; (b) the adoption of any contract for
which shareholder approval is required by the 1940 Act; (c) any termination of
the Trust or a class to the extent and as provided in the Declaration of Trust;
(d) any amendment of the Declaration of Trust (other than amendments changing
the name of the Trust, supplying any omission, curing any ambiguity or curing,
correcting or supplementing any defective or inconsistent provision thereof);
and (e) such additional matters as may be required by law, the Declaration of
Trust, the By-laws of the Trust, or any registration of the Trust with the
Securities and Exchange
31
<PAGE>
Commission or any state, or as the trustees may consider necessary or desirable.
The shareholders also would vote upon changes in fundamental investment
objectives, policies or restrictions.
Any matter shall be deemed to have been effectively acted upon with respect to a
Fund if acted upon as provided in Rule 18f-2 under the 1940 Act, or any
successor rule, and in the Trust's Declaration of Trust. As used in the
prospectus and in this Statement of Additional Information, the term "majority",
when referring to the approvals to be obtained from shareholders in connection
with general matters affecting the Funds and all additional portfolios (e.g.,
election of directors), means the vote of the lesser of (i) 67% of the Trust's
Shares represented at a meeting if the holders of more than 50% of the
outstanding Shares are present in person or by proxy, or (ii) more than 50% of
the Trust's outstanding Shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single portfolio (e.g., annual approval of investment
management contracts), means the vote of the lesser of (i) 67% of the Shares of
the portfolio represented at a meeting if the holders of more than 50% of the
outstanding Shares of the portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding Shares of the portfolio.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) the Trust will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of a Fund stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, each
Fund has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
The Trust's Declaration of Trust provides that the presence at a shareholder
meeting in person or by proxy of at least 30% of the shares entitled to vote on
a matter shall constitute a quorum. Thus, a meeting of shareholders of a Fund
could take place even if less than a majority of the shareholders were
represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
auditors. Some matters requiring a larger vote under the Declaration of Trust,
such as termination or reorganization of the Trust and certain amendments of the
Declaration of Trust, would not be affected by this provision; nor would matters
which under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act.
The Trust's Declaration of Trust specifically authorizes the Board of Trustees
to terminate a Fund or class by notice to the shareholders without shareholder
approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of a
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of each Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by a
Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of a Fund and each Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by Scudder Kemper remote
and not material, since it is limited to circumstances in which a disclaimer is
inoperative and such Fund itself is unable to meet its obligations.
32
<PAGE>
LONG TERM
INVESTING
IN A
SHORT TERM
WORLD(SM)
September 7, 1999
Prospectus
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
Kemper Disciplined 500 Equity Fund
The Securities and Exchange Commission has not approved
or disapproved these securities or passed upon
the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
CONTENTS
ABOUT THE FUND...............................................................3
Investment objective....................................................3
Main investment strategies..............................................3
Other investments.......................................................4
Risk management strategies..............................................4
Main risks..............................................................4
Investment Manager......................................................7
ABOUT YOUR INVESTMENT........................................................9
Choosing a share class..................................................9
Special features.......................................................10
Buying shares..........................................................12
Selling and exchanging shares..........................................19
Distributions and taxes................................................21
Transaction information................................................23
2
<PAGE>
ABOUT THE FUND
Investment objective
Kemper Disciplined 500 Equity Fund seeks to provide long-term growth of capital
through investment in selected stocks of the S&P 500(R) Index. Unless otherwise
indicated, the fund's investment objective and policies may be changed without a
vote of shareholders.
Main investment strategies
The fund pursues its objective by investing at least 80% of its total assets in
the stocks of companies in the S&P 500 Index, a commonly recognized unmanaged
measure of 500 widely held U.S. common stocks listed on the New York Stock
Exchange, Inc., American Stock Exchange and Nasdaq National Market System.
The fund's portfolio management team will use a multi-step process to select
portfolio securities from its benchmark index. This process includes the
following:
o Ranking - using a proprietary computer model, the stocks of companies
in the S&P 500 Index are evaluated and ranked based on their growth
prospects, relative valuation and price momentum.
o Selection - the 20% lowest ranking stocks in the index will generally
be excluded from the portfolio.
o Portfolio Construction - the remaining stocks will be weighted to
ensure portfolio diversification in an attempt to create a portfolio
that is similar to the S&P 500 Index. Factors to be considered in the
allocation of the remaining stocks include: level of exposure to
specific industries, company specific financial data, price volatility,
and market capitalization.
o Ongoing Active Management - the fund's portfolio will be rebalanced on
an ongoing basis as the rankings of the stocks in the S&P 500 Index
change over time.
The fund's sell criteria is based on an analysis of expected return and expected
risk. Securities which fall within the lowest 20% of the fund's benchmark index
will generally be sold unless the portfolio management team concludes that
retaining the security is in the best interest of the fund (i.e., the security's
expected return and risk characteristics warrant its inclusion).
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
3
<PAGE>
Other investments
The fund may, but is not required to, invest up to 20% of its total assets in
investment grade debt securities.
To a more limited extent, the fund may, but is not required to, utilize other
investments and investment techniques that may impact fund performance,
including, but not limited to, options, futures and other derivatives (financial
instruments that derive their value from other securities or commodities, or
that are based on indices).
Risk management strategies
The fund manages risk by diversifying its assets widely among industries and
companies, and using disciplined security selection.
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the fund may invest without limit in cash and
cash equivalents, U.S. Government securities, money market instruments and high
quality debt securities without equity features. In such a case, the fund would
not be pursuing, and may not achieve, its objective.
Main risks
The primary factor affecting the fund's performance is stock market movements
and the investment strategies used by the portfolio management team.
An investment in common stock of a company represents a proportionate ownership
interest in that company. Therefore, the fund participates in the success or
failure of any company in which it holds stock. The fund's returns and net asset
value will go up and down. Stock market movements will affect the fund's share
prices on a daily basis. Declines are possible both in the overall stock market
and in the types of securities held by the fund.
The portfolio management team's skill in choosing appropriate investments for
the fund will determine in large part the fund's ability to achieve its
investment objective. In addition, the portfolio management team's choice of
market sectors or specific investments may not perform as well as expected.
4
<PAGE>
While the fund invests primarily in the selected stocks of the companies that
are included in its benchmark index, the fund is not an index fund, and there is
no assurance that investment results of the fund will correspond to the price
and yield performance of its index.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
5
<PAGE>
Fee and Expense Information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the "Buying shares" and "Choosing a
share class - Special features" sections of this prospectus.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Shareholder fees (Fees paid directly from your investment):
-------------------------------------------------------------------------------------
Class A Class B Class C
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as % 5.75% None None
of offering price)
-------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of None(1) 4%(2) 1%(2)
redemption proceeds)
-------------------------------------------------------------------------------------
Maximum Sales Charge (Load) on Reinvested None None None
Dividends/Distibutions
-------------------------------------------------------------------------------------
Redemption Fee (as % of amount redeemed, if applicable) None None None
-------------------------------------------------------------------------------------
Exchange Fee None None None
-------------------------------------------------------------------------------------
</TABLE>
(1) 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.
(2) The contingent deferred sales charges on Class B shares are as follows: 4%
in the first year, 3% in the second and third year, 2% in the fourth and
fifth year, 1% in the sixth year and eliminated thereafter. The contingent
deferred sales charge on Class C shares is 1% during the first year and
eliminated thereafter.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Annual fund operating expenses (Expenses that are deducted from fund assets):
-------------------------------------------------------------------------------------
Class A Class B Class C
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fee 0.__% 0.__% 0.__%
-------------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
------------------------------------------------------------------------------------
Other Expenses (1) ___% ____% ____%
-------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses (2) ___% ___% ___%
-------------------------------------------------------------------------------------
</TABLE>
(1) Other expenses are based on estimated amounts for the fiscal year ending
August 31, 2000. Until further notice, an administrative services fee
("ASF"), which is reflected above in "Other Expenses", is currently
voluntarily waived.
(2) After waiver of the ASF, total annual fund operating expenses for Class A,
Class B, and Class C would be _____%, ____%, and ____%, respectively.
6
<PAGE>
Example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and that "Total Annual Fund Operating Expenses" remain the same each year. The
example is hypothetical: actual fund expenses and return vary from year to year,
and may be higher or lower than those shown.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fees and expenses if you sold shares Fees and expenses if you did not sell your
after: shares:
Class A Class B Class C Class A Class B Class C
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year $ $ $ 1 Year $ $ $
- -------------------------------------------------------------------------------------
3 Years $ $ $ 3 Years $ $ $
- -------------------------------------------------------------------------------------
</TABLE>
Investment Manager
The fund retains the investment management firm of Scudder Kemper Investments,
Inc., 345 Park Avenue, New York, New York, to manage its daily investment and
business affairs subject to the policies established by the fund's Board.
Scudder Kemper Investments, Inc. actively manages your investment in the fund.
Professional management can be an important advantage for investors who do not
have the time or expertise to invest directly in individual securities. Scudder
Kemper Investments, Inc. is one of the largest and most experienced investment
management organizations worldwide, managing more than $280 billion in assets
globally for mutual fund investors, retirement and pension plans, institutional
and corporate clients, and private family and individual accounts.
Kemper Disciplined 500 Equity Fund pays the investment manager an annual fee as
a percentage of the fund's average daily net assets for providing investment
management services, as described in the following table:
Applicable Assets ($) Annual Fee Rate
--------------------- ---------------
0 - __,000,000 0.__%
___,000,000 - ____,000,000 0.__%
_____,000,000 - _____,000,000 0.__%
More than ______,000,000 0.__%
7
<PAGE>
Portfolio management
The following investment professionals are associated with the funds as
indicated:
Name & Title Joined the Fund Background
- --------------------------------------------------------------------------------
Rob Tymoczko, August 1999 Joined Scudder Kemper Investments in 1997
Lead Manager as a quantitative research analyst. Since
1998, Mr. Tymoczko has been working as a
portfolio manager for the Adviser. From
1994 to 1995, Mr. Tymoczko worked as an
economic consultant. From 1995 until he
joined the Adviser, Mr. Tymoczko attended
business school. He began his investment
career in 1992.
Philip Fortuna, August 1999 Joined Scudder Kemper Investments in 1986
Portfolio Manager as a manager of institutional equity
accounts, and served as director of
quantitative services from 1987 to 1993
and director of investment operations
from 1993 to 1995. From 1995 to 1997 Mr.
Fortuna was involved in global planning
and new product development in addition
to his portfolio management
responsibilities. Since 1998 Mr. Fortuna
has been director of the Adviser's
quantitative group, responsible for the
firm's quantitative research and all
quantitative products.
Year 2000 Readiness
Like other mutual funds and financial and business organizations worldwide, the
fund could be adversely affected if computer systems on which the fund relies,
which primarily include those used by the investment manager, its affiliates or
other service providers, are unable to correctly process date-related
information on and after January 1, 2000. This risk is commonly called the Year
2000 Issue. Failure to successfully address the Year 2000 Issue could result in
interruptions to and other material adverse effects on the fund's business and
operations. The investment manager has commenced a review of the Year 2000 Issue
as it may affect the fund and is taking steps it believes are reasonably
designed to address the Year 2000 Issue, although there can be no assurances
that these steps will be sufficient. In addition, there can be no assurances
that the Year 2000 Issue will not have an adverse effect on the companies whose
securities are held by the fund or on global markets or economies generally.
8
<PAGE>
ABOUT YOUR INVESTMENT
Choosing a share class
The fund is composed of three classes of shares. All classes of the fund have a
common investment objective and investment portfolio. 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 during the
second year after purchase.
Class B Shares Offered at net asset value without an initial
sales charge, but subject to a 0.75% 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 0.75% Rule 12b-1
distribution fee and a 1% contingent deferred sales
charge on redemptions made within one year of purchase.
Class C shares do not convert into another class.
When placing purchase orders, investors must specify whether the order is for
Class A, Class B or Class C shares. Each class of shares represents interests in
the same portfolio of investments of the fund.
The decision as to which class to choose depends on a number of factors,
including the amount and intended length of the investment. Investors 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. For more information about the three sales
arrangements, consult your financial representative or Kemper at the address or
phone number as indicated on the back
9
<PAGE>
cover of this prospectus. Be aware that financial services firms may receive
different compensation depending upon which class of shares they sell.
Rule 12b-1 plan
The fund has adopted a plan under Rule 12b-1 that provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by Kemper
Distributors, Inc., as principal underwriter, to pay for distribution and other
services provided to shareholders of those classes. Because 12b-1 fees are paid
out of fund assets on an ongoing basis, they will, over time, increase the cost
of investment and may cost more than other types of sales charges. Long-term
Class B and Class C shareholders may pay more than the economic equivalent of
the maximum initial sales charges permitted by the National Association of
Securities Dealers, Inc., although Kemper Distributors, Inc. believes that it is
unlikely, in the case of Class B shares, because of the automatic conversion
feature of those shares.
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 most Kemper
Funds.
Class A Shares -- Letter of Intent. The same reduced sales charges for Class A
shares also apply to the aggregate amount of purchases made by any purchaser
within a 24-month period under a written Letter of Intent ("Letter") provided by
Kemper Distributors, Inc. 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.
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 most Kemper Funds (computed at the maximum offering price at the time of the
purchase for which the discount is applicable) already owned by the investor.
Class A Shares -- Large Order NAV Purchase Privilege. Class A shares of the fund
may also be purchased at net asset value by any purchaser provided that the
amount invested in the fund and other Kemper Funds in the aggregate 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
above (the "Large Order NAV Purchase Privilege").
Exchange Privilege -- General. Shareholders of Class A, Class B and Class C
shares may exchange their shares for shares of the corresponding class of Kemper
10
<PAGE>
Funds. Shares of a Kemper Fund with a value in excess of $1,000,000 (except
Kemper Cash Reserves Fund) acquired by exchange from another Kemper Fund, or
from a Money Market Fund, may not be exchanged thereafter until they have been
owned for 15 days (the "15 Day Hold Policy"). Shares of a Kemper Fund with a
value of $1,000,000 or less (except Kemper Cash Reserves Fund) acquired by
exchange from another Kemper Fund, or from a Money Market Fund, may not be
exchanged thereafter until they have been owned for 15 days if, in the
investment manager's judgment, the exchange activity may have an adverse effect
on the fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to the Fund and therefore may be subject to
the 15-Day Hold Policy. For purposes of determining whether the 15-Day Hold
Policy applies to a particular exchange, the value of the shares to be exchanged
shall be computed by aggregating the value of shares being exchanged for all
accounts under common control, direction or advice, including without limitation
accounts administered by a financial services firm offering market timing, asset
allocation or similar services.
For purposes of determining any contingent deferred sales charge that may be
imposed upon the redemption of the shares received on exchange, amounts
exchanged retain their original cost and purchase date.
11
<PAGE>
Buying shares
You may purchase shares of the fund by contacting the securities dealer or other
financial services firm from whom you received this prospectus.
Class A Shares
Public Amount of Purchase Sales Charge Sales Charge
Offering Price as a % of as a % of Net
Including Sales Offering Price* Asset Value**
Charge --------------- -------------
Less than $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.50 4.71
$100,000 but less than $250,000 3.50 3.63
$250,000 but less than $500,000 2.60 2.67
$500,000 but less than
$1 million 2.00 2.04
$1 million and over 0.00*** 0.00***
*Includes front-end sales load.
**Rounded to the nearest one-hundredth percent.
***Redemption of shares may be subject to a contingent
deferred sales charge as discussed below.
NAV Class A shares of the fund may be purchased at net asset
Purchases value by:
o shareholders in connection with the investment or reinvestment
of income and capital gain dividends;
o a participant-directed qualified retirement plan or a
participant-directed non-qualified deferred compensation plan
or a participant-directed qualified retirement plan which is
not sponsored by a K-12 school district, provided in each case
that such plan has not less than 200 eligible employees;
o any purchaser with Kemper Funds investment totals of at least
$1,000,000;
o unitholders of unit investment trusts sponsored by Ranson &
Associates, Inc. or its predecessors through reinvestment
programs described in the prospectuses of such trusts that
have such programs;
o officers, trustees, directors, employees (including retirees)
and sales representatives of the fund, its investment manager,
its principal underwriter or certain affiliated companies, for
themselves or members of their families, any trust, pension,
profit-sharing or other benefit plan for such persons;
o persons who purchase shares through bank trust departments
that process such trades through an automated, integrated
mutual fund clearing program provided by a third party
clearing firm;
o registered representatives and employees of broker-dealers
having selling group agreements with Kemper Distributors,
Inc., or any trust,
12
<PAGE>
pension, profit-sharing or other benefit plan for such
persons;
o officers, directors, and employees of service agents of the
fund;
13
<PAGE>
Class A Shares (cont.)
o 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);
o selected employees (including their spouses and dependent
children) of banks and other financial services firms that
provide administrative services related to the fund pursuant
to an agreement with Kemper Distributors, Inc., or one of its
affiliates;
o certain professionals who assist in the promotion of Kemper
Funds pursuant to personal services contracts with Kemper
Distributors, Inc., for themselves or members of their
families;
o in connection with the acquisition of the assets of or merger
or consolidation with another investment company;
o shareholders who owned shares of Kemper Value Series, Inc.
("KVS") on September 8, 1995, and have continuously owned
shares of KVS (or a Kemper Fund acquired by exchange of KVS
shares) since that date, for themselves or members of their
families or any trust, pension, profit-sharing or other
benefit plan for only such persons;
o persons who purchase shares of the fund through Kemper
Distributors, Inc., as part of an automated billing and wage
deduction program administered by RewardsPlus of America;
o through certain investment advisers registered under the
Investment Advisers Act of 1940 and other financial services
firms, acting solely as agents for their clients, that adhere
to certain standards established by Kemper Distributors, Inc.,
including a requirement that such shares be purchased for the
benefit of their clients participating in an investment
advisory program or agency commission program under which such
clients pay a fee to the investment adviser or other firm for
portfolio management or agency brokerage services.
14
<PAGE>
Class A Shares (cont.)
Contingent A contingent deferred sales charge may be imposed upon
Deferred Sales redemption of Class A shares purchased under the Large Order
Charge NAV Purchase Privilege as follows: 1% if they are redeemed
within one year of purchase and 0.50% if redeemed during the
second year following purchase. The charge will not be imposed
upon redemption of reinvested dividends or share appreciation.
The contingent deferred sales charge will be waived in the
event of:
o redemptions under the fund's Systematic Withdrawal
Plan at a maximum of 10% per year of the net asset
value of the account;
o redemption of shares of a shareholder (including a
registered joint owner) who has died;
o 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);
o redemptions by a participant-directed qualified
retirement plan or a participant-directed
non-qualified deferred compensation plan or a
participant-directed qualified retirement plan which
is not sponsored by a K-12 school district
o redemptions by employer sponsored employee benefit
plans using the subaccount record keeping system made
available through the Shareholder Service Agent
o redemptions of shares whose dealer of record at the
time of the investment notifies Kemper Distributors,
Inc., that the dealer waives the commission
applicable to such Large Order NAV Purchase.
Rule 12b-1 Fee None
Exchange Class A shares may be exchanged for each other at their
Privilege relative net asset values. Shares of Money Market Funds and
Kemper Cash Reserves Fund acquired by purchase (not including
shares acquired by dividend reinvestment) are subject to the
applicable sales charge on exchange. Class A shares purchased
under the Large Order NAV Purchase Privilege may be exchanged
for Class A shares of any Kemper Fund or a Money Market Fund
without paying any contingent deferred sales charge. If the
Class A shares received on exchange are redeemed thereafter, a
contingent deferred sales charge may be imposed.
15
<PAGE>
Class B Shares
Public Offering Net asset value per share without any sales charge at the time
Price of purchase
Contingent A contingent deferred sales charge may be imposed upon
Deferred Sales redemption of Class B shares. There is no such charge upon
Charge redemption of any share appreciation or reinvested dividends.
The charge is computed at the following rates applied to the
value of the shares redeemed excluding amounts not subject to
the charge.
Year of Redemption First Second Third Fourth Fifth Sixth
After Purchase:
---------------------------------------------------------------
Contingent Deferred 4% 3% 3% 2% 2% 1%
Sales Charge:
---------------------------------------------------------------
The contingent deferred sales charge will be waived:
o 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);
o 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 Code Section
72(t)(2)(A)(iv) prior to age 59 1/2;
o for redemptions made pursuant to a systematic
withdrawal plan;
o 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;
o in the event of the death of the shareholder
(including a registered joint owner).
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:
o 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);
o redemptions in connection with retirement
distributions (limited at any one time to 10% of the
total value of plan assets invested in a fund;
o redemptions in connection with distributions
qualifying under the hardship provisions of the Code;
o redemptions representing returns of excess
contributions to such plans.
16
<PAGE>
Rule 12b-1 Fee 0.75%
Conversion Class B shares of a fund will automatically convert to Class A
Feature shares of the same fund six years after issuance on the basis
of the relative net asset value per share. 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.
Exchange Class B shares of a fund and Class B shares of most Kemper
Privilege Funds may be exchanged for each other at their relative net
asset values without a contingent deferred sales charge.
17
<PAGE>
Class C Shares
Public Offering Net asset value per share without any sales charge at the time
Price of purchase
Contingent A contingent deferred sales charge of 1% may be imposed upon
Deferred Sales redemption of Class C shares redeemed within one year of
Charge purchase. The charge will not be imposed upon redemption of
reinvested dividends or share appreciation. The contingent
deferred sales charge will be waived in the event of:
o redemptions by a participant-directed qualified
retirement plan described in Code Section 401(a) or a
participant-directed non-qualified deferred
compensation plan described in Code Section 457;
o redemptions by employer sponsored employee benefit
plans (or their participants) using the subaccount
record keeping system made available through the
Shareholder Service Agent;
o redemption of shares of a shareholder (including a
registered joint owner) who has died;
o 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);
o redemptions under the fund's Systematic Withdrawal
Plan at a maximum of 10% per year of the net asset
value of the account;
o redemption of shares by an employer sponsored
employee benefit plan that offers funds in addition
to Kemper Funds and whose dealer of record has waived
the advance of the first year administrative service
and distribution fees applicable to such shares and
agrees to receive such fees quarterly;
o redemption of shares purchased through a
dealer-sponsored asset allocation program maintained
on an omnibus record-keeping system provided the
dealer of record has waived the advance of the first
year administrative services and distribution fees
applicable to such shares and has agreed to receive
such fees quarterly.
Rule 12b-1 Fee 0.75%
Conversion None
Feature
Exchange Class C shares of the fund and Class C shares of most Kemper
Privilege Funds may be exchanged for each other at their relative net
asset values. Class C shares may be exchanged without a
contingent deferred sales charge.
18
<PAGE>
Selling and exchanging shares
General
Contact your securities dealer or other financial services firm to arrange for
share redemptions or exchanges.
Any shareholder may require the fund to redeem his or her shares. When shares
are held for the account of a shareholder by the fund's transfer agent, the
shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557.
An exchange of shares entails the sale of fund shares and subsequent purchase of
shares of another Kemper Mutual Fund.
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, 1997 will be eligible for the second year's charge if redeemed on or
after December 1, 1998. 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. Kemper Distributors, Inc., receives any
contingent deferred sales charge directly.
Share certificates
When certificates for shares have been issued, they must be mailed to or
deposited with Kemper Service Company, 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.
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.
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
19
<PAGE>
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, 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 Kemper Service Company 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 Kemper Service Company 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
A request for repurchase may be communicated by a shareholder through a
securities dealer or other financial services firm to Kemper Distributors, Inc.,
which the fund has authorized to act as its agent. There is no charge by Kemper
Distributors, Inc., with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. 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 Kemper Service Company prior to the
determination of net asset value will result in shares being redeemed that day
at the net asset value of a class of the fund effective on that day and normally
the proceeds will be sent to the designated account the following business day,
subject to the fund's redemption policy set forth in "Redemption-in-Kind." Once
authorization is on file, Kemper
20
<PAGE>
Service Company 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 Kemper Service Company 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
Kemper Service Company by telephone, it may be difficult to use the expedited
redemption privilege. The Fund reserves the right to terminate or modify this
privilege at any time.
Reinvestment privilege
Under certain circumstances, a shareholder who has redeemed Class A shares may
reinvest up to the full amount redeemed at net asset value at the time of the
reinvestment. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares. The reinvestment privilege may be terminated or modified at any
time. The reinvestment privilege can be used only once as to any specific shares
and reinvestment must be effected within six months of the redemption.
Distributions and taxes
Dividends and capital gains distributions
The fund normally distributes annual dividends of net investment income. The
fund distributes any net realized short-term and long-term capital gains at
least annually.
Income and capital gains 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, Kemper Service Company, a shareholder may
select one of the following options:
21
<PAGE>
(1) To receive income and short-term capital gains dividends in cash and
long-term capital gains dividends in shares of the same class at net asset
value; or
(2) To receive income and capital gains dividends in cash.
Any dividends of a fund that are reinvested will normally be reinvested in
shares of the same class of that same fund. However, by writing to Kemper
Service Company, you may choose to have dividends of the fund invested in shares
of the same class of another Kemper fund at the net asset value of that class
and fund. To use this privilege, you must maintain a minimum account value of
$1,000 in the fund distributing the dividends. The funds will reinvest dividend
checks (and future dividends) in shares of that same fund and class if checks
are returned as undeliverable. Dividends and other distributions in the
aggregate amount of $10 or less are automatically reinvested in shares of the
same fund unless you request that such policy not be applied to your account.
Distributions are generally taxable, whether received in cash or reinvested.
Taxes
Dividends representing net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable to
individual shareholders as long-term capital gains, regardless of the length of
time shareholders have owned shares. Short-term capital gains and any other
taxable income distributions are taxable to you as ordinary income. A portion of
dividends from ordinary income may qualify for the dividends-received deduction
for corporations.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
are taxable to you as if paid on December 31 of the calendar year in which they
were declared.
A sale or exchange of your shares is a taxable event and may result in a capital
gain or loss which may be long-term or short-term, generally depending on how
long you owned the shares. Shareholders of the fund may be subject to state,
local and foreign taxes on fund distributions and dispositions of fund shares.
You should consult your tax advisor regarding the particular tax consequences of
an investment in the fund.
A dividend received by you 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, is taxable to you.
The fund sends you detailed tax information about the amount and type of its
distributions by January 31 of the following year.
22
<PAGE>
The fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to you if you fail to provide the fund with
your correct taxpayer identification number or to make required certifications,
or if you have been notified by the Internal Revenue Service that you are
subject to backup withholding. Any such withheld amounts may be credited against
your U.S. federal income tax liability.
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the fund as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading.
Net asset value per share is calculated by dividing the value of total fund
assets, less all liabilities, by the total number of shares outstanding. Market
prices are used to determine the value of the fund's assets. If market prices
are not readily available for a security or if a security's price is not
considered to be market indicative, that security may be valued by another
method that the Board or its delegate believes accurately reflects fair value.
In those circumstances where a security's price is not considered to be market
indicative, the security's valuation may differ from an available market
quotation.
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, less all liabilities of 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 annual expenses borne by the
Class B and Class C shares.
To the extent that the fund invests in foreign securities, these securities may
be listed on foreign exchanges that trade on days when the fund does not price
its shares. As a result, the net asset value per share of the fund may change at
a time when shareholders are not able to purchase or redeem their shares.
Processing time
All requests to buy and sell shares that are received in good order by the
fund's transfer agent by the close of regular trading on the New York Stock
Exchange are executed at the net asset value per share calculated at the close
of trading that day (subject to any applicable sales load or contingent deferred
sales charge). Orders received by dealers or other financial services firms
prior to the determination of net asset value and received by the fund's
transfer agent prior to the close of its business
23
<PAGE>
day will be confirmed at a price based on the net asset value effective on that
day. If an order is accompanied by a check drawn on a foreign bank, funds must
normally be collected before shares will be purchased.
Payment for shares you sell will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request.
If you have share certificates, these must accompany your order in proper form
for transfer. When you place an order to sell shares for which the fund may not
yet have received good payment (i.e., purchases by check, EXPRESS-Transfer or
Bank Direct Deposit), the fund may delay transmittal of the proceeds until it
has determined that collected funds have been received for the purchase of such
shares. This may be up to 10 days from receipt by a fund of the purchase amount.
The redemption of shares within certain time periods may be subject to
contingent deferred sales charges, as noted above.
Signature guarantees
A signature guarantee is required unless you sell $50,000 or less worth of
shares or when the proceeds are to be payable to or sent to someone other than
the shareholder of record at the address of record. You can obtain a guarantee
from most brokerage houses and financial institutions, although not from a
notary public. The fund will normally send you the proceeds within one business
day following your request, but may take up to seven business days (or longer in
the case of shares recently purchased by check).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
fund and its transfer agent each reserves the right to reject purchases of fund
shares (including exchanges) for any reason, including when there is evidence of
a pattern of frequent purchases and sales made in response to short-term
fluctuations in a fund's share price. The fund reserve the right to withdraw all
or any part of the offering made by this prospectus and to reject purchase
orders. Also, from time to time, the fund may temporarily suspend the offering
of its shares or a class of its shares to new investors. During the period of
such suspension, persons who are already shareholders normally are permitted to
continue to purchase additional shares and to have dividends reinvested.
Minimum balances
The minimum initial investment for each fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $250 and the minimum subsequent investment is $50. Under
24
<PAGE>
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.
Because of the high cost of maintaining small accounts, the fund may assess a
quarterly fee of $9 on an account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount record keeping system made available through the
Shareholder Service Agent.
Third party transactions
If you buy and sell shares of the fund through a member of the National
Association of Securities Dealers, Inc. (other than the fund's distributor,
Kemper Distributors, Inc.), that member may charge a fee for that service. This
prospectus should be read in connection with such firms' material regarding
their fees and services.
Redemption-in-kind
The fund reserves the right to honor any request for redemption or repurchase
order by making payment in whole or in part in readily marketable securities
("redemptions in kind"). These securities will be chosen by the fund and valued
as they are for purposes of computing the fund's net asset value. A shareholder
may incur transaction expenses in converting these securities to cash.
25
<PAGE>
Additional information about the fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries can be made by calling the toll-free telephone
number listed below. The Statement of Additional Information contains more
information on fund investments and operations. The Shareholder Services Guide
contains more information about purchases and sales of fund shares. The
semiannual and annual shareholder reports, when available, will contain a
discussion of the market conditions and the investment strategies that
significantly affected the funds' performance during the last fiscal year, as
well as a listing of portfolio holdings and financial statements. These and
other fund documents may be obtained without charge from the following sources:
- -------------------------------------------------------------------------------
By Phone: In Person:
- -------------------------------------------------------------------------------
Call Kemper at: Public Reference Room
Securities and Exchange Commission,
1-800-621-1048 Washington, D.C.
(Call 1-800-SEC-0330
for more information).
- -------------------------------------------------------------------------------
By Mail: By Internet:
- -------------------------------------------------------------------------------
Kemper Distributors, Inc. http://www.sec.gov
222 South Riverside Plaza http://www.kemper.com
Chicago, IL 60606-5808
Or
Public Reference Section, Securities
and Exchange Commission, Washington,
D.C. 20549-6009
(a duplication fee is charged)
- -------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number: 811-09057
Printed with SOYINK Printed on recycled paper
xx-xx-xx
(codes)
26
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
September 7, 1999
Kemper Disciplined 500 Equity Fund
a series of
Kemper Funds Trust
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 the fund listed above (the "Fund"). It
should be read in conjunction with the prospectus of the Fund dated September 7,
1999. The prospectus may be obtained without charge from the Fund at the address
or telephone number on this cover or from the firm from which this Statement of
Additional Information was obtained.
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS..................................................2
INVESTMENT POLICIES AND TECHNIQUES.......................................3
INVESTMENT MANAGER AND UNDERWRITER......................................15
PURCHASE AND REDEMPTION OF SHARES.......................................18
ADDITIONAL TRANSACTION INFORMATION......................................19
DIVIDENDS AND TAXES.....................................................21
NET ASSET VALUE.........................................................25
PERFORMANCE.............................................................28
OFFICERS AND TRUSTEES...................................................30
SHAREHOLDER RIGHTS......................................................32
Scudder Kemper Investments, Inc. acts as the Fund's investment manager.
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions which cannot be
changed without approval of a majority of the Fund's outstanding voting shares.
As defined in the Investment Company Act of 1940 (the "1940 Act"), this means
the lesser of the vote of (a) 67% of the shares of the Fund present at a meeting
where more than 50% of the outstanding shares are present in person or by proxy
or (b) more than 50% of the outstanding shares of the Fund.
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 investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objective will be
met.
As a matter of fundamental policy, the Fund has elected to be classified as a
diversified series of a registered open-end management investment company.
The Fund may not, as a fundamental policy:
(a) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction from time to time;
(b) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, 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 the 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 the 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 except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
and
(g) concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
The Board of Trustees has voluntarily adopted certain policies and restrictions
which are observed in the conduct of the Funds' affairs. These represent
intentions of the Trustees based upon current circumstances. They differ from
fundamental investment policies in that they may be changed or amended by action
of the Trustees without requiring prior notice to or approval of shareholders.
The Fund may not, as a non-fundamental policy which may be changed by the
Trustees without a vote of shareholders:
(1) invest more than 15% of the value of its net assets in
illiquid securities.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation.
2
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
General. The Fund is a diversified series of shares of beneficial interest of
Kemper Funds Trust (the "Trust"), an open-end management investment company.
There is no assurance that the investment objective will be achieved and
investment in the Fund includes risks that vary in kind and degree depending
upon the investment policies of the Fund. The returns and net asset value of the
Fund will fluctuate.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Fund may engage (such as hedging,
etc.) or a financial instrument which the Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. (the "Adviser"), in its
discretion, might, but is not required to, use in managing the Fund's portfolio
assets. The Adviser may, in its discretion, at any time employ such practice,
technique or instrument for one or more funds but not for all funds advised by
it. Furthermore, it is possible that certain types of financial instruments or
investment techniques described herein may not be available, permissible,
economically feasible or effective for their intended purposes in all markets.
Certain practices, techniques, or instruments may not be principal activities of
the Fund but, to the extent employed, could from time to time have a material
impact on the Fund's performance.
Common Stocks. Under normal circumstances, the Fund invests primarily in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore, the
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 and financial market movements. Despite the risk of price volatility,
however, common stocks have traditionally offered a greater potential for gain
on investment, compared to other classes of financial assets such as bonds or
cash equivalents.
Warrants. The Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by the Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
Convertible Securities. The Fund may invest in convertible securities, that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stock. Investments in convertible securities can provide
an opportunity for capital appreciation and/or income through interest and
dividend payments by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest are either fixed income
or zero coupon debt securities which may be converted or exchanged at a stated
or determinable exchange ratio into underlying shares of common stock. The
exchange ratio for any particular convertible security may be adjusted from time
to time due to stock splits, dividends, spin-offs, other corporate distributions
or scheduled changes in the exchange ratio. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise
3
<PAGE>
as a reflection of the value of the underlying common stock, although typically
not as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Of course, like all debt
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion or exchange features.
Repurchase Agreements. The Fund may enter into repurchase agreements with member
banks of the Federal Reserve System, any foreign bank, if the repurchase
agreement is fully secured by government securities of the particular foreign
jurisdiction, or with any domestic or foreign broker/dealer which is recognized
as a reporting government securities dealer if the creditworthiness of the bank
or broker/dealer has been determined by the Adviser to be at least as high as
that of other obligations the relevant Fund may purchase, or to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by Moody's or S&P.
A repurchase agreement provides a means for the Fund to earn income on assets
for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., the Fund) acquires a security ("Obligation") and the seller
agrees, at the time of sale, to repurchase the Obligation at a specified time
and price. Securities subject to a repurchase agreement are held in a segregated
account and the value of such securities kept at least equal to the repurchase
price on a daily basis. The repurchase price may be higher than the purchase
price, the difference being income to the Fund, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Fund together
with the repurchase price upon repurchase. In either case, the income to the
Fund is unrelated to the interest rate on the Obligation itself. Obligations
will be held by the Custodian or in the Federal Reserve Book Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from
the Fund to the seller of the Obligation subject to the repurchase agreement and
is therefore subject to that Fund's investment restriction applicable to loans.
It is not clear whether a court would consider the Obligation purchased by the
Fund subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the Obligation before repurchase of the Obligation under a repurchase
agreement, the Fund may encounter delay and incur costs before being able to
sell the security. Delays may involve loss of interest or decline in price of
the Obligation. If the court characterizes the transaction as a loan and the
Fund has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the Obligation, in which
case the Fund may incur a loss if the proceeds to the Fund of the sale to a
third party are less than the repurchase price. However, if the market value of
the Obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund will direct the seller of the
Obligation to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to impose on the seller a contractual obligation to deliver additional
securities.
Foreign Securities. The Fund may invest in foreign securities. The Adviser
believes that diversification of assets on an international basis may decrease
the degree to which events in any one country, including the U.S., will affect
an investor's entire investment holdings. In certain periods since World War II,
many leading foreign economies and foreign stock market indices have grown more
rapidly than the U.S. economy and leading U.S. stock market indices, although
there can be no assurance that this will be true in the future. Investors should
recognize that investing in foreign securities involves certain special
considerations, including those set forth below, which are not typically
associated with investing in U.S. securities and which may favorably or
unfavorably affect the Fund's performance. As foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to
4
<PAGE>
domestic companies, there may be less publicly available information about a
foreign company than about a domestic company. Many foreign securities markets,
while growing in volume of trading activity, have substantially less volume than
the U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the U.S. and, at times, volatility of
price can be greater than in the U.S. Fixed commissions on some foreign
securities exchanges and bid to asked spreads in foreign bond markets are
generally higher than commissions or bid to asked spreads on U.S. markets,
although the Fund will endeavor to achieve the most favorable net results on its
portfolio transactions. There is generally less governmental supervision and
regulation of securities exchanges, brokers and listed companies in foreign
countries than in the U.S. It may be more difficult for the Fund's agents to
keep currently informed about corporate actions in foreign countries 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., thus increasing the
risk of delayed settlements of portfolio transactions or loss of certificates
for portfolio securities. Payment for securities without delivery may be
required in certain foreign markets. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect U.S. investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. The
management of the Fund seeks to mitigate the risks associated with the foregoing
considerations through continuous professional management.
The introduction of a new European currency, the Euro, may result in
uncertainties for European securities and the operation of the portfolios. The
Euro was introduced on January 1, 1999 by eleven members countries of the
European Economic and Monetary Union (EMU). The introduction of the Euro
requires the redenomination of European debt and equity securities over a period
of time, which may result in various accounting differences and/or tax
treatments which would not otherwise occur. Additional questions are raised by
the fact that certain other European Community members, including the United
Kingdom, did not officially implement the Euro on January 1, 1999.
Foreign Currencies. Because investments in foreign securities usually will
involve currencies of foreign countries, and because the Fund may hold foreign
currencies and forward contracts, futures contracts and options on foreign
currencies and foreign currency futures contracts, the value of the assets of
the Fund as measured in U.S. dollars may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations, and
the Fund may incur costs in connection with conversions between various
currencies. Although the Fund values its assets daily in terms of U.S. dollars,
it does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer. The Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into options or forward or futures contracts to purchase or sell
foreign currencies.
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Fund does not currently intend to borrow for investment leveraging purposes,
if such a strategy were implemented in the future it would increase the Fund's
volatility and the risk of loss in a declining market. Borrowing by the Fund
will involve special risk considerations. Although the principal of the Fund's
borrowing will be fixed, the Fund's assets may change in value during the time a
borrowing is outstanding, thus increasing exposure to capital risk.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
maintains a segregated account in connection with outstanding reverse repurchase
agreements. The Fund will enter into reverse repurchase agreements only when the
Adviser believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers, and are required to be secured continuously by collateral in
cash, U.S. Government securities and high grade debt obligations, maintained on
a current basis at an amount at least equal to the market value and
5
<PAGE>
accrued interest of the securities loaned. The Fund has the right to call a loan
and obtain the securities loaned on no more than five days' notice. During the
existence of a loan, the Fund continues to receive the equivalent of any
distributions paid by the issuer on the securities loaned and also receives
compensation based on investment of the collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans may be made only to firms deemed by the Adviser to be of good standing and
will not be made unless, in the judgment of the Adviser, the consideration to be
earned from such loans would justify the risk.
Indexed Securities. The Fund may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). Most indexed securities have
maturities of three years or less.
Indexed securities differ from other types of debt securities in which the Fund
may invest in several respects. First, the interest rate or, unlike other debt
securities, the principal amount payable at maturity of an indexed security may
vary based on changes in one or more specified reference instruments, such as an
interest rate compared with a fixed interest rate or the currency exchange rates
between two currencies (neither of which need be the currency in which the
instrument is denominated). The reference instrument need not be related to the
terms of the indexed security. For example, the principal amount of a U.S.
dollar denominated indexed security may vary based on the exchange rate of two
foreign currencies. An indexed security may be positively or negatively indexed;
that is, its value may increase or decrease if the value of the reference
instrument increases. Further, the change in the principal amount payable or the
interest rate of an indexed security may be a multiple of the percentage change
(positive or negative) in the value of the underlying reference instrument(s).
Investment in indexed securities involves certain risks. In addition to the
credit risk of the security's issuer and the normal risks of price changes in
response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying the indexed
securities.
Real Estate Investment Trusts ("REITs"). The Fund may invest in REITs. REITs are
sometimes informally characterized as equity REITs, mortgage REITs and hybrid
REITs. Investment in REITs may subject the Fund to risks associated with the
direct ownership of real estate, such as decreases in real estate values,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Equity REITs generally experience these risks directly through fee or leasehold
interests, whereas mortgage REITs generally experience these risks indirectly
through mortgage interests, unless the mortgage REIT forecloses on the
underlying real estate. Changes in interest rates may also affect the value of
the Fund's investment in REITs. For instance, during periods of declining
interest rates, certain mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by
those REITs.
Certain REITs have relatively small market capitalizations, which may tend to
increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended, and to maintain exemption from the registration requirements of the
1940 Act. By investing in REITs indirectly through the Fund, a shareholder will
bear not only his or her proportionate share of the expenses of the Fund's, but
also, indirectly, similar expenses of the REITs. In addition, REITs depend
generally on their ability to generate cash flow to make distributions to
shareholders.
Illiquid Securities. The Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as
6
<PAGE>
Rule 144A) or because they are subject to other legal or contractual delays in
or restrictions on resale. The absence of a trading market can make it difficult
to ascertain a market value for these instruments. This investment practice,
therefore, could have the effect of increasing the level of illiquidity of the
Fund. It is the Fund's policy that illiquid securities (including repurchase
agreements of more than seven days duration, certain restricted securities, and
other securities which are not readily marketable) may not constitute, at the
time of purchase, more than 15% of the value of the Fund's net assets. A
security is deemed illiquid if so determined pursuant to procedures adopted by
the Board of Trustees.
Generally speaking, restricted securities may be sold (i) only to qualified
institutional buyers; (ii) in a privately negotiated transaction to a limited
number of purchasers; (iii) in limited quantities after they have been held for
a specified period of time and other conditions are met pursuant to an exemption
from registration; or (iv) in a public offering for which a registration
statement is in effect under the 1933 Act. Issuers of restricted securities may
not be subject to the disclosure and other investor protection requirements that
would be applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between the Fund's decision to sell
a restricted or illiquid security and the point at which the Fund is permitted
or able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, the Fund may be required to
bear all or part of the registration expenses. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Adviser will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Adviser may consider in reaching
liquidity decisions relating to Rule 144A securities are: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the market for the security (i.e., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
the transfer).
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in the fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts. Such strategies are generally accepted as part of modern portfolio
management and are regularly utilized by many mutual funds and other
institutional investors.
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 instruments, purchase and sell futures
contracts and options thereon, enter into various transactions such as swaps,
caps, floors, collars, currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency futures and various other
currency transactions (collectively, all the above are called "Strategic
Transactions"). In addition, Strategic Transactions may also include new
techniques, investments or strategies that are permitted as regulatory changes
occur. Strategic Transactions may be used 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 this purpose. Any or all of these
investment techniques may be used at any time 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 Adviser'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 will not be used to alter the fundamental
investment purposes and characteristics of the Fund and the Fund will segregate
assets (or as provided by applicable regulations, enter into certain offsetting
positions) to cover its obligations under options, futures and swaps to limit
leveraging of the Fund.
7
<PAGE>
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 Adviser'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 to create leveraged exposure in the Fund.
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 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
8
<PAGE>
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 of 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 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 Adviser 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 Adviser. 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 no more than 10% of its assets in illiquid securities.
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. The
Fund will not 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.
9
<PAGE>
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 futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio management and return enhancement 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.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of 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 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.
Standard & Poor's Depositary Receipts ("SPDRs"). The Fund may also invest in
SPDRs. SPDRs typically trade like a share of common stock and provide investment
results that generally correspond to the price and yield performance of the
component common stocks of the S&P 500 Index. There can be no assurance that
this can be accomplished as it may not be possible for the trust to replicate
and maintain exactly the composition and relative weightings of the S&P 500
Index securities. SPDRs are subject to the risks of an investment in a broadly
based portfolio of common stocks, including the risk that the general level of
stock prices may decline, thereby adversely affecting the value of such
investment. SPDRs are also subject to risks other than those associated with an
investment in a broadly based portfolio of common stocks in that the selection
of the stocks included in the trust may affect trading in SPDRs, as compared
with trading in a broadly based portfolio of common stocks.
10
<PAGE>
Currency Transactions. The Fund may engage in currency transactions with
Counterparties in order to hedge, or manage the risk of, the value of portfolio
holdings denominated in particular currencies against fluctuations in relative
value. Currency transactions include forward currency contracts, exchange listed
currency futures, exchange listed and OTC options on currencies, and currency
swaps. A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. A
currency swap is an agreement to exchange cash flows based on the notional
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations of 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 Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions. 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.
The Fund generally will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The 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 forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Adviser considers that the Austrian schilling is
linked to the German deutschemark (the "D-mark"), the Fund holds securities
denominated in schillings and the Adviser believes that the value of schillings
will decline against the U.S. dollar, the Adviser may enter into a contract 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 linkage 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 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.
11
<PAGE>
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 Adviser, 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 Adviser'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, index and other 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 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 the Fund will segregate
assets (or enter into any offsetting position) to cover obligations under swaps,
the Adviser and the Fund believe such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to its borrowing restrictions. The Fund will not enter into any swap,
cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from another NRSRO or is determined to be of equivalent credit quality by
the Adviser. 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.
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
12
<PAGE>
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 liquid assets
with its custodian to the extent the Fund's 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 securities 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 liquid securities
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 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 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 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, in connection with such options, 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 securities 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 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.
13
<PAGE>
Small Company Risk. The Fund may purchase the securities of small companies. The
Adviser believes that small companies often have sales and earnings growth rates
which exceed those of larger companies, and that such growth rates may in turn
be reflected in more rapid share price appreciation over time. However,
investing in smaller company stocks involves greater risk than is customarily
associated with investing in larger, more established companies. For example,
smaller companies can have limited product lines, markets, or financial and
managerial resources. Smaller companies may also be dependent on one or a few
key persons, and may be more susceptible to losses and risks of bankruptcy.
Also, the securities of the smaller companies in which the Fund may invest, may
be thinly traded (and therefore have to be sold at a discount from current
market prices or sold in small lots over an extended period of time).
Transaction costs in smaller company stocks may be higher than those of larger
companies.
Temporary Defensive Positions. From time to time, the Fund may invest a portion
of its assets in cash and cash equivalents for temporary defensive or emergency
purposes. Defensive investments should serve to lessen volatility in an adverse
stock market, although they also generate lower returns than stocks in most
markets. Because this defensive policy differs from the fund's investment
objective, the Fund may not achieve its goals during a defensive period.
Master/Feeder Fund Structure. The Board of Trustees may determine, without
further shareholder approval, in the future that the objective of the Fund would
be achieved more effectively by investing in a master fund in a master/feeder
fund structure. A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds in the master fund in an effort to achieve possible economies of
scale and efficiencies in portfolio management, while preserving separate
identities, management or distribution channels at the feeder fund level. An
existing investment company is able to convert to a feeder fund by selling all
of its investments, which involves brokerage and other transaction costs and the
realization of taxable gain or loss, or by contributing its assets to the master
fund and avoiding transaction costs and the realization of taxable gain or loss.
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Fund to reported commissions paid by
others. The Adviser routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, with out any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or the Fund in
14
<PAGE>
exchange for the direction by the Adviser of brokerage transactions to the
broker/dealer. These arrangements regarding receipt of research services
generally apply to equity security transactions. The Adviser may place orders
with a broker/dealer on the basis that the broker/dealer has or has not sold
shares of the Fund. In effecting transactions in over-the-counter securities,
orders are placed with the principal market makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research services from broker/dealers may be useful to
the Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Fund, and not all such information is used by the Adviser
in connection with the Fund. Conversely, such information provided to the
Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to
the Fund.
The Trustees review, from time to time, whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Scudder Kemper Investments, Inc. ("Scudder Kemper"), 345
Park Avenue, New York, New York, is the Fund's investment manager. Scudder
Kemper is approximately 70% owned by Zurich Financial Services, Inc. a newly
formed global insurance and financial services company. The balance of the
Adviser is owned by its officers and employees. Pursuant to an investment
management agreement, Scudder Kemper acts as the Fund's investment adviser,
manages its investments, administers its business affairs, furnishes office
facilities and equipment, provides clerical and administrative services, and
permits any of its officers or employees to serve without compensation as
trustees or officers of the Fund if elected to such positions. The investment
management agreement provides that the Fund pays the charges and expenses of its
operations, including the fees and expenses of the trustees (except those who
are affiliated with officers or employees of Scudder Kemper), independent
auditors, counsel, custodian and transfer agent and the cost of share
certificates, reports and notices to shareholders, brokerage commissions or
transaction costs, costs of calculating net asset value and maintaining all
accounting records related thereto, taxes and membership dues. The Fund 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 agreements provide that Scudder Kemper shall not be
liable for any error of judgment or of law, or for any loss suffered by the Fund
in connection with the matters to which the agreements relate, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Scudder Kemper in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under each agreement.
The Fund's investment management agreement continues in effect from year to year
so long as its continuation is approved at least annually (a) by a majority of
the trustees who are not parties to such agreement or interested persons of any
such party except in their capacity as trustees of the Fund and (b) by the
shareholders or the Board of Trustees of the Fund. The Fund's investment
management agreement may be terminated at any time upon 60 days notice by either
party, or by a majority vote of the outstanding shares of the Fund, and will
terminate automatically upon assignment. If additional funds become subject to
an investment management agreement, the provisions concerning continuation,
amendment and termination shall be on a fund by fund basis. Additional funds may
be subject to a different agreement.
In certain cases the investments for the Funds are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser
that have similar names, objectives and investment styles as a Fund. You should
be aware that
15
<PAGE>
the Funds are likely to differ from these other mutual funds in size, cash flow
pattern and tax matters. Accordingly, the holdings and performance of the Funds
can be expected to vary from those of the other mutual funds.
At December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder") and Zurich Insurance Company ("Zurich") formed a new
global organization by combining Scudder with Zurich Kemper Investments, Inc., a
former subsidiary of Zurich, and Scudder changed its name to Scudder Kemper
Investments, Inc. As a result of the transaction, Zurich owned approximately 70%
of the Adviser, with the balance owned by the Adviser's officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in Scudder Kemper) and the financial services businesses of B.A.T Industries
p.l.c. ("B.A.T") were combined to form a new global insurance and financial
services company known as Zurich Financial Services, Inc. By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Kemper Disciplined 500 Equity Fund pays the Adviser an annual fee as a
percentage of the fund's average daily net assets for providing investment
management services, as described in the following table:
Applicable Assets ($) Annual Fee Rate
--------------------- ---------------
0 - 250,000,000 0.__%
250,000,000 - 1,000,000,000 0.__%
1,000,000,000 - 2,500,000,000 0.__%
More than 2,500,000,000 0.__%
FUND ACCOUNTING AGENT. Scudder Fund Accounting Corporation ("SFAC"), a
subsidiary of Scudder Kemper, is responsible for determining the daily net asset
value per share of the Fund and maintaining all accounting records related
thereto. Currently, SFAC receives an annual fee of 2.50% of 1% of average daily
net assets for the first $150 million of fund net assets, 0.75 of 1% of average
daily net assets for the next $850 million of fund net assets, and 0.45 of 1% of
average daily net assets for the excess over $1 billion of fund net assets for
its services to the Fund.
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement"), Kemper Distributors, Inc. ("KDI"), 222
South Riverside Plaza, Chicago, Illinois, a wholly owned subsidiary of Scudder
Kemper, is the principal underwriter and distributor for the shares of the Fund
and acts as agent of the Fund in the continuous offering of its shares. KDI
bears all of its expenses of providing services pursuant to the distribution
agreement, including the payment of any commissions. The Fund pays the cost for
the prospectus and shareholder reports to be set in type and printed for
existing shareholders, and KDI, as principal underwriter, pays for the printing
and distribution of copies thereof used in connection with the offering of
shares to prospective investors. KDI also pays for supplementary sales
literature and advertising costs.
The distribution agreement continues in effect from year to year so long as such
continuance is approved for each class at least annually by a vote of the Board
of Trustees of the Fund, including the Trustees who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
agreement. The agreement automatically terminates in the event of its assignment
and may be terminated for a class at any time without penalty by the Fund or by
KDI upon 60 days' notice. Termination by the Fund with respect to a class may be
by vote of a majority of the Board of Trustees, or a majority of the Trustees
who are not interested persons of the Fund and who have no direct or indirect
financial interest in the agreement, or a "majority of the outstanding voting
securities" of the class of the Fund, as defined under the 1940 Act. The
agreement may not be amended for a class to increase the fee to be paid by 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. The
provisions concerning the continuation, amendment and termination of the
distribution agreement are on a fund by fund basis and for the Fund on a class
by class basis.
16
<PAGE>
RULE 12B-1 PLANS. The Trust has adopted on behalf of the Fund, in accordance
with Rule 12b-1 under the 1940 Act, Rule 12b-1 distribution plans pertaining to
the Fund's Class B and Class C shares (the "Plans"). Under the Plans, the Fund
pays KDI a distribution fee, payable monthly, at the annual rate of 0.75% of the
average daily net assets attributable to its Class B or Class C shares. Under
the Plans, KDI may compensate various financial services firms ("Firms") for
sales of Fund shares and may pay other commissions, fees and concessions to such
Firms. The distribution fee compensates KDI for expenses incurred in connection
with activities primarily intended to result in the sale of the Fund's Class B
or Class C shares, including the printing of prospectuses and reports for
persons other than existing shareholders and the preparation, printing and
distribution of sales literature and advertising materials.
Among other things, each Plan provides that KDI will prepare reports for the
Board on a quarterly basis for each class showing amounts paid to the various
Firms and such other information as the Board may reasonably request. Each Plan
will continue in effect indefinitely, provided that such continuance is approved
at least annually by vote of a majority of the Board of Trustees, and a majority
of the Trustees who are not "interested persons" (as defined in the 1940 Act) of
the Fund and who have no direct or indirect financial interest in the operation
of the Plan ("Qualified Board Members"), cast at an in-person meeting called for
such purpose, or by vote of at least a majority of the outstanding voting
securities of the applicable class. Any material amendment to a Plan must be
approved by vote of a majority of the Board of Trustees, and of the Qualified
Board Members. An amendment to a Plan to increase materially the amount to be
paid to KDI by the Fund for distribution services with respect to the applicable
class must be approved by a majority of the outstanding voting securities of
that class. While each Plan is in effect, the selection and nomination of
Trustees who are not "interested persons" of the Trust shall be committed to the
discretion of the Trustees who are not themselves "interested persons" of the
Trust. If a Plan is terminated (or not renewed) with respect to either class,
the Plan with respect to the other class may continue in effect unless it also
has been terminated (or not renewed).
ADMINISTRATIVE SERVICES. Administrative services are provided to the Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all of its expenses of providing services pursuant to the administrative
agreement between KDI and the Fund, including the payment of service fees. The
Fund pays KDI an administrative services fee, payable monthly, at an annual rate
of up to 0.25% of average daily net assets of Class A, B and C shares of 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 shareholders of the Fund. The
firms provide such office space and equipment, telephone facilities and
personnel as is necessary or beneficial for providing information and services
to their clients. Such services and assistance may include, but are not limited
to, establishing and maintaining accounts and records, processing purchase and
redemption transactions, answering routine inquiries regarding the Fund,
assisting clients in changing dividend and investment options, account
designations and addresses and providing such other services as may be agreed
upon from time to time and permitted by applicable statute, rule or regulation.
For Class A shares, KDI pays each firm a service fee, normally payable
quarterly, at an annual rate of up to 0.25% of the net assets in Fund accounts
that it maintains and services attributable to Class A shares commencing with
the month after investment. With respect to Class B and Class C shares, KDI
currently advances to firms the first-year service fee at a rate of up to 0.25%
of the purchase price of such shares. For periods after the first year, KDI
currently intends to pay firms a service fee at an annual rate of up to 0.25%
(calculated monthly and normally paid quarterly) of the net assets attributable
to Class B and Class C shares maintained and serviced by the firm and the fee
continues until terminated by KDI or the Fund. Firms to which service fees may
be paid include broker-dealers affiliated with KDI.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which there is a firm listed on the Fund's records and it is
intended that KDI will pay all the administrative services fee that it receives
from the Fund to firms in the form of service fees. The effective administrative
services fee rate to be charged against all assets of the Fund while this
procedure is in effect will depend upon the proportion of Fund assets that is in
accounts for which there is a firm of record. The Board of Trustees of the
Trust, in its discretion, may, with respect to the Fund, approve basing the fee
to KDI on all Fund assets in the future.
17
<PAGE>
Certain trustees or officers of the Trust are also directors or officers of
Scudder Kemper or KDI, as indicated under "Officers and Trustees."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. State Street Bank and
Trust Company, 225 Franklin Street, Boston, MA, as custodian, has custody of all
securities and cash of the Fund maintained in the United States. It attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Fund. Kemper Service Company
("KSvC"), 811 Main Street, Kansas City, MO, an affiliate of Scudder Kemper,
serves as transfer agent and dividend-paying agent and "Shareholder Service
Agent" of the Fund. KSvC receives as transfer agent annual account fees of $10
per account ($18 for retirement accounts) plus account set up, transaction,
maintenance charges, and annual fees associated with the contingent deferred
sales charges and an asset-based fee of 0.08% plus out-of-pocket expense
reimbursement. KSvC's fee is reduced by certain earnings credits in favor of the
Fund.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Fund's independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Fund's annual financial statements, review certain
regulatory reports and the Fund's federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Fund. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
LEGAL COUNSEL. Dechert Price & Rhoads serves as legal counsel to the Fund.
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 the Fund determines that it has received payment of the proceeds of
the check. The time required for such a determination will vary and cannot be
determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of the Fund will be redeemed by the Fund at the applicable net asset
value per share of such Fund as described in the Fund's prospectus.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B or Class C shares, by certain classes of persons or
through certain types of transactions as described in the prospectus, are
provided because of anticipated economies in sales and sales related efforts.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange, Inc. (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 the Fund to determine the value of its net assets, or (c) for
such other periods as the Securities and Exchange Commission may by order permit
for the protection of the Fund's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares
18
<PAGE>
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.
ADDITIONAL TRANSACTION INFORMATION
Initial Sales Charge Alternative--Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed
to Dealers
As a As a as a
Percentage Percentage Percentage of
of of Net Offering
Amount of Purchase Offering Price Asset Value* Price
------------------ -------------- ------------ -----
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over 0.00** 0.00** ***
</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 of its Class A shares sold.
KDI, the Fund's principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow up to the full applicable sales charge, as
shown in the above table, during periods and for transactions specified in such
notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the 1933
Act.
Class A shares of the Fund can be purchased at net asset value. (See the Fund's
prospectus for details)
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount recordkeeping system made available
through KSvC. For purposes of determining the appropriate commission percentage
to be applied to a particular sale, KDI will consider the cumulative amount
invested by the purchaser in the Fund and other Kemper Mutual Funds listed under
"Special Features--Class A Shares--Combined Purchases," including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features referred to above. The privilege of purchasing Class A shares
of the Fund at net asset value under the Large Order NAV Purchase Privilege is
not available if another net asset value purchase privilege also applies.
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."
19
<PAGE>
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."
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."
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 KSvC,
(iii) the registered representative placing the trade is a member of ProStar, a
group of persons designated by KDI in acknowledgment of their dedication to the
employee benefit plan area; and (iv) the purchase is not otherwise subject to a
commission.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell shares
of the Fund. Non-cash compensation includes luxury merchandise and trips to
luxury resorts. In some instances, such discounts, commissions or other
incentives will be offered only to certain firms that sell or are expected to
sell during specified time periods certain minimum amounts of shares of the
Fund, or other funds underwritten by KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day ("trade
date"). The Fund reserve the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly. Collection may take
significantly longer for a check drawn on a foreign bank than for a check drawn
on a domestic bank. Therefore, if an order is accompanied by a check drawn on a
foreign bank, funds must normally be collected before shares will be purchased.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the 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. 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
20
<PAGE>
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
Statement of Additional Information 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
pursuant to the prospectus and to reject purchase orders. Also, from time to
time, the Fund may temporarily suspend the offering of any class of its shares
to new investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
the prospectus.
DIVIDENDS AND TAXES
Dividends. The Fund normally distributes annual dividends of net investment
income as follows. The Fund distributes any net realized short-term and
long-term capital gains at least annually.
The Fund may at any time vary its foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and
long-term capital gains as the Board of Trustees of the Fund determines
appropriate under the then current circumstances. In particular, and without
limiting the foregoing, 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 paying such dividends unless
shareholders indicate in writing that they wish to receive them in cash or in
shares of other Kemper Funds as described in the prospectus.
The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C shares than for Class A shares primarily
as a result of the distribution services fee applicable to Class B and Class C
shares. Distributions of capital gains, if any, will be paid in the same amount
for each class.
Taxes. The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute and has qualified as
such from inception. The Fund intends to qualify for such treatement. Such
qualification does not involve governmental supervision of management or
investment practices or policies.
A regulated investment company qualifying under Subchapter M of the Code is
required to distribute to its shareholders at least 90% of its investment
company taxable income (including net short-term capital gain in excess of net
long-term capital loss) and generally is not subject to federal income tax to
the extent that it distributes annually its investment company taxable income
and net realized capital gains in the manner required under the Code.
Investment company taxable income generally is made up of dividends, interest,
and net short-term capital gains in excess of net long-term capital losses, less
expenses. Net capital gains (the excess of net long-term capital gain over net
short-term capital loss) are computed by taking into account any capital loss
carryforward of the Fund. Presently, the Fund has no capital loss carryforward.
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions at least equal to the sum
of 98% of the Fund's ordinary income for the calendar year, at least 98% of the
excess of its capital gains over capital losses (adjusted for certain ordinary
losses as prescribed in the Code) realized during the one-year period ending
October 31 during such year, and all ordinary income and capital gains for prior
years that were not previously distributed.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income.
21
<PAGE>
Dividends from domestic corporations are expected to comprise a substantial part
of the Fund's gross income. To the extent that such dividends constitute a
portion of the Fund's gross income, a portion of the income distributions of the
Fund may be eligible for the dividends received deduction for corporations.
Shareholders will be informed of the portion of dividends which so qualify. The
dividends-received deduction is reduced to the extent the shares with respect to
which the dividends are received are treated as debt-financed under the federal
income tax law and is eliminated if either those share or the shares of the Fund
are deemed to have been held by the Fund or the shareholder, as the case may be,
for less than 46 days during the 90 day period beginning 45 days before the
shares become ex-dividend.
Properly designated distributions of net capital gains are taxable to
shareholders as long-term capital gain, regardless of the length of time the
shares of the Fund have been held by such shareholders. Such distributions are
not eligible for the dividends received deduction. Any loss realized upon the
redemption of shares held at the time of redemption for six months or less will
be treated as a long-term capital loss to the extent of any amounts treated as
long-term capital gain distributions during such six-month period.
If any net capital gains are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a relative share of the federal income taxes paid
by the Fund on such gains as a credit against personal federal income tax
liabilities, and will be entitled to increase the adjusted tax basis on Fund
shares by the difference between such reported gains and the individual tax
credit. However, retention of such gains by the Fund may cause the Fund to be
liable for an excise tax on all or a portion of those gains.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether made in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gains, whether received in shares or cash, must be reported by each shareholder
on his or her federal income tax return. Dividends declared in October, November
or December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared. Redemptions of shares,
including exchanges for shares of another Kemper Mutual fund, may result in tax
consequences (gain or loss) to the shareholder and are also subject to these
reporting requirements.
An individual may make a deductible IRA contribution for any taxable year only
if (i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,050 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,250 to IRAs for an individual and his or her nonearning spouse) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, contributions may be made to a spousal
IRA even if the spouse has earnings in a given year, if the spouse elects to be
treated as having no earnings (for IRA contribution purposes) for the year.
Distributions by the Fund result in a reduction in the net asset value of that
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those
22
<PAGE>
purchasing just prior to a distribution will then receive a partial return of
capital upon the distribution, which will nevertheless be taxable to them.
If the Fund invests in stock of certain foreign investment companies, the Fund
may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
The Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U.S. federal income taxation.
At the end of each taxable year to which the election applies, the Fund would
report as ordinary income the amount by which the fair market value of the
foreign company's stock exceeds the Fund's adjusted basis in these shares. Any
mark-to-market losses and any loss from an actual disposition of shares would be
deductible as ordinary losses to the extent of any net mark-to-market gains
included in income in prior years. The effect of the election would be to treat
excess distributions and gain on dispositions as ordinary income which is not
subject to a fund level tax when distributed to shareholders as a dividend.
Alternatively, the Fund may elect to include as income and gain its share of the
ordinary earnings and net capital gain of certain foreign investment companies
in lieu of being taxed in the manner described above.
Equity options (including covered call options written on portfolio stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss will
be recognized by the Fund upon payment of a premium in connection with the
purchase of a put or call option. The character of any gain or loss recognized
(i.e. long-term or short-term) will generally depend, in the case of a lapse or
sale of the option, on the Fund's holding period for the option, and in the case
of the exercise of a put option, on the Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in the Fund's
portfolio.
If the Fund writes a covered call option on portfolio stock, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as short-term capital gain or loss. If the option is
exercised, the character of the gain or loss depends on the holding period of
the underlying stock.
Positions of the Fund which consist of at least one stock and at least one stock
option or other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stocks
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for certain "qualified
covered call options" on stock written by the Fund.
Many or all futures and forward contracts entered into by the Fund and many or
all listed nonequity options written or purchased by the Fund (including options
on debt securities, options on futures contracts, options on foreign currencies
and options on securities indices) will be governed by Section 1256 of the Code.
Absent a tax election to the contrary, gain or loss attributable to the lapse,
exercise or closing out of any such position generally will be treated as 60%
long-term and 40% short-term capital gain or loss, and on the last day of the
Fund's fiscal year (as well as on October 31 for purposes of the 4% excise tax),
all outstanding Section 1256 positions will be marked to market (i.e. treated as
if such positions were sold at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term capital
gain or loss. Under Section 988 of the Code, discussed below, foreign currency
gain or loss from foreign currency-related forward contracts, certain futures
and options, and similar financial instruments entered into or acquired by the
Fund will be treated as ordinary income. Under certain circumstances, entry into
a futures contract to sell a security may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in the Fund's
portfolio.
23
<PAGE>
Positions of the Fund which consist of at least one position not governed by
Section 1256 and at least one futures or forward contract or nonequity option or
other position governed by Section 1256 which substantially diminishes the
Fund's risk of loss with respect to such other position may be treated as a
"mixed straddle." Mixed straddles are subject to the straddle rules of Section
1092 of the Code and may result in the deferral of losses if the non-Section
1256 position is in an unrealized gain at the end of a reporting period.
Notwithstanding any of the foregoing, recent tax law changes may require the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if the Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
A portion of the difference between the issue price of zero coupon securities
and their face value ("original issue discount") is considered to be income to
the Fund each year, even though the Fund will not receive cash interest payments
from these securities. This original issue discount imputed income will comprise
a part of the investment company taxable income of the Fund which must be
distributed to shareholders in order to maintain the qualification of the Fund
as a regulated investment company and to avoid federal income tax at the Fund's
level.
Upon the sale or other disposition of shares of the Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as long-term capital loss to
the extent of any distributions of net capital gains received by the shareholder
with respect to such shares.
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 any 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 purchased after October 3, 1989 and were
held less than 91 days, then the lesser of (a) the sales charge waived on the
reinvested shares, or (b) the sales charge incurred on the redeemed shares, is
included in the basis of the reinvested shares and is not included in the basis
of the redeemed shares. If a shareholder realized a loss on the redemption or
exchange of 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. 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.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as
24
<PAGE>
"Section 988" gains or losses, may increase or decrease the amount of the Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
Income received by the Fund from sources within a foreign country may be subject
to foreign and other withholding taxes imposed by that country.
The Fund will be required to report to the IRS all distributions of taxable
income and capital gains as well as gross proceeds from the redemption or
exchange of Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code
distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
nonexempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Shareholders may be subject to state and local taxes on distributions received
from the Fund and on redemptions of the Fund's shares. Each distribution is
accompanied by a brief explanation of the form and character of the
distribution. By January 31 of each year the Fund issues to each shareholder a
statement of the federal income tax status of all distributions.
The Trust is organized as a Massachusetts business trust. Neither the Trust nor
the Fund is expected to be liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that the Fund qualifies as a regulated
investment company under the Code.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Shareholders should consult their tax advisers about the application of the
provisions of tax law described in this statement of additional information in
light of their particular tax situations.
NET ASSET VALUE
The net asset value per share of 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 the class by the number of shares of that class
outstanding. The per share net asset value of each of Class B and Class C shares
of the Fund will generally be lower than that of the Class A shares of 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
(the "value time") on the New York Stock Exchange, Inc. (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, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.
25
<PAGE>
With respect to securities listed primarily on foreign exchanges, such
securities may trade on days when the Fund's net asset value is not computed;
and therefore, the net asset value of the Fund may be significantly affected on
days when the investor has no access to the Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market, Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the investment manager of the particular fund may calculate the price
of that debt security, subject to limitations established by the Board.
An exchange-traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate on the
valuation date.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
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 market value of the property on the valuation date.
Following the valuations of securities or other portfolios assets in terms of
the currency in which the market quotation used is expressed ("Local Currency"),
the value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
RETIREMENT PLANS
Shares of the Fund may be purchased as an investment in a number of kinds of
retirement plans, including qualified pension, profit sharing, money purchase
pension, and 401(k) plans, Code Section 403(b) custodial accounts, and
individual retirement accounts.
Individual Retirement Accounts. One of the tax-deferred retirement plan accounts
that may hold Fund shares is an individual retirement account ("IRA"). There are
three kinds of IRAs that an individual may establish: traditional IRAs, Roth
IRAs and education IRAs. With a traditional IRA, an individual may make a
contribution of up to $2,000 or, if less, the amount of the individual's earned
income for any taxable year prior to the year the individual reaches age 70 1/2.
The contribution will be fully deductible if neither the individual nor his or
her spouse is an active participant in an employer's
26
<PAGE>
retirement plan. If an individual is (or has a spouse who is) an active
participant in an employer-sponsored retirement plan , the amount, if any, of
IRA contributions that are deductible by such an individual is determined by the
individual's (or, if married filing jointly, the couple's) adjusted gross income
for the year. Even if an individual's contributions to an IRA for a taxable year
are not deductible, the individual nonetheless may make nondeductible
contributions up to $2,000, or 100% of earned income if less, for that year. A
higher-earning spouse also may contribute up to $2,000 per year to the
lower-earning spouse's own IRA, whether or not the lower-earning spouse has
earned income of less than $2,000, as long as the spouses' joint earned income
is at least equal to the combined amount of the spouses' IRA contributions for
the year. There are special rules for determining how withdrawals are to be
taxed if an IRA contains both deductible and nondeductible amounts. In general,
a proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Lump sum distributions from another qualified
retirement plan may be rolled over into a traditional IRA, also.
With a Roth IRA, an individual may make only nondeductible contributions;
contributions can be made of up to $2,000 or, if less, the amount of the
individual's earned income for any taxable year, but only if the individual's
adjusted gross income for the year is less than $95,000 ,or, if married filing
jointly, the couple's adjusted gross income is less than $150,000. The maximum
contribution amount phases out and falls to zero between $95,000 and $110,000
for single persons, and between $150,000 and $160,000 for married persons.
Contributions to a Roth IRA may be made even after the individual attains age 70
1/2. No distributions are required to be taken prior to the death of the
original account holder. Distributions from a Roth IRA that satisfy certain
requirements will not be taxable when taken; other distributions of earnings
will be taxable. An individual with adjusted gross income of $100,000 or less
generally may elect to roll over amounts from a traditional IRA to a Roth IRA.
The full taxable amount held in the traditional IRA that is rolled over to a
Roth IRA will be taxable in the year of the rollover, except rollovers made for
1998, which may be included in taxable income over a four-year period.
An education IRA provides a method for saving for the higher education expenses
of a child; it is not designed for retirement savings. Generally, amounts held
in an education IRA may be used to pay for qualified higher education expenses
at an eligible (post-secondary) educational institution. An individual may
contribute to an education IRA for the benefit of a child under 18 years old if
the individual's income does not exceed certain limits. The maximum contribution
for the benefit of any one child is $500 per year. Contributions are not
deductible, but earnings accumulate tax-free until withdrawal, and withdrawals
used to pay qualified higher education expenses of the beneficiary (or
transferred to an education IRA of a qualified family member) will be taxable.
Other withdrawals will be subject to tax.
In addition, there are special IRA programs available for employers under which
an employer may establish IRA accounts for its employees in lieu of establishing
more complicated retirement plans, such as qualified profit sharing or 401(k)
plans. Known as SEP-IRAs (Simplified Employee Pension-IRAs) and SIMPLE IRAs,
they permit employers to maintain a retirement program for their employees
without being subject to a number of the record keeping and testing requirements
applicable to qualified plans.
Qualified Retirement Plans. Fund shares also may be held in profit sharing,
money purchase pension, and 401(k) plan accounts. An employer, whether a
corporation, partnership or other kind of business entity, generally may
maintain one or more qualified retirement plans for its employees. These plans,
which are qualified plans under Code Section 401(a), are subject to numerous
rules relating to such matters as the maximum contribution that can be allocated
to participant's accounts, nondiscrimination, and distributions from the plan,
as well as being subject in many cases to the fiduciary duty and other
provisions of the Employee Retirement Income Securities Act of 1974, as amended.
Businesses considering adopting a qualified retirment plan are encouraged to
seek competent professional advice before adopting one of these plans.
403(b) Plan Accounts. Fund shares also may be purchased as an investment for
Code Section 403(b)(7) custodial accounts. In general, employees of tax-exempt
organizations described in Code Section 501(c)(3) and of public school systems
are eligible to participate in 403(b) accounts. These arrangements may permit
employer contributions and/or employee salary reduction contributions, and are
subject to rules relating to such matters as the maximum contribution than can
be made to a participant's account, nondiscrimination, and distributions from
the account.
General Information. Please call the Fund to obtain information regarding the
establishment of IRAs or other retirement plans. A retirement plan custodian may
charge fees in connection with establishing and maintaining the plan. An
investor should consult with a competent adviser for specific advice concerning
his or her tax status and the possible benefits of establishing one or more
retirement plan accounts. The description above is only very general; there are
numerous other rules applicable to these plans to be considered before
establishing one.
27
<PAGE>
PERFORMANCE
The Fund may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return." Performance
information will be computed separately for Class A, Class B and Class C shares
of the Fund. 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 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 such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Fund for performance purposes). Average annual
total return figures represent the average annual percentage change over the
period in question. Total return figures represent the aggregate percentage or
dollar value change over the period in question.
The Fund's 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 or Class C shares includes the effect of the
applicable contingent deferred sales charge that may be imposed at the end of
the period. The redeemable value is then divided by the initial investment, and
this quotient is taken to the Nth root (N representing the number of years in
the period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value on the reinvestment
dates during the period. Average annual total return may also be calculated
without deducting the maximum sales charge.
Calculation of the Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the Fund's "Financial Highlights" table
in the Fund's financial statements and prospectus. Total return performance for
a specific period is calculated by first taking an investment (assumed below to
be $10,000) ("initial investment") in 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 and Class C shares may or may not
include the effect of the applicable contingent deferred sales charge that may
be imposed at the end of the period. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Total return may also be shown as
the increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge for Class
A shares or the contingent deferred sales charge for Class B and Class C shares
would be reduced if such charge were included.
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. While
the maximum sales charge is normally reflected in the Fund's Class A performance
figures, certain total return calculations may not include such charge and those
results would be reduced if it were included. Class B shares and Class C shares
are sold at net asset value. Redemptions of Class B shares within the first six
years after 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. 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
28
<PAGE>
returns described in this section. Shares of the Fund are redeemable at the then
current net asset value, which may be more or less than original cost.
The Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged equity indexes including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock 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, the Standard & Poor's/Barra Growth Index, the Russell
1000(R) Value Index, the Russell 2000(R) Index, the Russell 2000(R) Value Index,
and the Russell 2000(R) Growth Index. The performance of the Fund may also be
compared to the performance of other mutual funds or mutual fund indexes with
similar objectives and policies as reported by independent mutual fund reporting
services such as Lipper Analytical Services, Inc. ("Lipper"). Lipper performance
calculations are based upon changes in net asset value with all dividends
reinvested and do not include the effect of any sales charges.
Information may be quoted from publications such as Morningstar, Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit, money market funds and U.S. Treasury
obligations. Bank product performance may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) or various certificate of deposit indexes.
Money market fund performance may be based upon, among other things, the
IBC/Donoghue's Money Fund Report(R) or Money Market Insight(R), reporting
services on money market funds. Performance of U.S. Treasury obligations may be
based upon, among other things, various U.S. Treasury bill indexes. Certain of
these alternative investments may offer fixed rates of return and guaranteed
principal and may be insured.
The Fund may depict the historical performance of the securities in which the
Fund may invest over periods reflecting a variety of market or economic
conditions either alone or in comparison with alternative investments,
performance indexes of those investments or economic indicators. The Fund may
also describe its portfolio holdings and depict its size or relative size
compared to other mutual funds, the number and make-up of its shareholder base
and other descriptive factors concerning the Fund. The relative performance of
growth stocks versus value stocks may also be discussed.
The Fund's returns and net asset value will fluctuate. Shares of the Fund are
redeemable by an investor at the then current net asset value, which may be more
or less than original cost. Redemption of Class B shares and Class C shares may
be subject to a contingent deferred sales charge as described above. Additional
information concerning the Fund's performance 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.
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.
29
<PAGE>
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(R) (all taxable) or Money Market Insight(R). 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 the Fund, their birthdates, their principal
occupations and their affiliations, if any, with the Adviser and KDI are listed
below:
JAMES E. AKINS (10/15/26), Trustee, 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs; formerly, a
career United States Foreign Service Officer, Energy Adviser for the White
House; United States Ambassador to Saudi Arabia, 1973-76.
ARTHUR R. GOTTSCHALK (2/13/25), Trustee, 10642 Brookridge Drive, Frankfort,
Illinois, Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; formerly, Illinois State Senator;
formerly, Vice President, The Reuben H. Donnelly Corp.
FREDERICK T. KELSEY (4/25/27), Trustee, 4010 Arbor Lane, Unit 102, Northfield,
Illinois; Retired; formerly, consultant to Goldman, Sachs & Co.; formerly,
President, Treasurer and Trustee of Institutional Liquid Assets and its
affiliated mutual funds; Trustee of Northern Institutional; formerly, Trustee of
the Pilot Funds.
THOMAS W. LITTAUER (4/26/55), Trustee and Vice President*, Two International
Place, Boston, Massachusetts; Managing Director, Adviser; Head of Broker Dealer
Division of an unaffiliated investment management firm during 1997; prior
thereto, President of Client Management Services of an unaffiliated investment
management firm from 1991 to 1996.
DANIEL PIERCE (3/18/34), Trustee and Chairman*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser.
KATHRYN L. QUIRK (12/3/52), Trustee and Vice President*, 345 Park Avenue, New
York, New York; Managing Director, Adviser.
FRED B. RENWICK (2/1/30), Trustee, 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director,
TIFF Investment Program, Inc.; Director, the Wartburg Home Foundation; Chairman,
Investment Committee of Morehouse College Board of Trustees; Chairman, American
Bible Society Investment Committee; formerly, member of the Investment Committee
of Atlanta University Board of Trustees; formerly, Director of Board of Pensions
Evangelical Lutheran Church of America.
JOHN B. TINGLEFF (5/4/35), Trustee, 2015 South Lake Shore Drive, Harbor Springs,
Michigan; Retired; formerly, President, Tingleff & Associates (management
consulting firm); formerly, Senior Vice President, Continental Illinois National
Bank & Trust Company.
JOHN G. WEITHERS (8/8/33), Trustee, 311 Spring Lake, Hinsdale, Illinois;
Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago
Stock Exchange; Director, Federal Life Insurance Company, President of the
Members of the Corporation and Trustee, DePaul University; Director, Systems
Imagineering, Inc.
MARK S. CASADY (9/21/60), President*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser; formerly, Institutional Sales Manager
of an unaffiliated mutual fund distributor.
PHILIP J. COLLORA (11/15/45), Vice President and Secretary*, 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President and Assistant Secretary, Scudder
Kemper.
30
<PAGE>
ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser.
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
JOHN R. HEBBLE (6/27/58), Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
BRENDA LYONS (2/21/63) Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Senior Vice President, Adviser; formerly, Associate,
Dechert Price & Rhoads (law firm) 1989 to 1997.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Adviser; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior thereto,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
VALERIE F. MALTER (7/25/58), Vice President*, 345 Park Avenue, New York, New
York; Senior Vice President, Adviser.
ELIZABETH D. SMITH (10/27/46), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
WILLIAM F. TRUSCOTT (9/14/60), Vice President*, 345 Park Avenue, New York, New
York; Senior Vice President, Adviser.
JAMES M. EYSENBACH (4/1/62), Vice President*, 101 California Street, San
Francisco, California; Senior Vice President, Adviser.
* "Interested persons" as defined in the 1940 Act.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Trust. The information in the last column is
for calendar year ended December 31, 1998. The Trust has not yet adopted a
Trustees compensation schedule.
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation Kemper Funds Paid
Name of Board Member from the Trust to Board Members(2)
- -------------------- -------------- -------------------
<S> <C> <C>
James E. Akins $0 $
Arthur R. Gottschalk(1) $0 $
Frederick T. Kelsey $0 $
Fred B. Renwick $0 $
John B. Tingleff $0 $
John G. Weithers $0 $
</TABLE>
(1) Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with the Fund. Deferred amounts accrue interest
monthly at a rate equal to the yield of Zurich Money Funds -- Zurich
Money Market Fund.
(2) Includes compensation for service on the Boards of 13 Kemper Funds,
with 36 fund portfolios. Each trustee currently serves as a board
member of 15 Kemper Funds with 51 fund portfolios. Total compensation
does not reflect amounts paid by Scudder Kemper Investments, Inc. to
the board members for meetings regarding the combination of Scudder and
Zurich Kemper Investments, Inc. Such amounts totaled $42,800, $40,100,
$39,000,
31
<PAGE>
$42,900, $42,900 and $42,900 for Messrs. Akins, Gorrschalk, Kelsey,
Renwick, Tingleff and Weithers, respectively.
The Board of Trustees is responsible for the general oversight of the Fund's
business. A majority of the Board's members are not affiliated with Scudder
Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees reviews the investment performance of the Fund and other
operational matters, including policies and procedures designed to ensure
compliance with various regulatory requirements. At least annually, the
Independent Trustees review the fees paid to the Adviser and its affiliates for
investment advisory services and other administrative and shareholder services.
In this regard, they evaluate, among other things, the Fund's investment
performance, the quality and efficiency of the various other services provided,
costs incurred by the Adviser and its affiliates and comparative information
regarding fees and expenses of competitive funds. They are assisted in this
process by the Fund's independent public accountants and by independent legal
counsel selected by the Independent Trustees.
Principal Holders of Securities
[As of July 31, 1999, the trustees and officers as a group, owned less than 1%
of the then outstanding shares of the Fund and no person owned of record 5% or
more of the outstanding shares of any class of the Fund. ]
SHAREHOLDER RIGHTS
The Fund is a series of Kemper Funds Trust, a registered open-end management
investment company organized as a business trust under the laws of Massachusetts
on October 14, 1998.
The Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "funds," all having $.01 par value, which may be divided by
the Board of Trustees into classes of shares. The Board of Trustees of the Trust
may authorize the issuance of additional classes and additional funds if deemed
desirable, each with its own investment objective, policies and restrictions.
Since the Trust may offer multiple funds, it is known as a "series company."
Shares of a fund have equal noncumulative voting rights and equal rights with
respect to dividends, assets and liquidation of such fund and are subject to any
preferences, rights or privileges of any classes of shares of the Portfolio.
Currently, the Trust , on behalf of the Fund, offers three classes of shares.
These are Class A, Class B and Class C shares, which have different expenses,
that may affect performance, and are available for purchase exclusively by the
following investors: (a) tax-exempt retirement plans of the Adviser and its
affiliates; and (b) the following investment advisory clients of the Adviser and
its investment advisory affiliates that invest at least $1 million in a fund:
(1) unaffiliated benefit plans, such as qualified retirement plans (other than
individual retirement accounts and self-directed retirement plans); (2)
unaffiliated banks and insurance companies purchasing for their own accounts;
and (3) endowment funds of unaffiliated non-profit organizations. Shares of the
Fund have equal noncumulative voting rights except that Class B and Class C
shares have separate and exclusive voting rights with respect to the Fund's Rule
12b-1 Plans. Shares of each class also have equal rights with respect to
dividends, assets and liquidation 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.
The Fund is not required to hold meetings of their shareholders and have no
current intention to do so. Under the Agreement and Declaration of Trust of the
Trust ("Declaration of Trust"), however, shareholder meetings will be held in
connection with the following matters: (a) the election or removal of trustees
if a meeting is called for such purpose; (b) the adoption of any contract for
which shareholder approval is required by the 1940 Act; (c) any termination of
the Trust or a class to the extent and as provided in the Declaration of Trust;
(d) any amendment of the Declaration of Trust (other than amendments changing
the name of the Trust, supplying any omission, curing any ambiguity or curing,
correcting or supplementing any defective or inconsistent provision thereof);
and (e) such additional matters as may be required by law, the Declaration of
Trust, the By-laws of the Trust, or any registration of the Trust with the
Securities and Exchange Commission or any state, or as the trustees may consider
necessary or desirable. The shareholders also would vote upon changes in
fundamental investment objectives, policies or restrictions.
32
<PAGE>
Any matter shall be deemed to have been effectively acted upon with respect to
the Fund if acted upon as provided in Rule 18f-2 under the 1940 Act, or any
successor rule, and in the Trust's Declaration of Trust. As used in the
prospectus and in this Statement of Additional Information, the term "majority",
when referring to the approvals to be obtained from shareholders in connection
with general matters affecting the Fund and all additional portfolios (e.g.,
election of directors), means the vote of the lesser of (i) 67% of the Trust's
Shares represented at a meeting if the holders of more than 50% of the
outstanding Shares are present in person or by proxy, or (ii) more than 50% of
the Trust's outstanding Shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single portfolio (e.g., annual approval of investment
management contracts), means the vote of the lesser of (i) 67% of the Shares of
the portfolio represented at a meeting if the holders of more than 50% of the
outstanding Shares of the portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding Shares of the portfolio.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) the Trust will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of the Fund stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, the
Fund has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
The Trust's Declaration of Trust provides that the presence at a shareholder
meeting in person or by proxy of at least 30% of the shares entitled to vote on
a matter shall constitute a quorum. Thus, a meeting of shareholders of the Fund
could take place even if less than a majority of the shareholders were
represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
auditors. Some matters requiring a larger vote under the Declaration of Trust,
such as termination or reorganization of the Trust and certain amendments of the
Declaration of Trust, would not be affected by this provision; nor would matters
which under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act.
The Trust's Declaration of Trust specifically authorizes the Board of Trustees
to terminate the Fund or class by notice to the shareholders without shareholder
approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of the
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund and the Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by Scudder Kemper remote
and not material, since it is limited to circumstances in which a disclaimer is
inoperative and such Fund itself is unable to meet its obligations.
33
<PAGE>
PART C
------
OTHER INFORMATION
-----------------
Item 23 Exhibits
- ------- --------
<TABLE>
<S> <C> <C>
(a) Declaration of Trust, dated October 14, 1998, is incorporated by
reference to Post-Effective Amendment No. 2 to the Registration
Statement.
(b) By-Laws, dated October 14, 1998, is incorporated by reference to
Post-Effective Amendment No. 2 to the Registration Statement.
(c) (c)(1) Establishment and Designation of Series of Beneficial Interest,
dated October 14, 1998, is incorporated by reference to
Post-Effective Amendment No. 2 to the Registration Statement.
(c)(2) Establishment and Designation of Series of Beneficial Interest,
with respect to Kemper Disciplined 500 Equity Fund, Kemper
Disciplined 1000 Growth Fund, and Kemper Disciplined 1000 Value
Fund to be filed by subsequent amendment.
(d) (d)(1) Investment Management Agreement between the Registrant, on behalf
of Kemper Large Company Growth Fund, and Scudder Kemper
Investments, dated December 28, 1998, is incorporated by reference
to Post-Effective Amendment No. 2 to the Registration Statement.
(d)(2) Investment Management Agreement between the Registrant, on behalf
of Kemper Research Fund, and Scudder Kemper Investments, dated
December 28, 1998 is incorporated by reference to Post-Effective
Amendment No. 2 to the Registration Statement.
(d)(3) Investment Management Agreement between the Registrant, on behalf
of Kemper Small Cap Value+Growth Fund, and Scudder Kemper
Investments, dated December 28, 1998 is incorporated by reference
to Post-Effective Amendment No. 2 to the Registration Statement.
(d)(4) Investment Management Agreement between the Registrant, on behalf
of Kemper Disciplined 500 Equity Fund, and Scudder Kemper
Investments to be filed by subsequent amendment.
(d)(5) Investment Management Agreement between the Registrant, on behalf
of Kemper Disciplined 1000 Growth Fund, and Scudder Kemper
Investments to be filed by subsequent amendment.
(d)(6) Investment Management Agreement between the Registrant, on behalf
of Kemper Disciplined 1000 Value Fund, and Scudder Kemper
Investments to be filed by subsequent amendment.
(e) Underwriting and Distribution Services Agreement between the
Registrant and Kemper Distributors, Inc., dated December 28, 1998
2
<PAGE>
is incorporated by reference to Post-Effective Amendment No. 2 to
the Registration Statement.
(f) Inapplicable.
(g) Form of Custody Agreement between the Registrant and State Street
Bank and Trust Company is incorporated by reference to
Post-Effective Amendment No. 2 to the Registration Statement.
(h) (h)(1) Agency Agreement dated December 28, 1998 is incorporated by
reference to Post-Effective Amendment No. 2 to the Registration
Statement.
(h)(2) Administrative Services Agreement, dated December 28, 1998, is
incorporated by reference to Post-Effective Amendment No. 2 to the
Registration Statement.
(h)(3) Fund Accounting Services Agreement between the Registrant, on
behalf of Kemper Large Company Growth Fund, and Scudder Fund
Accounting Corp., dated December 28, 1998, is incorporated by
reference to Post-Effective Amendment No. 2 to the Registration
Statement.
(h)(4) Fund Accounting Services Agreement between the Registrant, on
behalf of Kemper Research Fund, and Scudder Fund Accounting Corp.,
dated December 28, 1998, is incorporated by reference to
Post-Effective Amendment No. 2 to the Registration Statement.
(h)(5) Fund Accounting Services Agreement between the Registrant, on
behalf of Kemper Small Cap Value+Growth Fund, and Scudder Fund
Accounting Corp., dated December 28, 1998, is incorporated by
reference to Post-Effective Amendment No. 2 to the Registration
Statement.
(h)(6) Fund Accounting Services Agreement between the Registrant, on
behalf of Kemper Disciplined 500 Equity Fund, and Scudder Fund
Accounting Corp. to be filed by subsequent amendment.
(h)(7) Fund Accounting Services Agreement between the Registrant, on
behalf of Kemper Disciplined 1000 Growth Fund, and Scudder Fund
Accounting Corp. to be filed by subsequent amendment.
(h)(8) Fund Accounting Services Agreement between the Registrant, on
behalf of Kemper Disciplined 1000 Value Fund, and Scudder Fund
Accounting Corp. to be filed by subsequent amendment.
(i) Legal Opinion and Consent of Dechert, Price & Rhoads, counsel to
the funds, to be filed by subsequent amendment.
(j) Consent of Independent Auditors to be filed by subsequent amendment.
(k) Inapplicable.
(l) Purchase Agreement between Kemper Funds Trust and Scudder Kemper
Investments, Inc. dated December 23, 1998, is incorporated
3
<PAGE>
by reference to Post-Effective Amendment No. 2 to the Registration
Statement.
(m) (m)(1) 12b-1 Plan between Kemper Large Company Growth Fund (Class B
shares) and Kemper Distributors, Inc., dated December 28, 1998, is
incorporated by reference to Post-Effective Amendment No. 2 to the
Registration Statement.
(m)(2) 12b-1 Plan between Kemper Large Company Growth Fund (Class C
shares) and Kemper Distributors, Inc., dated December 28, 1998, is
incorporated by reference to Post-Effective Amendment No. 2 to the
Registration Statement.
(m)(3) 12b-1 Plan between Kemper Research Fund (Class B shares)and Kemper
Distributors, Inc., dated December 28, 1998, is incorporated by
reference to Post-Effective Amendment No. 2 to the Registration
Statement.
(m)(4) 12b-1 Plan between Kemper Research Fund (Class C shares) and Kemper
Distributors, Inc., dated December 28, 1998, is incorporated by
reference to Post-Effective Amendment No. 2 to the Registration
Statement.
(m)(5) 12b-1 Plan between Kemper Small Cap Value+Growth Fund (Class B
shares) and Kemper Distributors, Inc., dated December 28, 1998, is
incorporated by reference to Post-Effective Amendment No. 2 to the
Registration Statement.
(m)(6) 12b-1 Plan between Kemper Small Cap Value+Growth Fund (Class C
shares) and Kemper Distributors, Inc., dated December 28, 1998, is
incorporated by reference to Post-Effective Amendment No. 2 to the
Registration Statement.
(m)(7) 12b-1 Plan between Kemper Disciplined 500 Equity Fund (Class B
shares) and Kemper Distributors, Inc. to be filed by subsequent
amendment.
(m)(8) 12b-1 Plan between Kemper Disciplined 500 Equity Fund (Class C
shares) and Kemper Distributors, Inc. to be filed by subsequent
amendment.
(m)(9) 12b-1 Plan between Kemper Disciplined 1000 Growth Fund (Class B
shares) and Kemper Distributors, Inc. to be filed by subsequent
amendment.
(m)(10) 12b-1 Plan between Kemper Disciplined 1000 Growth Fund (Class C
shares) and Kemper Distributors, Inc. to be filed by subsequent
amendment.
(m)(11) 12b-1 Plan between Kemper Disciplined 1000 Value Fund (Class B
shares) and Kemper Distributors, Inc. to be filed by subsequent
amendment.
(m)(12) 12b-1 Plan between Kemper Disciplined 1000 Value Fund (Class C
shares) and Kemper Distributors, Inc. to be filed by subsequent
amendment.
4
<PAGE>
(n) Inapplicable
(o) Multi-Distribution System Plan, dated December 28, 1998, is
incorporated by reference to Post-Effective Amendment No. 2 to the
Registration Statement.
</TABLE>
Item 24. Persons Controlled or under Common Control with Fund.
- -------- -----------------------------------------------------
None
Item 25. Indemnification
- -------- ---------------
As permitted by Sections 17(h) and 17(i) of the Investment
Company Act of 1940, as amended (the "1940 Act"), pursuant to
Article IV of the Registrant's By-Laws (filed as Exhibit No. 2
to the Registration Statement), officers, directors, employees
and representatives of the Funds may be indemnified against
certain liabilities in connection with the Funds, and pursuant
to Section 12 of the Underwriting Agreement dated May 6, 1998
(filed as Exhibit No. 6(c) to the Registration Statement),
Scudder Investor Services, Inc. (formerly "Scudder Fund
Distributors, Inc."), as principal underwriter of the
Registrant, may be indemnified against certain liabilities
that it may incur. Said Article IV of the By-Laws and Section
12 of the Underwriting Agreement are hereby incorporated by
reference in their entirety.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be
permitted to directors, officers and controlling persons of
the Registrant and the principal underwriter 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 director, officer, or
controlling person of the Registrant and the principal
underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant
by such director, officer or controlling person or the
principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
Item 26. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<TABLE>
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
5
<PAGE>
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Financial Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
6
<PAGE>
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman, British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
</TABLE>
Item 27. Principal Underwriters
- -------- ----------------------
(a) Kemper Distributors, Inc. acts as principal underwriter of
the Registrant's shares and acts as principal underwriter of the Kemper
Funds.
(b) Information on the officers and directors of Kemper
Distributors, Inc., principal underwriter for the Registrant is set
forth below. The principal business address is 222 South Riverside
Plaza, Chicago, Illinois 60606.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(1) (2) (3)
Position and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
James L. Greenawalt President None
Thomas W. Littauer Director, Chief Executive Officer Vice President
Kathryn L. Quirk Director, Secretary, Chief Legal Vice President
Officer & Vice President
James J. McGovern Chief Financial Officer & Vice None
President
Linda J. Wondrack Vice President & Chief Compliance None
Officer
Paula Gaccione Vice President None
Michael E. Harrington Vice President None
Robert A. Rudell Vice President None
William M. Thomas Vice President None
Todd N. Gierke Assistant Treasurer None
7
<PAGE>
Position and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
Philip J. Collora Assistant Secretary Vice President and
Secretary
Paul J. Elmlinger Assistant Secretary None
Diane E. Ratekin Assistant Secretary None
Daniel Pierce Director, Chairman Trustee
Mark S. Casady Director, Vice Chairman President
Stephen R. Beckwith Director None
</TABLE>
(c) Not applicable
Item 28. Location of Accounts and Records
- -------- --------------------------------
Accounts, books and other documents are maintained at the offices of the
Registrant, the offices of Registrant's investment adviser, Scudder Kemper
Investments, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, at the
offices of the Registrant's principal underwriter, Kemper Distributors, Inc.,
222 South Riverside Plaza, Chicago, Illinois 60606 or, in the case of records
concerning custodial functions, at the offices of the custodian, Investors
Fiduciary Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri
64105 or, in the case of records concerning transfer agency functions, at the
offices of IFTC and of the shareholder service agent, Kemper Service Company,
811 Main Street, Kansas City, Missouri 64105.
Item 29. Management Services
- -------- -------------------
Not applicable.
Item 30. Undertakings
- -------- ------------
Not applicable.
8
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485 under the Securities Act of 1933 and 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 18th day of June 1999.
KEMPER FUNDS TRUST
By /s/Philip J. Collora
---------------------------
Philip J. Collora
Vice President and 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>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/Mark S. Casady
- --------------------------------------
Mark S. Casady President (Principal Executive June 18, 1999
Officer)
/s/Daniel Pierce
- --------------------------------------
Daniel Pierce Trustee June 18, 1999
/s/James E. Akins
- --------------------------------------
James E. Akins Trustee June 18, 1999
/s/Arthur R. Gottschalk
- --------------------------------------
Arthur R. Gottschalk Trustee June 18, 1999
/s/James R. Edgar Trustee June 18, 1999
- --------------------------------------
James R. Edgar
/s/Fredrick T. Kelsey
- --------------------------------------
Frederick T. Kelsey Trustee June 18, 1999
/s/Thomas W. Littauer
- --------------------------------------
Thomas W. Littauer Chairman, Trustee and Vice President June 18, 1999
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Kathryn L. Quirk
- --------------------------------------
Kathryn L. Quirk Trustee and Vice President June 18, 1999
/s/Fred B. Renwick
- --------------------------------------
Fred B. Renwick Trustee June 18, 1999
/s/John G. Weithers
- --------------------------------------
John G. Weithers Trustee June 18, 1999
/s/John R. Hebble
- --------------------------------------
John R. Hebble Treasurer June 18, 1999
</TABLE>
2
<PAGE>
File No. 333-65661
File No. 811-09057
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
PRE-EFFECTIVE AMENDMENT NO. 2
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 3
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
KEMPER FUNDS TRUST
9
<PAGE>
KEMPER FUNDS TRUST
EXHIBIT INDEX
10
