LONG TERM
INVESTING
IN A
SHORT TERM
WORLD(SM)
January 1, 2000
Prospectus
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
3 Kemper Equity Funds
Kemper Large Company Growth 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 employees of Scudder Kemper Investments, Inc.
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 Research Fund........................................................8
Kemper Small Cap Value+Growth Fund.........................................13
ABOUT YOUR INVESTMENT.........................................................23
Choosing a share class...................................................23
Rule 12b-1 plan..........................................................24
Special features.........................................................24
Buying shares............................................................26
Selling and exchanging shares............................................31
Distributions and taxes..................................................34
Transaction information..................................................35
FINANCIAL HIGHLIGHTS..........................................................38
2
<PAGE>
ABOUT THE FUNDS
- --------------------------------------------------------------------------------
Kemper Large Company Growth Fund
- --------------------------------------------------------------------------------
Investment objective
Kemper Large Company Growth Fund seeks long-term growth of capital. Although
major changes tend to be infrequent, the fund's Board could change its
investment objective without seeking shareholder approval.
Main investment strategies
The fund pursues its objective by investing primarily in the equity securities
of seasoned, financially strong large U.S. growth companies (i.e., those with
market capitalizations of $1 billion or more). Currently, companies in which the
fund invests have a median market capitalization of approximately $45.4 billion.
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.
Under normal circumstances, the fund will invest at least 65% of its total
assets in equity securities of large U.S. growth companies, mainly common
stocks.
In choosing stocks, the portfolio management team looks for companies with 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 Stock Price Index) with prospects
for above-average growth in earnings, cash flow or assets in the future;
o strong competitive positioning, such as 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; or
o experienced, motivated management.
3
<PAGE>
The fund typically sells a stock when:
o the company's earnings growth potential has become less favorable;
o the capitalization of the issuer ceases to qualify the issuer's securities
as an investment for the fund;
o the stock fails to meet the portfolio management team's expectations; or
o changes occur 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
While most of the fund's equity securities are common stocks, the fund may also
invest in convertible securities, preferred stocks and depositary receipts.
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 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 fund's principal risks are associated with investing in the stock market and
the portfolio management team's skill in managing the fund's portfolio.
An investment in the 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 in value are possible both in the
overall stock market and in the types of securities held by the fund.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater
4
<PAGE>
share price fluctuations as the market reacts to changing perceptions of the
underlying companies' growth potential and broader economic activity.
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.
There are market and investment risks with any security. The value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
Past Performance
As the fund does not have a full calendar year of performance, no past
performance information is provided.
5
<PAGE>
Fee and Expense Information
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
<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
% of offering price) 5.75% None None
- --------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as % of redemption proceeds) None^(1) 4.00%^(2) 1.00%^(2)
- --------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------------
Redemption Fee (as % of amount redeemed,
if applicable) None None None
- --------------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets
- --------------------------------------------------------------------------------------
Management Fee 0.70% 0.70% 0.70%
- --------------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------------
Other Expenses 1.65% 1.82% 1.82%
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses* 2.35% 3.27% 3.27%
- --------------------------------------------------------------------------------------
</TABLE>
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege (for purchases totaling at least
$1,000,000) 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,
measured from the date of purchase: 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. A contingent deferred sales charge of 1% is
applicable to Class C shares redeemed within one year of purchase.
* Total Annual Fund Operating Expenses are temporarily capped at 1.50%, 2.25%
and 2.25% for Class A, Class B and Class C shares, respectively. This
arrangement may be discontinued at any time. For the fiscal year ended
August 31, 1999, Total Annual Fund Operating Expenses of Class A, B and C
shares were reduced by 0.85%, 1.02%, and 1.02%, respectively; and actual
Total Annual Fund Operating Expenses were 1.50%, 2.25% and 2.25%,
respectively.
6
<PAGE>
Example
This example is 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 "total annual fund operating expenses" remaining the same each year.
Actual fund expenses and returns 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
after: your shares:
- ----------------------------------------- ---------------------------------------------
Class A Class B Class C Class A Class B Class C
- ----------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year $799 $730 $430 1 Year $799 $330 $330
- ----------------------------------------- ---------------------------------------------
3 Years $1,266 $1,307 $1,007 3 Years $1,266 $1,007 $1,007
- ----------------------------------------- ---------------------------------------------
5 Years $1,758 $1,907 $1,707 5 Years $1,758 $1,707 $1,707
- ----------------------------------------- ---------------------------------------------
10 Years $3,107 $3,165 $3,567 10 Years $3,107 $3,165 $3,567
- ----------------------------------------- ---------------------------------------------
</TABLE>
7
<PAGE>
- --------------------------------------------------------------------------------
Kemper Research Fund
- --------------------------------------------------------------------------------
Investment objective
Kemper Research Fund seeks long-term growth of capital. Although major changes
tend to be infrequent, the fund's Board could change its investment objective
without seeking shareholder approval.
Main investment strategies
The fund pursues its objective by investing primarily in a diversified portfolio
of common stocks. The investment manager generally invests among different
industry sectors (i.e. energy, technology, financial, etc.).
Under normal market conditions, the fund invests at least 65% of its total
assets in common stocks of large U.S. companies (i.e., those with market
capitalizations of $1 billion or more). Currently, companies in which the fund
invests have a median market capitalization of approximately $43 billion.
The fund invests in securities based on the top research recommendations of the
investment manager's industry research analysts and other investment
specialists. These recommendations represent both growth and value stocks across
various sectors. Value stocks are stocks that tend to have low price-to-earnings
ratios, while growth stocks are stocks with above-average earnings growth
potential. Typically, the fund's sector weightings closely mirror those of the
S&P 500 Index.
In making their recommendations, the research analysts and investment
specialists look for companies that have sound finances, strong management and
product franchises, good business prospects and strong competitive positioning,
among other factors. They also consider price-to-earnings, price-to-book and
price-to-cash flow ratios.
The fund typically sells a stock if:
o its fundamental characteristics change;
o the stock fails to meet the portfolio management team's expectations; or
o changes occur 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.
8
<PAGE>
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 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 fund's principal risks are associated with investing in the stock market and
the portfolio management team's skill in managing the fund's portfolio.
An investment in the 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 in value are possible both in the
overall stock market and in the types of securities held by the fund.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying companies' growth potential and broader economic
activity.
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 may lead it to
underperform in a market that particularly favors value or growth stocks.
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.
9
<PAGE>
There are market and investment risks with any security. The value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
Past Performance
As the fund does not have a full calendar year of performance, no past
performance information is provided.
10
<PAGE>
Fee and Expense Information
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
<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 % of offering price) 5.75% None None
- --------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as % of redemption proceeds) None^(1) 4.00%^(2) 1.00%^(2)
- --------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------------
Redemption Fee (as % of amount redeemed, if
applicable) None None None
- --------------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets
- --------------------------------------------------------------------------------------
Management Fee 0.70% 0.70% 0.70%
- --------------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------------
Other Expenses 1.63 % 1.82% 1.82%
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses* 2.33% 3.27 % 3.27%
--------------------------------------------------------------------------------------
</TABLE>
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege (for purchases totaling at least
$1,000,000) 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,
measured from the date of purchase: 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
and eliminated thereafter. A contingent deferred sales charge of 1% is
applicable to Class C shares redeemed within one year of purchase.
* Total Annual Fund Operating Expenses are temporarily capped at 1.50%, 2.25%
and 2.25% for Class A, Class B and Class C shares, respectively. This
arrangement may be discontinued at any time. For the fiscal year ended
August 31, 1999, Total Annual Fund Operating Expenses of Class A, B and C
shares were reduced by 0.85%, 0.85%, and 0.85%, respectively; and actual
Total Annual Fund Operating Expenses were 1.48%, 2.42% and 2.42%,
respectively.
11
<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 "total annual fund operating expenses" remaining the same each year.
Actual fund expenses and returns 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
after: your shares:
- ------------------------------------------- -------------------------------------------
Class A Class B Class C Class A Class B Class C
- ------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year $798 $730 $430 1 Year $798 $330 $330
- ------------------------------------------- -------------------------------------------
3 Years $1,261 $1,307 $1,007 3 Years $1,261 $1,007 $1,007
- ------------------------------------------- -------------------------------------------
5 Years $1,749 $1,907 $1,707 5 Years $1,749 $1,707 $1,707
- ------------------------------------------- -------------------------------------------
10 Years $3,088 $3,156 $3,567 10 Years $3,088 $3,156 $3,567
- ------------------------------------------- -------------------------------------------
</TABLE>
12
<PAGE>
- --------------------------------------------------------------------------------
Kemper Small Cap Value+Growth Fund
- --------------------------------------------------------------------------------
Investment objective
Kemper Small Cap Value+Growth Fund seeks long-term capital appreciation Although
major changes tend to be infrequent, the fund's Board could change its
investment objective without seeking shareholder approval.
Main investment strategies
The fund pursues its objective by investing primarily in a diversified portfolio
of domestic small company value and small company growth stocks. 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.
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. Generally, small companies are those with
market capitalizations of less than $1.5 billion. Currently, companies in which
the fund invests have a median market capitalization of approximately $364
million. 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.
Value stocks are stocks that 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. Securities may be
undervalued as a result of overreaction by investors to actual or anticipated
unfavorable news about a company, industry or the stock markets in general or as
a result of a market decline or poor economic conditions.
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.
13
<PAGE>
The investment manager uses 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 the following attributes in determining which securities may be
attractive investments:
o valuations;
o earnings trends;
o future earnings potential; or
o a company's financial strength.
The fund typically sells a security if:
o the company's market capitalization exceeds the market capitalization of
the largest company in the Russell 2000 Index;
o the portfolio management team believes the security has become unattractive
on a valuation basis;
o the company's earnings trends have deteriorated;
o the company's outlook for future earnings is uncertain; or
o the security has not met the portfolio management team's expectations.
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 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.
14
<PAGE>
Main risks
The fund's principal risks are associated with investing in the stock market and
the portfolio management team's skill in managing the fund's portfolio.
An investment in the 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 in value are possible both in the
overall stock market and in the types of securities held by the fund.
While small company stocks have historically outperformed large company stocks,
they also have been subject to greater investment risk. The risks generally
associated with small companies include more limited product lines, markets and
financial resources, lack of management depth or experience, dependency on key
personnel and vulnerability to adverse market and economic developments.
Accordingly, the prices of small company stocks tend to be more volatile than
prices of large company stocks. Further, the prices of small company stocks are
often adversely affected by limited trading volumes and the lack of publicly
available information.
Also, because small companies normally have fewer shares outstanding and these
shares generally trade less frequently than large companies, it may be more
difficult for the fund to buy and sell significant amounts of small company
shares without having an unfavorable impact on the shares' market price.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying companies' growth potential and broader economic
activity.
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.
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.
There are market and investment risks with any security. 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>
Past Performance
As the fund does not have a full calendar year of performance, no past
performance information is provided.
16
<PAGE>
Fee and Expense Information
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
<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 % of offering price) 5.75% None None
- --------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as % of redemption proceeds) None^(1) 4.00%^(2) 1.00%(2)
- --------------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------------
Redemption Fee (as % of amount redeemed,
if applicable) None None None
- --------------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets
- --------------------------------------------------------------------------------------
Management Fee 0.75% 0.75% 0.75%
- --------------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------------
Other Expenses 3.74% 3.88% 3.88%
----- ----- -----
- --------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses* 4.49% 5.38% 5.38%
- --------------------------------------------------------------------------------------
</TABLE>
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege (for purchases totaling at least
$1,000,000) 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,
measured from the date of purchase: 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. A contingent deferred sales charge of 1% is
applicable to Class C shares redeemed within one year of purchase.
* Total Annual Fund Operating Expenses are temporarily capped at 1.60%, 2.50%
and 2.50% for Class A, Class B and Class C shares, respectively. This
arrangement may be discontinued at any time. For the fiscal year ended
August 31, 1999, Total Annual Fund Operating Expenses of Class A, B and C
shares were reduced by 1.59%, 1.59%, and 1.59%, respectively; and actual
Total Annual Fund Operating Expenses were 1.63%, 2.52% and 2.52%,
respectively.
17
<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 "total annual fund operating expenses" remaining the same each year.
Actual fund expenses and returns 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
after: not sell your shares:
- ------------------------------------------- -------------------------------------------
Class A Class B Class C Class A Class B Class C
- ------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year $999 $937 $637 1 Year $999 $537 $537
- ------------------------------------------- -------------------------------------------
3 Years $1,854 $1,905 $1,605 3 Years $1,854 $1,605 $1,605
- ------------------------------------------- -------------------------------------------
5 Years $2,718 $2,865 $2,665 5 Years $2,718 $2,665 $2,665
- ------------------------------------------- -------------------------------------------
10 Years $4,916 $4,965 $5,279 10 Years $4,916 $4,965 $5,279
- ------------------------------------------- -------------------------------------------
</TABLE>
18
<PAGE>
Investment Manager
Each fund retains the investment management firm of Scudder Kemper Investments,
Inc., 345 Park Avenue, New York, New York 10154-0010, to manage its daily
investment and business affairs subject to the policies established by the
funds' Board. Scudder Kemper Investments, Inc. actively manages the funds'
investments. 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
$290 billion in assets globally for mutual fund investors, retirement and
pension plans, institutional and corporate clients, and private family and
individual accounts.
Kemper Large Company Growth Fund and Kemper Research Fund each pay Scudder
Kemper Investments, Inc. a graduated monthly investment management fee at the
following annual rate:
As a % of Average Daily Net Assets ($) 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 Scudder Kemper Investments, Inc. a
graduated monthly investment management fee at the following annual rate:
As a % of Average Daily Net 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%
19
<PAGE>
Portfolio management
The following investment professionals are associated with the funds as
indicated:
Kemper Large Company Growth Fund
<TABLE>
<CAPTION>
Name & Title Joined the Fund Background
- ------------------------------------------------------------------------------------
<S> <C> <C>
Valerie Malter, December 1998 Joined Scudder Kemper Investments in 1995
Lead Manager as Product Leader of Global Equity Growth.
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.
- ------------------------------------------------------------------------------------
20
<PAGE>
Kemper Research Fund
Name & Title Joined the Fund Background
- ------------------------------------------------------------------------------------
Elizabeth D. Smith, December 1998 Joined Scudder Kemper Investments in 1973.
Co-Lead Portfolio Ms. Smith has been the product leader for
Manager 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.
- ------------------------------------------------------------------------------------
Kathleen Millard, December 1998 Joined Scudder Kemper Investments in 1991
Co-Lead Portfolio as a portfolio manager. She began her
Manager investment career in 1984.
- ------------------------------------------------------------------------------------
Laurie Feldman, December 1998 Joined Scudder Kemper Investments in 1997.
Portfolio Manager Prior to joining Scudder Kemper, Ms.
Feldman was an analyst and Managing
Director at an unaffiliated investment
management company.
- ------------------------------------------------------------------------------------
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 the
Quantitative Services Group 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.
- -------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Year 2000
Like all mutual funds, the funds could be affected by the inability of some
computer systems to recognize the year 2000. Scudder Kemper has a readiness
program designed to address these problems, and has researched the readiness of
suppliers and business partners as well as issuers of securities the fund owns.
Still, there is some risk this problem could materially affect each fund's
operations (such as its ability to calculate net asset value and to handle
purchases and redemptions), its investments, or securities markets in general.
22
<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.
23
<PAGE>
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 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 (but not necessarily all) 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.
24
<PAGE>
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 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 a 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.
The funds reserve the right to terminate or modify this privilege at any time.
25
<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.
Class A Shares
Public Sales Charge
Offering Price Sales Charge as a % of Net
Including as a % of Amount
Sales Charge Amount of Purchase Offering Price* Invested**
- ------------ ------------------ --------------- ----------
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 2.00 2.04
million 0.00*** 0.00***
$1 million and over
* 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 Purchases Class A shares of a fund may be purchased at net asset value by:
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;
26
<PAGE>
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;
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, 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 a 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;
27
<PAGE>
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.
28
<PAGE>
Class B Shares
Public Offering Net asset value per share without any sales charge at the
Price time 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
After Purchase: First Second Third Fourth Fifth Sixth
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contingent Deferred
Sales Charge: 4% 3% 3% 2% 2% 1%
-----------------------------------------------------------------
</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 the Internal Revenue
Code (the "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
Feature A 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.
29
<PAGE>
Class C Shares
Public Offering Net asset value per share without any sales charge at the
Price time 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 purchase. The charge will not be imposed upon redemption of
Charge 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.
30
<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 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.
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, 1998 will be eligible for the second year's charge if redeemed on or
after December 1, 1999. 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.
31
<PAGE>
Telephone Redemptions
If the proceeds of the redemption (prior to the imposition of any contingent
deferred sales charge) are $50,000 or less and the proceeds are payable to the
shareholder of record at the address of record, normally a telephone request or
a written request by any one account holder without a signature guarantee is
sufficient for redemptions by individual or joint account holders, and trust,
executor, guardian and custodial account holders, provided the trustee,
executor, guardian or custodian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to 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 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.
32
<PAGE>
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 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.
33
<PAGE>
Distributions and taxes
Dividends and capital gains distributions
Each fund will normally distribute annual dividends of net investment income and
any net realized short-term and long-term capital gains.
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 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
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable to
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 shareholders 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 a shareholder as if paid on December 31 of the calendar year in
which they were declared.
34
<PAGE>
A sale or exchange of a shareholder's 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 the shareholder owned the shares.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, is taxable to you.
Each fund sends shareholders 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 shareholders if shareholders fail to
provide the fund with their correct taxpayer identification number or to make
required certifications, or if shareholders have been notified by the Internal
Revenue Service that they are subject to backup withholding. Any such withheld
amounts may be credited against your U.S. federal income tax liability.
Shareholders of a fund may be subject to state, local and foreign taxes on fund
distributions and dispositions of fund shares. Shareholders should consult your
tax advisor regarding the particular tax consequences of an investment in a
fund.
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.
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 total
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.
35
<PAGE>
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 you place an order to sell shares for which a 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 and the proceeds are payable to 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 distributor 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 reserves the right to withdraw
all or any part of the offering made by this prospectus and to reject purchase
orders. Also, from time to time, 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
36
<PAGE>
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 plan,
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 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 a 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.
37
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below are intended to help you understand the funds' financial
performance for the periods reflected below. Certain information reflects the
financial results for a single fund share. The total return figures show what a
shareholder in a fund would have earned (or lost) assuming reinvestment of all
distributions. This information has been audited by Ernst & Young LLP, whose
report, along with the fund's financial statements, are included in each fund's
annual report, which is available upon request by calling Kemper at
1-800-621-1048.
Kemper Large Company Growth Fund^(a)
<TABLE>
<CAPTION>
Class A Class B Class C
- ---------------------------------------------------------------------------------------
Per share operating performance
<S> <C> <C> <C>
Net asset value, beginning of period $9.50 9.50 9.50
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.07) (.14) (.14)
- ---------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .62 .63 .63
- ---------------------------------------------------------------------------------------
Total from investment operations .55 .49 .49
- ---------------------------------------------------------------------------------------
Net asset value, end of period $10.05 9.99 9.99
- ---------------------------------------------------------------------------------------
Total return (not annualized) 5.79% 5.16 5.16
- ---------------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.85% 2.77 2.77
- ---------------------------------------------------------------------------------------
Net investment income (loss) (1.02)% (1.95) (1.95)
- ---------------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 2.35% 3.27 3.27
- ---------------------------------------------------------------------------------------
Net investment income (loss) (1.52)% (2.45) (2.45)
- ---------------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of period $2,107,816
- ---------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 64%
- ---------------------------------------------------------------------------------------
</TABLE>
(a) For the period from December 31, 1998 (commencement of operations) to
August 31, 1999
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive and absorb certain
operating expenses of the fund. The other ratios to average net assets are
computed without this expense absorption. Per share data for the period ended
August 31, 1999 was determined based on average shares outstanding.
38
<PAGE>
Kemper Research Fund^(a)
<TABLE>
<CAPTION>
Class A Class B Class C
- ---------------------------------------------------------------------------------------
Per share operating performance
<S> <C> <C> <C>
Net asset value, beginning of period $9.50 9.50 9.50
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.01) (.07) (.07)
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain .63 .63 .63
- ---------------------------------------------------------------------------------------
Total from investment operations .62 .56 .56
- ---------------------------------------------------------------------------------------
Net asset value, end of period $10.12 10.06 10.06
- ---------------------------------------------------------------------------------------
Total return (not annualized) 6.53% 5.89 5.89
- ---------------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.48% 2.42 2.42
- ---------------------------------------------------------------------------------------
Net investment income (loss) (.08)% (1.02) (1.02)
- ---------------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 2.33% 3.27 3.27
- ---------------------------------------------------------------------------------------
Net investment income (loss) (.93)% (1.87) (1.87)
- ---------------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of period $3,200,749
- ---------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 78%
- ---------------------------------------------------------------------------------------
</TABLE>
(a) For the period from December 31, 1998 (commencement of operations) to
August 31, 1999
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive and absorb certain
operating expenses of the fund. The other ratios to average net assets are
computed without this expense waiver or absorption. Per share data for the
period ended August 31, 1999 was determined based on average shares outstanding.
39
<PAGE>
Kemper Small Cap Value+Growth Fund^(a)
<TABLE>
<CAPTION>
Class A Class B Class C
- ---------------------------------------------------------------------------------------
Per share operating performance
<S> <C> <C> <C>
Net asset value, beginning of period $9.50 9.50 9.50
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.04) (.09) (.09)
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain .02 .01 .01
(loss)
- ---------------------------------------------------------------------------------------
Total from investment operations (.02) (.08) (.08)
- ---------------------------------------------------------------------------------------
Net asset value, end of period $9.48 9.42 9.42
- ---------------------------------------------------------------------------------------
Total return (not annualized) (.21)% (.84) (.84)
- ---------------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.63% 2.52 2.52
- ---------------------------------------------------------------------------------------
Net investment income (loss) (.62)% (1.51) (1.51)
- ---------------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 4.49% 5.38 5.38
- ---------------------------------------------------------------------------------------
Net investment income (loss) (3.48)% (4.37) (4.37)
- ---------------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of period $994,014
- ---------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 36%
- ---------------------------------------------------------------------------------------
</TABLE>
(a) For the period from December 31, 1998 (commencement of operations) to
August 31, 1999
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive 0.35% of its management
fee and absorb certain operating expenses of the fund. The other ratios to
average net assets are computed without this expense waiver or absorption. Per
share data for the period ended August 31, 1999 was determined based on average
shares outstanding.
40
<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 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 Call Kemper at: 1-800-621-1048
- --------------------------------------------------------------------------------
By Mail Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.kemper.com
- --------------------------------------------------------------------------------
The Statement of Additional Information dated January 1, 2000 is incorporated by
reference into this prospectus (is legally a part of this prospectus).
Kemper Funds Trust
Investment Company Act file number: 811-09057
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
January 1, 2000
Kemper Large Company Growth 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 January 1,
2000. 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 and is also available along
with other related materials at the SEC's Internet web site
(http://www.sec.gov). The Annual Reports, dated August 31, 1999 for Kemper Large
Company Growth Fund, Kemper Research Fund and Kemper Small Cap Value Fund are
incorporated herein, are hereby deemed to be a part of this Statement of
Additional Information and are available, without charge by calling
1-800-621-1048.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
INVESTMENT RESTRICTIONS..........................................................................................2
INVESTMENT POLICIES AND TECHNIQUES...............................................................................3
BROKERAGE COMMISSIONS...........................................................................................15
INVESTMENT MANAGER AND UNDERWRITER..............................................................................17
PURCHASE AND REDEMPTION OF SHARES...............................................................................21
ADDITIONAL TRANSACTION INFORMATION..............................................................................22
DIVIDENDS AND TAXES.............................................................................................24
NET ASSET VALUE.................................................................................................29
PERFORMANCE.....................................................................................................30
OFFICERS AND TRUSTEES...........................................................................................31
PRINCIPAL HOLDERS OF SECURITIES.................................................................................33
SHAREHOLDER RIGHTS..............................................................................................34
FINANCIAL STATEMENTS............................................................................................35
</TABLE>
These funds are 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.
<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, as amended (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 Investor Services, Inc. ("Moody's") or Standard &
Poor's Ratings Services ("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
4
<PAGE>
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 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.
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 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
5
<PAGE>
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 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
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 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).
Investment Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, the Fund may invest in a variety of investment companies which seek
to track the composition and performance of specific indexes or a specific
portion of an index. These index-based investments hold substantially all of
their assets in securities representing their specific index. Accordingly, the
main risk of investing in index-based investments is the same as investing in a
portfolio of equity securities comprising the index. The market prices of
index-based investments will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their NAVs). Index-based
investments may not replicate exactly the performance of their specified index
because of transaction costs and because of the temporary unavailability of
certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
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Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
STRATEGIC TRANSACTIONS AND DERIVATIVES. The Funds may, but are not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in a Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, the Funds 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, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (subject to
certain limitations imposed by the 1940 Act) to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for a 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 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 non-hedging purposes. Any or all of these investment techniques
may be used at any time and in any combination, and there is no particular
strategy that dictates the use of one technique rather than another, as use of
any Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Funds 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 fundamental
investment purposes and characteristics of the Funds, and the Funds 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 Funds.
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 Funds, 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 Funds can realize on its investments or
cause the Funds to hold a security it might otherwise sell. The use of currency
transactions can result in the Funds incurring losses as a result of a number of
factors including the imposition of
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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, the Funds might not be able to close out a transaction without
incurring substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, 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 the
Funds 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 the
Funds 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 Funds
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
Each 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.
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The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Funds will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Funds to require the Counterparty
to sell the option back to the Funds at a formula price within seven days. The
Funds expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Funds or fails to make a cash settlement
payment due in accordance with the terms of that option, the Funds 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 Funds 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 Funds, 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 the Funds' limitation on investing no
more than 15% of its net 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.
The Funds may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by the Funds must be
"covered" (i.e., the Funds 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 Funds will receive the option
premium to help protect it against loss, a call sold by the Funds exposes the
Funds 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 Funds to hold a security or instrument which it might otherwise
have sold.
The Funds 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 Funds 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 the Funds may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Funds may enter into futures contracts
or purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a
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firm obligation by the Funds, 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 Funds' use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio and return enhancement management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Funds 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 Funds.
If the Funds exercise an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Funds 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. 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.
Currency Transactions. The Funds may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Funds may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
Each 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 except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of
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the Funds, 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 Funds 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 Funds 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 Funds have or in which the Funds
expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Funds 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 commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Funds 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 commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the
Funds if the currency being hedged fluctuates in value to a degree or in a
direction that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Funds are engaging in proxy hedging. If a
Fund enters into a currency hedging transaction, that 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 Funds if it is unable to deliver or receive currency or funds
in settlement of obligations and could also cause hedges it has entered into to
be rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The 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 the Funds 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
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against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Funds anticipate 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 the
Funds may be obligated to pay. Interest rate swaps involve the exchange by the
Funds 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 Funds 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 Funds 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 offsetting positions) to cover its obligations under
swaps, the Adviser and the Funds believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Funds will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Funds 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 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. The Funds might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Funds segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Funds to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Funds will require the Funds to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Funds on an index will require the Funds to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value
13
<PAGE>
over the exercise price on a current basis. A put option written by the Funds
requires the Funds to segregate cash or liquid assets equal to the exercise
price.
Except when the Funds 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 Funds to buy or sell currency will
generally require the Funds to hold an amount of that currency or liquid assets
denominated in that currency equal to a Fund's obligations or to segregate cash
or liquid assets equal to the amount of a Fund's obligation.
OTC options entered into by the Funds, 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 Funds
sell these instruments it will only segregate an amount of cash or liquid assets
equal to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Funds, 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 Funds sell a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Funds 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 Funds other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Funds will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Funds must deposit
initial margin and possible daily variation margin in addition to segregating
cash or liquid assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Funds will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Funds 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 Funds 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 Funds. Moreover, instead of segregating cash or liquid assets if the
Funds held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than the
price of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
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. For temporary defensive purposes the funds 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 case, the funds would not be pursuing, and may not achieve,
their objective.
14
<PAGE>
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.
Interfund Borrowing and Lending Program. The Trust's Board of Trustees has
approved the filing of an application for exemptive relief with the SEC which
would permit the Funds to participate in an interfund lending program among
certain investment companies advised by the Adviser. If the Funds receive the
requested relief, the interfund lending program would allow the participating
funds to borrow money from and loan money to each other for temporary or
emergency purposes. The program would be subject to a number of conditions
designed to ensure fair and equitable treatment of all participating funds,
including the following: (1) no fund may borrow money through the program unless
it receives a more favorable interest rate than a rate approximating the lowest
interest rate at which bank loans would be available to any of the participating
funds under a loan agreement; and (2) no fund may lend money through the program
unless it receives a more favorable return than that available from an
investment in repurchase agreements and, to the extent applicable, money market
cash sweep arrangements. In addition, a fund would participate in the program
only if and to the extent that such participation is consistent with the fund's
investment objectives and policies (for instance, money market funds would
normally participate only as lenders and tax exempt funds only as borrowers).
Interfund loans and borrowings would extend overnight, but could have a maximum
duration of seven days. Loans could be called on one day's notice. A fund may
have to borrow from a bank at a higher interest rate if an interfund loan is
called or not renewed. Any delay in repayment to a lending fund could result in
a lost investment opportunity or additional costs. The program is subject to the
oversight and periodic review of the Boards of the participating funds. To the
extent the Funds are actually engaged in borrowing through the interfund lending
program, the Funds, as a matter of non-fundamental policy, may not borrow for
other than temporary or emergency purposes (and not for leveraging), except that
the Funds may engage in reverse repurchase agreements for any purpose.
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.
15
<PAGE>
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 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 Scudder Investor Services, Inc.
("SIS"), which is a corporation registered as a broker/dealer and a subsidiary
of the Adviser; SIS will place orders on behalf of the Funds with issuers,
underwriters or other brokers and dealers. The SIS 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.
For the eight month fiscal period ended August 31, 1999, Kemper Large Company
Growth Fund paid brokerage commissions of $1,852.15. For the eight month fiscal
period ended August 31, 1999, the Fund paid brokerage commissions of $1,046.75
(56.52% of the total brokerage commissions), resulting from orders placed,
consistent with the policy of seeking to obtain the most favorable net results,
for transactions placed with brokers and dealers who provided supplementary
research services to the Trust or Adviser. The total amount of brokerage
transactions aggregated, for the 8 month fiscal period ended August 31, 1999,
was $3,463,011.48, of which $1,881,927.09 (54.34%) of all brokerage transactions
were transactions which included research commissions.
For the eight month fiscal period ended August 31, 1999, Kemper Research Fund
paid brokerage commissions of $3,734.19. For the eight month fiscal period ended
August 31, 1999, the Fund paid brokerage commissions of $1,568.37 (42%) of the
total brokerage commissions), resulting from orders placed, consistent with the
policy of seeking to obtain the most favorable net results, for transactions
placed with brokers and dealers who provided supplementary research services to
the Trust or Adviser. The total amount of brokerage transactions aggregated, for
the 8 month fiscal period ended August 31, 1999, was $6,260,975.35, of which
$2,545,719.89 (40.66%) of all brokerage transactions were transactions which
included research commissions.
For the eight month fiscal period ended August 31, 1999, Kemper Small Cap
Value+Growth Fund paid brokerage commissions of $1,318.00. For the eight month
fiscal period ended August 31, 1999, the Fund paid brokerage commissions of
$85.50 (6.49% of the total brokerage commissions), resulting from orders placed,
consistent with the policy of seeking to obtain the most favorable net results,
for transactions placed with brokers and dealers who provided supplementary
research services to the Trust or Adviser. The total amount of brokerage
transactions aggregated, for the 8 month fiscal period ended August 31, 1999,
was $1,415,236.77, of which $626,717.98 (44.28%) of all brokerage transactions
were transactions which included research commissions.
16
<PAGE>
INVESTMENT MANAGER AND UNDERWRITER
Investment Manager. Scudder Kemper Investments, Inc. ("Scudder Kemper",
"investment manager" or "Adviser"), 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 and, effective January 1, 2000, pays the cost of qualifying and
maintaining the qualification of each Fund's shares for sale under the
securities laws of the various states ("Blue Sky expenses"). Prior to January 1,
2000, Kemper Distributors, Inc. ("KDI"), as principal underwriter, paid the Blue
Sky expenses.
The investment management agreements provide that Scudder Kemper shall not be
liable for any error of judgment or of law, or for any loss suffered by 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.
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 pay the Adviser a
monthly fee as a percentage of the fund's average daily net assets for providing
investment management services based upon the annual rates, as described in the
following table:
<TABLE>
<CAPTION>
Applicable Assets ($) Annual Fee Rate
--------------------- ---------------
17
<PAGE>
<S> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
Applicable Assets ($) Annual Fee Rate
--------------------- ---------------
<S> <C>
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%
</TABLE>
For Kemper Large Company Growth Fund, the Fund incurred a management fee of
$9,516 for the eight month period ended August 31, 1999. Scudder Kemper agreed
to absorb temporarily certain operating expenses of the Fund. Under this
arrangement, Scudder Kemper absorbed expenses of $6,641 for the eight month
period ended August 31, 1999.
For Kemper Research Fund, the Fund incurred a management fee of $14,509 for the
eight month period ended August 31, 1999. Scudder Kemper agreed to absorb
temporarily certain operating expenses of the Fund. Under this arrangement,
Scudder Kemper absorbed expenses of $17,712 for the eight month period ended
August 31, 1999.
For Kemper Small Cap Value+Growth Fund, the Fund incurred a management fee of
$5,000 for the eight month period ended August 31, 1999.. Scudder Kemper agreed
to absorb temporarily certain operating expenses of the Fund. Under this
arrangement, Scudder Kemper absorbed expenses of $18,333 for the eight month
period ended August 31, 1999.
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.
For Kemper Large Company Growth Fund, the Fund incurred accounting fees of
$4,000 for the eight month period ended August 31, 1999, which were not imposed
after an expense absorption by Scudder Kemper.
For Kemper Research Fund, the Fund incurred accounting fees of $7,971 for the
eight month period ending August 31, 1999.
For Kemper Small Cap Value+Growth Fund, the Fund incurred accounting fees of
$5,000 for the eight month period ended August 31, 1999, which were not imposed
after an expense absorption by Scudder Kemper.
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 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.
18
<PAGE>
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).
Class B Shares and Class C Shares. Each Fund has adopted a plan under Rule 12b-1
(the "Rule 12b-1 Plan") that provides for fees payable as an expense of the
Class B shares and Class C shares that are used by KDI to pay for distribution
and services for those classes. Because 12b-1 fees are paid out of fund assets
on an ongoing basis they will, over time, increase the cost of the investment
and may cost more than other types of sales charges. Expenses of the Funds and
of KDI, in connection with the Rule 12b-1 Plans for the Class B and Class C
shares for the eight month period ended August 31, 1999 are set forth below. A
portion of the marketing, sales and operating expenses shown below could be
considered overhead expenses.
<TABLE>
<CAPTION>
Fund Class B Shares
-------------------
Research SmCapV+G LCGF
-------- -------- ----
1999* 1999* 1999*
----- ----- -----
<S> <C> <C> <C>
Distribution Fees Paid by Fund to KDI $5,160 $1,580 $3,395
- -------------------------------------
Contingent Deferred Sales Charges to KDI $4,900 $11,220 0
Total Commissions Paid by KDI to Firms $2,374 $40,867 $2311
Distribution Fees Paid by KDI to Affiliated Firms 0 0 0
Advertising and Literature $2,994 $998 $1,995
19
<PAGE>
Other Distribution Expenses Paid by KDI
Prospectus Printing $289 $97 192
Marketing and Sales Expenses $8,303 $2768 $5,535
Misc. Operating Expenses $4,751 $4306 $4535
Interest Expenses $427 $214 $494
</TABLE>
<TABLE>
<CAPTION>
Fund Class C Shares
-------------------
Research SmCapV+G LCGF
-------- -------- ----
1999* 1999* 1999*
----- ----- -----
<S> <C> <C> <C>
Distribution Fees Paid by Fund to KDI $5,160 $1,580 $3,394
- -------------------------------------
Contingent Deferred Sales Charges to KDI 0 $1,049 0
Total Distribution Fees Paid by KDI to Firms $5,861 $1,296 $6,696
Distribution Fees Paid by KDI to Affiliated Firms 0 0 0
Distribution Fees Paid by KDI to Affiliated Firms 0 0 0
Advertising and Literature $3,037 $1,013 $2,024
Other Distribution Expenses Paid by KDI
Prospectus Printing $267 $90 $177
Marketing and Sales Expenses $7,587 $2,530 $5,058
Misc. Operating Expenses $4,815 $4,327 $4,578
Interest Expenses $870 $224 $698
</TABLE>
*For the period December 31, 19998 (commencement of operations) through August
31, 1999.
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 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.
For Kemper Large Company Growth Fund, the Fund incurred administrative services
fees of $3,000 for the eight month period ended August 31, 1999, which were not
imposed after an expense absorption by Scudder Kemper.
For Kemper Research Fund, the Fund incurred administrative services fees of
$5,000 for the eight month period ending August 31, 1999, which were not imposed
after an expense absorption by Scudder Kemper.
20
<PAGE>
For Kemper Small Cap Value+Growth Fund, the Fund incurred administrative
services fees of $2,000 for the eight month period ended August 31, 1999, which
were not imposed after an expense absorption by Scudder Kemper.
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 payable at an annual rate of 0.25%
based upon each Fund's assets in accounts for which a firm provides
administrative services and, effective January 1, 2000, at the annual rate of
0.15% based upon each Fund's assets in accounts for which there is no firm of
record (other than KDI) listed on the Fund's records. The effective
administrative services fee rate to be charged against all assets of a Fund
while this procedure is in effect will depend upon the proportion of a Fund's
assets that is in accounts for which a firm of record provides administrative
services. The Board of Trustees, in its discretion, may approve paying the fee
to KDI at the annual rate of 0.25% on all Fund assets in the future. In
addition, KDI may, from time to time, from its own resources pay certain firms
additional amounts for ongoing administrative services and assistance provided
to their customers and clients who are shareholders of the Funds.
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. Custodian, Transfer
Agent and Shareholder Service Agent. State Street Bank and Trust Company ("State
Street"), 225 Franklin Street, Boston, Massachusetts 02110, as custodian, has
custody of all securities and cash of each Fund. State Street attends to the
collection of principal and income, and payment for and collection of proceeds
of securities bought and sold by each Fund.
Pursuant to an agency agreement between the Fund and Kemper Service Company
("KSvC"), 811 Main Street, Kansas City, Missouri, an affiliate of Scudder
Kemper, KSvC serves as transfer agent, dividend paying agent, and "Shareholder
Service Agent" of the Fund. Currently, KSvC receives as transfer agent as
follows: annual account fees of $10.00 ($18.00 for retirement accounts) plus set
up charges, annual fees associated with the contingent deferred sales charge
(Class B only), an asset-based fee of 0.08% and out-of-pocket reimbursement.
For Kemper Large Company Growth Fund, KSvC earned transfer agency fees of $763
for the eight month period ended August 31, 1999.
For Kemper Research Fund, KSvC earned transfer agency fees of $4,517 for the
eight month period ending August 31, 1999.
For Kemper Small Cap Value+Growth Fund, KSvC earned transfer agency fees of $978
for the eight month period ended August 31, 1999.
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, Ten Post Office Square - South, Boston,
Massachusetts 02109, 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
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<PAGE>
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.
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
------------
As a As a Allowed to Dealers as a
Percentage of Percentage of Net Percentage of
Amount of Purchase Offering Price Amount Invested* Offering Price
- ------------------ -------------- ---------------- --------------
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over 0.00** 0.00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales
charge as discussed below.
*** Commission is payable by KDI as discussed below.
Each 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.
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<PAGE>
Class A shares of each Fund can be purchased at net asset value in certain
circumstances. (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 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, including Class R Shares of certain
Scudder Funds. 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, to firms that sell shares of the Funds. In some
instances, such
23
<PAGE>
discounts, commissions or other incentives will be offered only to certain firms
that sell or are expected to sell during specified time periods certain minimum
amounts of shares of the Funds, or other funds underwritten by KDI.
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day ("trade
date"). The Funds reserve the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly. Collection may take
significantly longer for a check drawn on a foreign bank than for a check drawn
on a domestic bank. Therefore, if an order is accompanied by a check drawn on a
foreign bank, funds must normally be collected before shares will be purchased.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Funds' shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Funds' shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Funds' transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Funds through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Funds through the Shareholder Service Agent for
these services. This Statement of Additional Information should be read in
connection with such firms' material regarding their fees and services.
The Funds reserve the right to withdraw all or any part of the offering made
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 Funds or the Trust
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.
24
<PAGE>
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 treatment. 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.
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
25
<PAGE>
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 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.
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<PAGE>
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.
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 or loss. Under certain circumstances,
entry into a futures contract to sell a security may constitute a short sale for
federal income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in the 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
27
<PAGE>
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 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.
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<PAGE>
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 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
29
<PAGE>
all available information. The value of other portfolio holdings owned by a Fund
is determined in a manner which, in the discretion of the Valuation Committee,
most fairly reflects market value of the property on the valuation date.
Following the valuations of securities or other Fund 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
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<PAGE>
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 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.
In connection with communicating its performance to current or prospective
shareholders, each Fund may compare these figures to the performance of
unmanaged indices which may assume reinvestment of dividends or interest but
generally do not reflect deductions for administrative and management costs..
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. 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.
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. 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.
The performance information for the Kemper Large Company Growth Fund, Kemper
Research Fund and Kemper Small Company Value+Growth Fund are incorporated herein
by reference to the respective funds' annual report filed with the SEC on
November 1 and 2 , 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.
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<PAGE>
JAMES R. EDGAR ( 7/22/46), Trustee, 1927 County Road 150 E, Seymour, IL;
Distinguished Fellow, University of Illinois Institute of Government and Public
Affairs; formerly, Governor of the State of Illinois, 1991-1998; Illinois
Secretary of State, 1981-1990; Director of Legislative Affairs, Office of the
Governor of Illinois, 1979-1980; Representative in Illinois General Assembly,
1976-1979.
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.; formerly, attorney.
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 the Northern Institutional Funds; formerly,
Trustee of the Pilot Fund.
THOMAS W. LITTAUER (4/26/55), Trustee, Chairman, 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.
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 Foundation; Chairman,
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.
CORNELIA M. SMALL (7/28/44), Trustee and Vice President*, 345 Park Avenue, New
York, New York, Managing Director, Adviser.
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.
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.
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.
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<PAGE>
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; Managing Director, Adviser.
ELIZABETH D. SMITH (10/27/46), Vice President*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser.
WILLIAM F. TRUSCOTT (9/14/60), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Adviser.
ROBERT D. TYMOCZKO (2/3/70), Vice President*, 101 California Street, San
Francisco, California; Assistant 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 Funds. The table below shows estimated amounts
to be paid or accrued to those trustees who are not designated "interested
persons" during the Trust's current fiscal year except that the information in
the last column is for calendar year 1998.
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation Kemper Funds Paid
Name of Board Member from Kemper Funds Trust to Board Members(3)
- -------------------- ----------------------- -------------------
<S> <C> <C>
James E. Akins $4,000 $140,800
James R. Edgar (1) $1,000 $0
Arthur R. Gottschalk(2) $4,000 $146,300
Frederick T. Kelsey $4,300 $141,300
Fred B. Renwick $3,900 $141,300
John G. Weithers $4,0000 $146,300
</TABLE>
(1) Elected trustee on May 27, 1999
(2) Includes deferred fees. Pursuant to deferred compensation agreements
with the Funds, deferred amounts accrue interest monthly at a rate
approximate to the yield of Zurich Money Funds -- Zurich Money Market
Fund. The total deferred fees (including interest thereon) accrued for
the eight month fiscal period ending August 31, 1999, payable from the
Funds to Mr. Gottschalk was $2,5000.
(3) 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.
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.
PRINCIPAL HOLDERS OF SECURITIES
As of November 30, 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.
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<PAGE>
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. 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 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.
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<PAGE>
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.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolios of each Portfolio,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of Kemper
Large Company Growth Fund, Kemper Research Fund and Kemper Small Company
Value+Growth Fund dated August 31, 1999 are incorporated herein by reference and
are hereby deemed to be a part of this Statement of Additional Information.
35
