Filed electronically with the Securities and Exchange Commission on
December 29, 2000
File No. 333-65661
File No. 811-09057
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 /___/
Pre-Effective Amendment No. __ /___/
Post-Effective Amendment No. 10 /_X_/
--
And
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /___/
Amendment No. 11 /_X_/
--
KEMPER FUNDS TRUST
------------------
(Exact Name of Registrant as Specified in Charter)
222 South Riverside Plaza, Chicago, Illinois 60606
--------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (312) 537-7000
Philip J. Collora, Vice President and Secretary
-----------------------------------------------
Kemper Funds Trust
------------------
222 South Riverside Plaza
-------------------------
Chicago, Illinois 60606
-----------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
<TABLE>
<S> <C>
/___/ Immediately upon filing pursuant to paragraph (b) /___/ 60 days after filing pursuant to paragraph (a)(1)
/___/ 75 days after filing pursuant to paragraph (a)(2) /_X_/ On January 1, 2001 pursuant to paragraph (b)
/___/ On January 1, 2001 pursuant to paragraph (a)(1) /___/ On (date) pursuant to paragraph (a)(3) of Rule 485
</TABLE>
/___/ If the following is appropriate, check the preceding box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
KEMPER FUNDS TRUST
Kemper Large Company Growth Fund
Kemper Research Fund
Kemper Small Cap Value+Growth Fund
Kemper S&P 500 Index Fund
2
<PAGE>
Kemper Small Cap
Value+Growth Fund
Supplement to the currently effective
Prospectus
--------------------------------------------------------------------------------
On November 29, 2000, the Board of the above-noted Fund approved the cessation
of operations of the Fund effective on or about February 23, 2001 (the "Closing
Date"). Accordingly, the Board has voted to liquidate and terminate the Fund on
the Closing Date. Shareholders will receive the net asset value per share for
all shares they own on that date. This may be a taxable event for shareholders
with the exception of those participating in a qualified defined contribution,
defined benefit or other qualified retirement vehicle.
In conjunction with approving the cessation of operations of the Fund, the Board
further approved closing the Fund to new investments effective as of the close
of business on November 29, 2000. Qualified defined contribution retirement
plans (i.e., 401(k) plans, profit sharing plans and money purchase pension
plans), 403(b) plans and 457 plans that invest through existing accounts held at
a financial intermediary may continue to make additional purchases in existing
accounts of the Fund through the Closing Date.
November 30, 2000
KEF-1C
516267
<PAGE>
Scudder
Investments (SM)
[LOGO]
January 1, 2001
Prospectus
Equity Funds/Growth Style
Scudder Focus Growth Fund
Scudder Research Fund
Advisor Classes A, B and C
As with all mutual funds, the Securities and Exchange Commission
(SEC) does not approve or disapprove these shares or determine
whether the information in this prospectus is truthful or
complete. It is a criminal offense for anyone to inform you
otherwise.
<PAGE>
Contents
--------------------------------------------------------------------------------
How the Funds Work How to Invest in the Funds
4 Scudder Focus Growth Fund 21 Choosing a Share Class
8 Scudder Research Fund 26 How to Buy Shares
12 Other Policies and Risks 27 How to Exchange or Sell
Shares
13 Who Manages and Oversees
the Funds 28 Policies You Should Know
About
14 Financial Highlights
34 Understanding Distributions
and Taxes
<PAGE>
How The Funds Work
These funds invest mainly in common stocks, as a way of seeking growth of your
investment. Each fund has its own strategy and follows its own goal.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency and you could
lose money by investing in them.
<PAGE>
--------------------------------------------------------------------------------
Class A Class B Class C
ticker symbol SFWAX SFWBX SFWCX
fund number 121 221 321
Scudder Focus Growth Fund
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks long-term growth of capital.
The fund normally invests at least 65% of total assets in large U.S. growth
companies (those with market values of $1 billion or more). The fund intends to
invest in approximately 20-30 such companies. These investments are primarily
common stocks, but may include preferred stocks and securities convertible into
common stocks.
In choosing stocks, the portfolio managers look for individual companies that
show such qualities as a history of above-average growth relative to the overall
market, prospects for continued growth, strong competitive positioning, sound
finances and effective management. The managers prefer companies whose stock
appears reasonably valued in light of potential growth, based on various factors
such as price-to-earnings ratios and market capitalizations.
The managers may favor securities from different industries and companies at
different times, while still maintaining variety in terms of the industries and
companies represented.
The fund normally will sell a stock when the managers believe its earnings
potential or fundamental qualities have deteriorated, it has performed below
expectations or market conditions have changed.
--------------------------------------------------------------------------------
OTHER INVESTMENTS Although the managers are permitted to use various types of
derivatives (contracts whose value is based on, for example, indices, currencies
or securities), the managers don't intend to use them as principal investments,
and may not use them at all.
4
<PAGE>
The Main Risks of Investing in the Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the large company portion of the U.S. stock
market. When prices of these stocks fall, you should expect the value of your
investment to fall as well. Large company stocks at times may not perform as
well as stocks of smaller or mid-size companies. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
The fact that the fund is not diversified and may invest in securities of
relatively few issuers increases its risk, because any factors affecting a given
company could affect performance of the fund to a greater degree.
To the extent that the fund focuses on a given industry, any factors affecting
that industry could affect portfolio securities. For example, a rise in
unemployment could hurt manufacturers of consumer goods, or the emergence of new
technologies could hurt computer software or hardware companies.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends or other matters
o growth stocks may have above-average volatility and may be out of favor for
certain periods
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Investors who are interested in a long-term growth investment that focuses on
large companies may want to consider this fund.
5
<PAGE>
The Fund's Performance History
Although past performance isn't necessarily a sign of how a fund will do in the
future, it can be valuable for an investor to know. The performance of Class A
shares in the bar chart and performance table reflects performance for the
period during which the fund was a "limited distribution" fund known as Kemper
Large Company Growth Fund (through 12/31/00). Because the fund did not have
significant inflows of capital when it was open only to a limited group of
investors, its performance during the periods shown may have been different than
if it had operated with a wider distribution.
The bar chart shows the performance figures for the fund's first complete
calendar year, which may give some idea of risk. The chart doesn't reflect sales
loads; if it did, returns would be lower.
The table shows how these performance figures for the fund's Class A, B and C
shares compare with a broad-based market index (which, unlike the fund, has no
fees or expenses). The performance of both the fund and the index varies over
time. All figures on this page assume reinvestment of dividends and
distributions.
Scudder Focus Growth Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 Class A Shares
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1999 31.68
2000 Total Return as of September 30: 9.51%
Best Quarter: 26.11%, Q4 1999 Worst Quarter: -3.31%, Q3 1999
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
Since 12/31/98
1 Year
--------------------------------------------------------------------------------
Class A 24.11
--------------------------------------------------------------------------------
Class B 30.53
--------------------------------------------------------------------------------
Class C 30.53
--------------------------------------------------------------------------------
Index 28.25
--------------------------------------------------------------------------------
The table includes the effects of maximum sales loads.
Index: S&P/BARRA Growth Index, an index based on S&P 500 companies with high
price-to-book ratios.
Total returns from inception through 2000 would have been lower if operating
expenses hadn't been reduced.
6
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
--------------------------------------------------------------------------------
Fee Table Class A Class B Class C
--------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On
Purchases (% of offering price) 5.75% None None
--------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(% of redemption proceeds) None* 4.00% 1.00%
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee 0.70% 0.70% 0.70%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
--------------------------------------------------------------------------------
Other Expenses** 4.26 4.35 4.35
--------------------------------------------------------------------------------
Total Annual Operating Expenses 4.96 5.80 5.80
--------------------------------------------------------------------------------
Expense Reimbursement -3.46 -3.55 -3.55
--------------------------------------------------------------------------------
Net Annual Operating Expenses*** 1.50 2.25 2.25
--------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see "Policies You Should Know About -- Policies
about transactions") may be subject to a contingent deferred sales charge
of 1.00% if redeemed within one year of purchase and 0.50% if redeemed
during the second year following purchase.
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors.
** By contract, Total Annual Fund Operating Expenses are capped at 1.50%,
2.25% and 2.25% through 1/1/2002 for Class A, Class B and Class C shares,
respectively.
Based on the figures above (including one year of capped expenses in each
period), this example is designed to help you compare the expenses of each share
class to those of other mutual funds. The example assumes operating expenses
remain the same and that you invested $10,000, earned 5% annual returns and
reinvested all dividends and distributions. This is only an example; actual
expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Expenses assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares $719 $1,687 $2,656 $5,081
--------------------------------------------------------------------------------
Class B shares 628 1,710 2,774 5,109
--------------------------------------------------------------------------------
Class C shares 328 1,410 2,574 5,402
--------------------------------------------------------------------------------
Expenses assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares $719 $1,687 $2,656 $5,081
--------------------------------------------------------------------------------
Class B shares 228 1,410 2,574 5,109
--------------------------------------------------------------------------------
Class C shares 228 1,410 2,574 5,402
--------------------------------------------------------------------------------
7
<PAGE>
--------------------------------------------------------------------------------
Class A Class B Class C
ticker symbol SRHAX SRHBX SRHCX
fund number 120 220 320
Scudder Research Fund
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks long-term growth of capital.
The fund normally invests at least 65% of total assets in large U.S. companies
(those with market values of $1 billion or more). These investments are
primarily common stocks, but may include preferred stocks and securities
convertible into common stocks.
The fund invests in securities based on the top research recommendations of the
investment advisor's industry research analysts and other investment
specialists. In making their recommendations, the analysts and specialists look
for companies that have sound finances, effective management, strong product
franchises, good business prospects and established competitive positions, among
other factors. These may be companies that appear to offer the potential for
sustainable above-average growth of earnings or revenues as well as companies
whose stock prices appear low in light of other measures of worth, such as
price-to-earnings ratios.
The managers may favor securities from different industries and companies at
different times, while still maintaining variety in terms of the industries and
companies represented. Typically, the fund's sector weightings closely mirror
those of the S&P 500 Index.
The fund normally will sell a stock when the managers believe its fundamental
qualities have deteriorated, market conditions have changed, the company no
longer qualifies as a large company or it has performed below expectations.
--------------------------------------------------------------------------------
OTHER INVESTMENTS Although the managers are permitted to use various types of
derivatives (contracts whose value is based on, for example, indices, currencies
or securities), the managers don't intend to use them as principal investments,
and may not use them at all.
8
<PAGE>
The Main Risks of Investing in the Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the large company portion of the U.S. stock
market. When prices of these stocks fall, you should expect the value of your
investment to fall as well. Large company stocks at times may not perform as
well as stocks of smaller or mid-size companies. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
To the extent that the fund focuses on a given industry, any factors affecting
that industry could affect portfolio securities. For example, a rise in
unemployment could hurt consumer goods makers, or the emergence of new
technologies could hurt computer software or hardware companies.
In any given period, either growth stocks or value stocks will generally lag the
other; because the fund invests in both, it is likely to lag any fund that
focuses on the type of stock that outperforms during that period, and may lag
both.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends or other matters
o growth stocks may have above-average volatility or may be out of favor for
certain periods
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This fund may be suitable for investors who are interested in a diversified
long-term growth fund that focuses on the advisor's top research
recommendations.
9
<PAGE>
The Fund's Performance History
Although past performance isn't necessarily a sign of how a fund will do in the
future, it can be valuable for an investor to know. The performance of Class A
shares in the bar chart and performance table reflects performance for the
period during which the fund was a "limited distribution" fund known as Kemper
Research Fund (through 12/31/00). Because the fund did not have significant
inflows of capital when it was open only to a limited group of investors, its
performance during the periods shown may have been different than if it had
operated with a wider distribution.
The bar chart shows the performance figures for the fund's first complete
calendar year, which may give some idea of risk. The chart doesn't reflect sales
loads; if it did, returns would be lower.
The table shows how these performance figures for the fund's Class A, B and C
shares compare with a broad-based market index (which, unlike the fund, has no
fees or expenses). The performance of both the fund and the index varies over
time. All figures on this page assume reinvestment of dividends and
distributions.
Scudder Research Fund
--------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 Class A Shares
--------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1999 29.68
2000 Total Return as of September 30: 1.30%
Best Quarter: 24.57%, Q4 1999 Worst Quarter: -5.99%, Q3 1999
--------------------------------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/1999
--------------------------------------------------------------------------------
Since 12/31/98
1 Year
--------------------------------------------------------------------------------
Class A 22.22
--------------------------------------------------------------------------------
Class B 28.53
--------------------------------------------------------------------------------
Class C 28.53
--------------------------------------------------------------------------------
Index 21.03
--------------------------------------------------------------------------------
The table includes the effects of maximum sales loads.
Index: Standard & Poor's 500 Composite Stock Price Index, an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
Total returns from inception through 2000 would have been lower if operating
expenses hadn't been reduced.
10
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
--------------------------------------------------------------------------------
Fee Table Class A Class B Class C
--------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On
Purchases (% of offering price) 5.75% None None
--------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(% of redemption proceeds) None* 4.00% 1.00%
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee 0.70% 0.70% 0.70%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
--------------------------------------------------------------------------------
Other Expenses** 3.10 3.06 3.06
--------------------------------------------------------------------------------
Total Annual Operating Expenses 3.80 4.51 4.51
--------------------------------------------------------------------------------
Expense Reimbursement -2.30 -2.26 -2.26
--------------------------------------------------------------------------------
Net Annual Operating Expenses*** 1.50 2.25 2.25
--------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see "Policies You Should Know About -- Policies
about transactions") may be subject to a contingent deferred sales charge
of 1.00% if redeemed within one year of purchase and 0.50% if redeemed
during the second year following purchase.
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors.
*** By contract, Total Annual Fund Operating Expenses are capped at 1.50%,
2.25% and 2.25% through 1/1/2002 for Class A, Class B and Class C shares,
respectively.
Based on the figures above (including one year of capped expenses in each
period), this example is designed to help you compare the expenses of each share
class to those of other mutual funds. The example assumes operating expenses
remain the same and that you invested $10,000, earned 5% annual returns and
reinvested all dividends and distributions. This is only an example; actual
expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Expenses assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares $719 $1,469 $2,238 $4,241
--------------------------------------------------------------------------------
Class B shares 628 1,459 2,300 4,213
--------------------------------------------------------------------------------
Class C shares 328 1,159 2,100 4,492
--------------------------------------------------------------------------------
Expenses assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares $719 $1,469 $2,238 $4,241
--------------------------------------------------------------------------------
Class B shares 228 1,159 2,100 4,213
--------------------------------------------------------------------------------
Class C shares 228 1,159 2,100 4,492
--------------------------------------------------------------------------------
11
<PAGE>
Other Policies And Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, each fund's Board could
change that fund's investment goal without seeking shareholder approval
o As a temporary defensive measure, either of these funds could shift up to
100% of assets into investments such as money market securities. This could
prevent losses, but would mean that the fund would not be pursuing its goal
o The funds may trade securities more actively than many funds, which could
mean higher expenses (thus lowering return) and higher taxable
distributions For more information
This prospectus doesn't tell you about every policy or risk of investing in the
funds.
If you want more information on the funds' allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
12
<PAGE>
Who Manages and Oversees the Funds
The investment advisor
The funds' investment advisor is Zurich Scudder Investments, Inc., 345 Park
Avenue, New York, NY. The advisor has more than 80 years of experience managing
mutual funds, and currently has more than $290 billion in assets under
management.
The advisor's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
The advisor receives a management fee from each fund. Below are the actual rates
paid by each fund for the 12 months through the most recent fiscal year end, as
a percentage of average daily net assets:
Fund Name Fee Paid
---------------------------------------------------------------------
Scudder Focus Growth Fund 0.70%
---------------------------------------------------------------------
Scudder Research Fund 0.70%
---------------------------------------------------------------------
Portfolio managers
The following people handle the day-to-day management of the funds.
Scudder Focus Growth Fund Scudder Research Fund
Valerie F. Malter Joann M. Barry
o Began investment career Lead Portfolio Manager
in 1985 o Began investment career
o Joined the advisor in 1995 in 1988
o Joined the fund team in 1998 o Joined the advisor in 1995
o Joined the fund team in 1999
Anne T. Carney
o Began investment career
in 1988
o Joined the advisor in 1992
o Joined the fund team in 2000
Elizabeth D. Smith
o Began investment career
in 1969
o Joined the advisor in 1973
o Joined the fund team in 1998
13
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance in recent years. The figures in the first part of each table are for
a single share. The total return figures represent the percentage that an
investor in a particular fund would have earned (or lost), assuming all
dividends and distributions were reinvested. This information has been audited
by Ernst & Young LLP, whose reports, along with each fund's financial
statements, are included in that fund's annual report (see "Shareholder reports"
on the back cover).
Scudder Focus Growth Fund(1) -- Class A
From December 31, 1998
Year ended (commencement of operations)
August 31, 2000 to August 31, 1999
--------------------------------------------------------------------------------
Net assets value, beginning
of period $10.05 $9.50
-------------------------------------------------
--------------------------------------------------------------------------------
Income from investment
operations:
--------------------------------------------------------------------------------
Net investment income (loss) (a) (0.12) (0.07)
--------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investment
transactions 4.62 0.62
-------------------------------------------------
--------------------------------------------------------------------------------
Total from investment
operations 4.50 0.55
--------------------------------------------------------------------------------
Net asset value, end of period $14.55 $10.05
-------------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (b) (c) 44.78 5.79**
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net Assets, end of period
($ in thousands) 1,021 706
--------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 4.96 2.35*
--------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 1.61 1.85*
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) (0.98) (1.02)*
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 149 64*
--------------------------------------------------------------------------------
(1) On January 1, 2001, the fund changed its name from Kemper Large Company
Growth Fund to Scudder Focus Growth Fund.
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
14
<PAGE>
Scudder Focus Growth Fund(1) -- Class B
From December 31, 1998
Year ended (commencement of operations)
August 31, 2000 to August 31, 1999
--------------------------------------------------------------------------------
Net assets value, beginning $9.99 $9.50
of period
-------------------------------------------------
--------------------------------------------------------------------------------
Income from investment
operations:
--------------------------------------------------------------------------------
Net investment income (loss) (a) (0.21) (0.14)
--------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investment
transactions 4.57 0.63
-------------------------------------------------
--------------------------------------------------------------------------------
Total from investment period 4.36 0.49
operations
--------------------------------------------------------------------------------
Net asset value, end of $14.35 $9.99
-------------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (b) (c) 43.64 5.16**
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net Assets, end of period
($ in thousands) 1,019 701
--------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 5.80 3.27*
--------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 2.42 2.77*
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) (1.79) (1.95)*
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 149 64*
--------------------------------------------------------------------------------
(1) On January 1, 2001, the fund changed its name from Kemper Large Company
Growth Fund to Scudder Focus Growth Fund.
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
15
<PAGE>
Scudder Focus Growth Fund(1) -- Class C
From December 31, 1998
Year ended (commencement of operations)
August 31, 2000 to August 31, 1999
--------------------------------------------------------------------------------
Net assets value, beginning
of period $9.99 $9.50
-------------------------------------------------
--------------------------------------------------------------------------------
Income from investment
operations:
--------------------------------------------------------------------------------
Net investment income (loss) (a) (0.22) (0.14)
--------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investment
transactions 4.58 0.63
-------------------------------------------------
--------------------------------------------------------------------------------
Total from investment
operations 4.36 0.49
--------------------------------------------------------------------------------
Net asset value, end of period $14.35 $9.99
-------------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (b) (c) 43.64 5.16**
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net Assets, end of period
($ in thousands) 1,007 701
--------------------------------------------------------------------------------
Ratio of expenses before
expense reductions(%) 5.80 3.27*
--------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 2.42 2.77*
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) (1.79) (1.95)*
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 149 64*
--------------------------------------------------------------------------------
(1) On January 1, 2001, the fund changed its name from Kemper Large Company
Growth Fund to Scudder Focus Growth Fund.
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
16
<PAGE>
Scudder Research Fund(1) -- Class A
From December 31, 1998
Year ended (commencement of operations)
August 31, 2000 to August 31, 1999
--------------------------------------------------------------------------------
Net assets value, beginning $10.12 $9.50
of period
-------------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
Net investment income (loss) (a) (0.07) (0.01)
--------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investment
transactions 3.26 0.63
-------------------------------------------------
--------------------------------------------------------------------------------
Total from investment
operations 3.19 0.62
--------------------------------------------------------------------------------
Net asset value, end of period $13.31 $10.12
-------------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (b) (c) 31.52 6.53**
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net Assets, end of period
($ in thousands) 1,553 1,083
--------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 3.80 2.33*
--------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 1.49 1.48*
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) (0.56) (0.08)*
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 101 78*
--------------------------------------------------------------------------------
(1) On January 1, 2001, the fund changed its name from Kemper Research Fund to
Scudder Research Fund.
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
17
<PAGE>
Scudder Research Fund(1) -- Class B
From December 31, 1998
Year ended (commencement of operations)
August 31, 2000 to August 31, 1999
--------------------------------------------------------------------------------
Net assets value, beginning
of period $10.06 $9.50
-------------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
Net investment income (loss) (a) (0.16) (0.07)
--------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investment
transactions 3.22 0.63
-------------------------------------------------
--------------------------------------------------------------------------------
Total from investment
operations 3.06 0.56
--------------------------------------------------------------------------------
Net asset value, end of period $13.12 $10.06
-------------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (b) (c) 30.42 5.89**
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net Assets, end of period
($ in thousands) 1,381 1,059
--------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 4.51 3.27*
--------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 2.30 2.42*
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) (1.37) (1.02)*
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 101 78*
--------------------------------------------------------------------------------
(1) On January 1, 2001, the fund changed its name from Kemper Research Fund to
Scudder Research Fund.
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
18
<PAGE>
Scudder Research Fund(1) -- Class C
From December 31, 1998
Year ended (commencement of operations)
August 31, 2000 to August 31, 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Net assets value, beginning
of period $10.06 $9.50
-------------------------------------------------
--------------------------------------------------------------------------------
Income (loss) from investment
operations:
--------------------------------------------------------------------------------
Net investment income (loss) (a) (0.16) (0.07)
--------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investment
transactions 3.22 0.63
-------------------------------------------------
--------------------------------------------------------------------------------
Total from investment
operations 3.06 0.56
--------------------------------------------------------------------------------
Net asset value, end of period $13.12 $10.06
-------------------------------------------------
--------------------------------------------------------------------------------
Total return (%) (b) (c) 30.42 5.89**
--------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
--------------------------------------------------------------------------------
Net Assets, end of period
($ in thousands) 1,381 1,059
--------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 4.51 3.27*
--------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 2.31 2.42*
--------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) (1.37) (1.02)*
--------------------------------------------------------------------------------
Portfolio turnover rate (%) 101 78*
--------------------------------------------------------------------------------
(1) On January 1, 2001, the fund changed its name from Kemper Research Fund to
Scudder Research Fund.
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
19
<PAGE>
How to Invest in the Funds
The following pages tell you about many of the services, choices and benefits of
being a shareholder. You'll also find information on how to check the status of
your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representatives or a representative of your workplace retirement plan
or other investment provider.
<PAGE>
Choosing A Share Class
Offered in this prospectus are three share classes for the fund. Each class has
its own fees and expenses, offering you a choice of cost structures. Class A,
Class B and Class C shares are intended for investors seeking the advice and
assistance of a financial representative, who may receive compensation for those
services through sales commissions, service fees and/or distribution fees.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
--------------------------------------------------------------------------------
Classes and features Points to help you compare
--------------------------------------------------------------------------------
Class A
o Sales charges of up to 5.75%, charged o Some investors may be able to reduce
when you buy shares or eliminate their sales charges;
see next page
o In most cases, no charges when you
sell shares o Total annual expenses are lower than
those for Class B or Class C
o No distribution fee
--------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge rate falls
to zero after six years
o Deferred sales charges declining from
4.00%, charged when you sell shares o Shares automatically convert to
you bought within the last six years Class A after six years after
purchase, which means lower annual
o 0.75% distribution fee expenses going forward
--------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge rate is
lower, but your shares never convert
o Deferred sales charge of 1.00%, to Class A, so annual expenses
charged when you sell shares you remain higher
bought within the last year
o 0.75% distribution fee
--------------------------------------------------------------------------------
21
<PAGE>
Class A shares
Class A shares have a sales charge that varies with the amount you invest:
Sales charge as a % Sales charge as a % of
Your investment of offering price your net investment
---------------------------------------------------------------------
Up to $50,000 5.75% 6.10%
---------------------------------------------------------------------
$50,000-$99,999 4.50 4.71
---------------------------------------------------------------------
$100,000-$249,999 3.50 3.63
---------------------------------------------------------------------
$250,000-$499,999 2.60 2.67
---------------------------------------------------------------------
$500,000-$999,999 2.00 2.04
----------------------------------------------------------------------
$1 million or more See below and next page
----------------------------------------------------------------------
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $50,000 over the next 24 months ("letter of
intent")
o the amount of shares you already own (including shares in certain other
funds) plus the amount you're investing now is at least $50,000
("cumulative discount")
o you are investing a total of $50,000 or more in several funds at once
("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Class A shares may make sense for long-term investors, especially those who are
eligible for reduced or eliminated sales charges.
22
<PAGE>
You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you pay a fee
to an investment advisor or other firm for portfolio management services
There are a number of additional provisions that apply in order to be
eligible for a sales charge waiver. The fund may waive the sales charges for
investors in other situations as well. Your financial representative or Kemper
Service Company can answer your questions and help you determine if you are
eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. This CDSC is waived under
certain circumstances (see "Policies You Should Know About"). Your financial
representative or Shareholder Services can answer your questions and help you
determine if you're eligible.
23
<PAGE>
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% is deducted
from fund assets each year. This means the annual expenses for Class B shares
are somewhat higher (and their performance correspondingly lower) compared to
Class A shares, which don't have a 12b-1 fee. After six years, Class B shares
automatically convert to Class A, which has the net effect of lowering the
annual expenses from the seventh year on. However, unlike Class A shares, your
entire investment goes to work immediately.
Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:
Year after you bought shares CDSC on shares you sell
---------------------------------------------------------------------
First year 4.00%
---------------------------------------------------------------------
Second or third year 3.00
---------------------------------------------------------------------
Fourth or fifth year 2.00
---------------------------------------------------------------------
Sixth year 1.00
---------------------------------------------------------------------
Seventh year and later None (automatic conversion
to Class A)
---------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Class B shares can be a logical choice for long-term investors who would prefer
to see all of their investment go to work right away, and can accept somewhat
higher annual expenses in exchange.
24
<PAGE>
Class C shares
Like Class B shares, Class C shares have no up-front sales charges and have a
12b-1 plan under which a distribution fee of 0.75% is deducted from fund assets
each year. Because of this fee, the annual expenses for Class C shares are
similar to those of Class B shares, but higher than those for Class A shares
(and the performance of Class C shares is correspondingly lower than that of
Class A). However, unlike Class A shares, your entire investment goes to work
immediately.
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a CDSC, but only on shares you sell within one year of
buying them:
Year after you bought shares CDSC on shares you sell
---------------------------------------------------------------------
First year 1.00%
---------------------------------------------------------------------
Second year and later None
---------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.
25
<PAGE>
How to Buy Shares
Once you've chosen a share class, use these instructions to make investments.
Make out any checks to "Kemper Funds."
--------------------------------------------------------------------------------
First investment Additional investments
--------------------------------------------------------------------------------
$1,000 or more for regular accounts $100 or more for regular accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan, payroll deduction or
direct deposit
--------------------------------------------------------------------------------
Through a financial representative
o Contact your representative using
o Contact your representative using the the method that's most convenient
method that's most convenient for you for you
--------------------------------------------------------------------------------
By mail or express mail (see below)
o Fill out and sign an application o Send a check and an investment slip
to us at the appropriate address
o Send it to us at the appropriate below
address, along with an investment check
o If you don't have an investment
slip, simply include a letter with
your name, account number, the full
name of the fund and the share class
and your investment instructions
--------------------------------------------------------------------------------
By wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
By phone
-- o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
With an automatic investment plan
-- o To set up regular investments, call
(800) 621-1048
--------------------------------------------------------------------------------
On the Internet
o Follow the instructions at o Follow the instructions at
www.kemper.com www.kemper.com
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Regular mail:
Kemper Funds, PO Box 219153, Kansas City, MO 64121-9153
Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
26
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in your account.
--------------------------------------------------------------------------------
Exchanging into another fund Selling shares
--------------------------------------------------------------------------------
$1,000 or more to open a new account Some transactions, including most for
over $50,000, can only be ordered in
$100 or more for exchanges between writing with a signature guarantee; if
existing accounts you're in doubt, see page 29
--------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by the
o Contact your representative by the method that's most convenient for
method that's most convenient for you you
--------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for instructions
o Call (800) 621-1048 for instructions
--------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes: Write a letter that includes:
o the fund, class and account number o the fund, class and account number
you're exchanging out of from which you want to sell shares
o the dollar amount or number of shares o the dollar amount or number of
you want to exchange shares you want to sell
o the name and class of the fund you o your name(s), signature(s) and
want to exchange into address, as they appear on your
account
o your name(s), signature(s) and
address, as they appear on your account o a daytime telephone number
o a daytime telephone number
--------------------------------------------------------------------------------
With a systematic exchange plan With a systematic withdrawal plan
o To set up regular exchanges from a o To set up regular cash payments from
Kemper fund account, call a Kemper fund account, call
(800) 621-1048 (800) 621-1048
--------------------------------------------------------------------------------
On the Internet
o Follow the instructions at o Follow the instructions at
www.kemper.com www.kemper.com
--------------------------------------------------------------------------------
27
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder.
If you are investing through an investment provider, check the materials you
received from them. As a general rule, you should follow the information in
those materials wherever it contradicts the information given here. Please note
that an investment provider may charge its own fees.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 3 p.m. Central time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Kemper funds generally and on accounts held directly at Kemper. You can also use
it to make exchanges and sell shares.
28
<PAGE>
EXPRESS-Transfer lets you set up a link between a Kemper or Scudder account and
a bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. Transactions take two to three days to be completed, and
there is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the
account application; to add it to an existing account, call (800) 621-1048.
Share certificates are available on written request. However, we don't recommend
them unless you want them for a specific purpose, because your shares can only
be sold by mailing them in, and if they're ever lost they're difficult and
expensive to replace.
Since many transactions may be initiated by telephone or electronically, it's
important to understand that as long as we take reasonable steps to ensure that
an order to purchase or redeem shares is genuine, such as recording calls or
requesting personalized security codes or other information, we are not
responsible for any losses that may occur. For transactions conducted over the
Internet, we recommend the use of a secure Internet browser. In addition, you
should verify the accuracy of your confirmation statements immediately after you
receive them.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are normally completed within 24 hours. The funds can only
send or accept wires of $1,000 or more.
Exchanges are a shareholder privilege, not a right: we may reject any exchange
order, particularly when there appears to be a pattern of "market timing" or
other frequent purchases and sales. We may also reject or limit purchase orders,
for these or other reasons.
When you want to sell more than $50,000 worth of shares or send the proceeds to
a third party or to a new address you'll usually need to place your order in
writing and include a signature guarantee. The only exception is if you want
money wired to a bank account that is already on file with us; in that case, you
don't need a signature guarantee. Also, you don't need a signature guarantee for
an exchange, although we may require one in certain other circumstances.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
The Kemper Web site can be a valuable resource for shareholders with Internet
access. Go to www.kemper.com to get up-to-date information, review balances or
even place orders for exchanges.
29
<PAGE>
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one Kemper fund
into another don't affect CDSCs: for each investment you make, the date you
first bought Kemper shares is the date we use to calculate a CDSC on that
particular investment.
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns of
excess contributions from retirement plans
o for Class A shares purchased through the Large Order NAV Purchase
Privilege, redemption of shares whose dealer of record at the time of the
investment notifies Kemper Distributors that the dealer is waiving the
applicable commission
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Shareholder Services can answer your questions and help you determine if you are
eligible.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.
30
<PAGE>
If you sell shares in a Scudder or Kemper fund and then decide to invest with
Scudder or Kemper again within six months, you can take advantage of the
"reinstatement feature." With this feature, you can put your money back into the
same class of a Scudder or Kemper fund at its current NAV and for purposes of
sales charges it will be treated as if it had never left Scudder or Kemper.
You'll also be reimbursed (in the form of fund shares) for any CDSC you paid
when you sold your shares. Future CDSC calculations will be based on your
original investment date, rather than your reinstatement date. There is also an
option that lets investors who sold Class B shares buy Class A shares with no
sales charge, although they won't be reimbursed for any CDSC they paid. You can
only use the reinstatement feature once for any given group of shares. To take
advantage of this feature, contact Shareholder Services or your financial
representative.
Money from shares you sell is normally sent out within one business day of when
your order is received in proper form, although it could be delayed for up to
seven days. There are also two circumstances when it could be longer: when you
are selling shares you bought recently by check and that check hasn't cleared
yet (maximum delay: 10 days) or when unusual circumstances prompt the SEC to
allow further delays. Certain expedited redemption processes may also be delayed
when you are selling recently purchased shares.
31
<PAGE>
How the funds calculate share price
For each fund in this prospectus, the price at which you buy shares is as
follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing A Share Class")
Class B and Class C shares-- net asset value per share, or NAV
To calculate NAV, each share class of each fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For each fund and share class in this prospectus, the price at which you sell
shares is also the NAV, although for Class B and Class C investors a contingent
deferred sales charge may be taken out of the proceeds (see "Choosing A Share
Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
32
<PAGE>
Other rights we reserve
For each fund in this prospectus, you should be aware that we may do any of the
following:
o withhold 31% of your distributions as federal income tax if we have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened, we
may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below $1,000
for the entire quarter; this policy doesn't apply to most retirement
accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
33
<PAGE>
Understanding Distributions And Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The funds intend to pay dividends and distributions to shareholders in December,
and if necessary may do so at other times as well.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares (at NAV), all sent to you by
check, have one type reinvested and the other sent to you by check or have them
invested in a different fund. Tell us your preference on your application. If
you don't indicate a preference, your dividends and distributions will all be
reinvested without sales charges. For retirement plans, reinvestment is the only
option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Because each shareholder's tax situation is unique, ask your tax professional
about the tax consequences of your investments, including any state and local
tax consequences.
34
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
---------------------------------------------------------------------
o short-term capital gains from selling fund shares
---------------------------------------------------------------------
o taxable income dividends you receive from a fund
---------------------------------------------------------------------
o short-term capital gains distributions received from a fund
---------------------------------------------------------------------
Generally taxed at capital gains rates
---------------------------------------------------------------------
o long-term capital gains from selling fund shares
---------------------------------------------------------------------
o long-term capital gains distributions received from a fund
---------------------------------------------------------------------
You may be able to claim a tax credit or deduction for your share of any foreign
taxes your fund pays.
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
Corporations may be able to take a dividends- received deduction for a portion
of income dividends they receive.
35
<PAGE>
NOTES
--------------------------------------------------------------------------------
<PAGE>
NOTES
--------------------------------------------------------------------------------
<PAGE>
NOTES
--------------------------------------------------------------------------------
<PAGE>
NOTES
--------------------------------------------------------------------------------
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. For more copies, call (800) 621-1048.
Statements of Additional Information (SAIs) -- These tell you more about each
fund's features and policies, including additional risk information. The SAIs
are incorporated by reference into this document (meaning that they're legally
part of this prospectus).
If you'd like to ask for copies of these documents, please contact Kemper or the
SEC. If you're a shareholder and have questions, please contact Kemper (see
below). Materials you get from Kemper are free; those from the SEC involve a
copying fee. If you like, you can look over these materials in person at the
SEC's Public Reference Room in Washington, DC or request them electronically at
[email protected].
SEC Scudder Funds c/o
450 Fifth Street, N.W. Kemper Distributors, Inc.
Washington, DC 20549-0102 222 South Riverside Plaza
www.sec.gov Chicago, IL 60606-5808
Tel (202) 942-8090 www.kemper.com
Tel (800) 621-1048
SEC File Numbers
Scudder Focus Growth Fund 811-09057
Scudder Research Fund 811-09057
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
<PAGE>
LONG TERM
INVESTING
IN A
SHORT TERM
WORLD(SM)
January 1, 2001
Prospectus
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
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.
ThIS fund is available only to employees of ZURICH Scudder Investments, Inc. in
the following states: California, Connecticut, Florida, Illinois, Kansas,
Massachusetts, Missouri, New Hampshire, New Jersey and New York.
<PAGE>
CONTENTS
Kemper Small Cap Value+Growth Fund.................................3
ABOUT YOUR INVESTMENT.............................................11
Choosing a share class.......................................11
Rule 12b-1 plan..............................................12
Special features.............................................12
Buying shares................................................14
Selling and exchanging shares................................19
Distributions and taxes......................................23
Transaction information......................................24
FINANCIAL HIGHLIGHTS..............................................27
2
<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. As of December 15, 2000,
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 Advisor 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 Advisor
believes justifies the price.
3
<PAGE>
The Advisor 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.
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.
4
<PAGE>
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.
5
<PAGE>
Past Performance
The chart and the table below provide some indication of the risks of investing
in the fund by illustrating how the fund has performed and compares this
information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance. All figures
assume reinvestment of dividends and distributions.
Total returns for year ended December 31, 1999
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE:
BAR CHART DATA:
1999 -0.21%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 16.82% (the second quarter of 1999), and the funds' lowest
return for a calendar quarter was -10.53% (the first quarter of 1999).
The fund's year-to-date total return as of September 30, 2000 was 1.90%.
Average Annual Total Returns
For periods ended Russell
December 31, 1999 Class A Class B Class C 2000 Index
----------------- ------- ------- ------- ----------
One Year -0.21% -1.15% -1.15% 21.26%
Since December 31, 1998 -0.21% -1.15% -1.15% 21.26%
(Inception of the Fund)
The Russell 2000 Index is an unmanaged capitalization-weighted measure of
approximately 2000 small U.S. stocks. Index returns assume reinvestment of
dividends and, unlike the fund, do not reflect any fees, expenses or sales
charges.
6
<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.
--------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment
--------------------------------------------------------------------------------
Class A Class B Class 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)
--------------------------------------------------------------------------------
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 9.70% 9.70% 9.68%
----- ----- -----
--------------------------------------------------------------------------------
Total Annual Operating Expenses* 10.45% 11.20% 11.18%
--------------------------------------------------------------------------------
(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 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.
7
<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.
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
1 Year $1533 $1485 $1183 1 Year $1533 $1085 $1083
--------------------------------------------------------------------------------
3 Years $3295 $3358 $3054 3 Years $3295 $3058 $30540
--------------------------------------------------------------------------------
5 Years $4871 $4994 $4788 5 Years $4871 $4794 $4788
--------------------------------------------------------------------------------
10 Years $8117 $8133 $8268 10 Years $8117 $8133 $8268
--------------------------------------------------------------------------------
8
<PAGE>
Advisor
The fund retains the investment management firm of Zurich Scudder Investments,
Inc., 345 Park Avenue, New York, New York, to manage its daily investment and
business affairs subject to the policies established by the fund's Board. The
Advisor manages the fund's investments. Professional management can be an
important advantage for investors who do not have the time or expertise to
invest directly in individual securities. The Advisor 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.
The Advisor receives a management fee from the fund. The actual rate paid by the
fund for the fiscal period ended September 30, 2000, as a percentage of average
daily net assets, was 0%*.
*Reflecting the effect of expense limitations and/or fee waivers then in effect.
9
<PAGE>
Portfolio management
The following investment professionals are associated with the fund:
Name & Title Responsibilities and Background
-------------------------------------------------------------------
James M. Eysenbach, Began investment career in 1984
Lead Portfolio Joined the Advisor in 1991
Manager Joined the fund team in 1998
-------------------------------------------------------------------
Calvin S. Young, Began investment career in 1988
Portfolio Manager Joined the Advisor in 1990
Joined the fund team in 1998
-------------------------------------------------------------------
Jennifer P. Carter, Began investment career in 1988
Portfolio Manager Joined the Advisor in 1992
Joined the fund team in 2000
-------------------------------------------------------------------
10
<PAGE>
ABOUT YOUR INVESTMENT
The fund is available only to Zurich Scudder 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, the 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
The fund is composed of three classes of shares. All classes of the fund have a
common investment objective and investment portfolio. The fund provides
investors with the option of purchasing shares in the following ways:
Class A Shares Offered at net asset value plus a maximum sales
charge of 5.75% of the offering price. Reduced sales
charges apply to purchases of $50,000 or more. Class
A shares purchased at net asset value under the Large
Order NAV Purchase Privilege may be subject to a 1%
contingent deferred sales charge if redeemed within
one year of purchase and a 0.50% contingent deferred
sales charge if redeemed during the second year after
purchase.
Class B Shares Offered at net asset value without an initial sales
charge, but subject to a 0.75% Rule 12b-1
distribution fee and a contingent deferred sales
charge that declines from 4% to zero on certain
redemptions made within six years of purchase. Class
B shares automatically convert into Class A shares
(which have lower ongoing expenses) six years after
purchase.
Class C Shares Offered at net asset value without an initial sales
charge, but subject to a 0.75% Rule 12b-1
distribution fee and a 1% contingent deferred sales
charge on redemptions made within one year of
purchase. Class C shares do not convert into another
class.
When placing purchase orders, investors must specify whether the order is for
Class A, Class B or Class C shares. Each class of shares represents interests in
the same portfolio of investments of the fund.
11
<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
The fund has adopted a plan under Rule 12b-1 that provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by Kemper
Distributors, Inc., as principal underwriter, to pay for distribution and other
services provided to shareholders of those classes. Because 12b-1 fees are paid
out of fund assets on an ongoing basis, they will, over time, increase the cost
of investment and may cost more than other types of sales charges. Long-term
Class B and Class C shareholders may pay more than the economic equivalent of
the maximum initial sales charges permitted by the National Association of
Securities Dealers, although Kemper Distributors, Inc. believes that it is
unlikely, in the case of Class B shares, because of the automatic conversion
feature of those shares.
Special features
Class A Shares -- Combined Purchases. The fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of most Kemper
Funds.
Class A Shares -- Letter of Intent. The same reduced sales charges for Class A
shares also apply to the aggregate amount of purchases made by any purchaser
within a 24-month period under a written Letter of Intent ("Letter") provided by
Kemper Distributors, Inc. The Letter, which imposes no obligation to purchase or
sell additional Class A shares, provides for a price adjustment depending upon
the actual amount purchased within such period.
Class A Shares -- Cumulative Discount. Class A shares of the fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of 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.
12
<PAGE>
Class A Shares -- Large Order NAV Purchase Privilege. Class A shares of the fund
may also be purchased at net asset value by any purchaser provided that the
amount invested in 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 Advisor'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 fund reserves the right to terminate or modify this privilege at any time.
13
<PAGE>
Buying shares
You may purchase shares of the fund by contacting the securities dealer or other
financial services firm from whom you received this prospectus.
This fund is currently available only to employees of Zurich Scudder
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 million 2.00 2.04
$1 million and over 0.00*** 0.00***
* Includes front-end sales load.
** Rounded to the nearest one-hundredth percent.
*** Redemption of shares may be subject to a contingent
deferred sales charge as discussed below.
NAV Class A shares of a fund may be purchased at net asset value
Purchases 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
advisor, 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;
14
<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 fund;
o Members of the plaintiff class in the proceeding
known as Howard and Audrey Tabankin, et al. v. Kemper
Short-Term Global Income Fund, et. al., Case No. 93 C
5231 (N.D.IL);
o Selected employees (including their spouses and
dependent children) of banks and other financial
services firms that provide administrative services
related to the fund pursuant to an agreement with
Kemper Distributors, Inc. or one of its affiliates;
o Certain professionals who assist in the promotion of
Kemper Funds pursuant to personal services contracts
with Kemper Distributors, Inc., for themselves or
members of their families;
o In connection with the acquisition of the assets of
or merger or consolidation with another investment
company;
o Shareholders who owned shares of Kemper Value Series,
Inc. ("KVS") on September 8, 1995, and have
continuously owned shares of KVS (or a Kemper Fund
acquired by exchange of KVS shares) since that date,
for themselves or members of their families or any
trust, pension, profit-sharing or other benefit plan
for only such persons;
o Persons who purchase shares of 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;
15
<PAGE>
Contingent A contingent deferred sales charge may be imposed
Deferred Sales upon redemption of Class A shares purchased under the
Charge Large Order 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
Privilege their 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.
16
<PAGE>
Class B Shares
Public Offering Net asset value per share without any sales charge at the time
Price of purchase A contingent deferred sales charge may be imposed
Contingent upon redemption of Class B shares. There is no such charge
Deferred Sales upon redemption of any share appreciation or reinvested
Charge dividends. The charge is computed at the following rates
applied to the value of the shares redeemed excluding amounts
not subject to the charge.
Year of Redemption
After Purchase: First Second Third Fourth Fifth Sixth
--------------------------------------------------------------
Contingent Deferred
Sales Charge: 4% 3% 3% 2% 2% 1%
-------------------------------------------------------------
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 A
Feature shares of the same fund six years after issuance on the basis
of the relative net asset value per share. Shares purchased
through the reinvestment of dividends and other distributions
paid with respect to Class B shares in a shareholder's fund
account will be converted to Class A shares on a pro rata
basis.
Exchange Class B shares of a fund and Class B shares of most Kemper
Privilege Funds may be exchanged for each other at their relative net
asset values without a contingent deferred sales charge.
17
<PAGE>
Class C Shares
Public Offering Net asset value per share without any sales charge at the time
Price of purchase
Contingent A contingent deferred sales charge of 1% may be imposed upon
Deferred redemption of Class C shares redeemed within one year of
Sales Charge purchase. The charge will not be imposed upon redemption of
reinvested dividends or share appreciation. The contingent
deferred sales charge will be waived in the event of:
o redemption of shares of a shareholder (including a
registered joint owner) who has died;
o redemption of shares of a shareholder (including a
registered joint owner) who after purchase of the
shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social
Security Administration);
o redemptions under a fund's Systematic Withdrawal Plan
at a maximum of 10% per year of the net asset value
of the account;
o redemption of shares purchased through a
dealer-sponsored asset allocation program maintained
on an omnibus record-keeping system provided the
dealer of record has waived the advance of the first
year administrative services and distribution fees
applicable to such shares and has agreed to receive
such fees quarterly.
Rule 12b-1 Fee 0.75%
Conversion
Feature None
Exchange Class C shares of a fund and Class C shares of most Kemper
Privilege Funds may be exchanged for each other at their relative net
asset values. Class C shares may be exchanged without a
contingent deferred sales charge.
18
<PAGE>
Selling and exchanging shares
General
Contact your securities dealer or other financial services firm to arrange for
share redemptions or exchanges.
Any shareholder may require a fund to redeem his or her shares. When shares are
held for the account of a shareholder by the fund's transfer agent, the
shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
219153, Kansas City, Missouri 64121-9153.
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, 2000 will be eligible for the second year's charge if redeemed on or
after December 1, 2001. 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.
Since many transactions may be initiated by telephone or electronically, it's
important to understand that as long as we take reasonable steps to ensure that
an order to purchase or redeem shares is genuine, such as recording calls or
requesting personalized security codes or other information, we are not
responsible for any losses that may occur. For transactions conducted over the
Internet, we recommend the use of a secure Internet browser. In addition, you
should verify the accuracy of your confirmation statements immediately after you
receive them.
19
<PAGE>
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.
20
<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 fund reserves the right to terminate or modify this privilege at
any time.
Repurchases
A request for repurchase may be communicated by a shareholder through a
securities dealer or other financial services firm to Kemper Distributors, Inc.,
which the fund has authorized to act as its agent. There is no charge by Kemper
Distributors, Inc. with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. The offer to repurchase may
be suspended at any time. Requirements as to stock powers, certificates,
payments and delay of payments are the same as for redemptions.
21
<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 fund is not responsible for the efficiency of the
federal wire system or the account holder's financial services firm or bank. The
fund currently does not charge the account holder for wire transfers. The
account holder is responsible for any charges imposed by the account holder's
firm or bank. There is a $1,000 wire redemption minimum (including any
contingent deferred sales charge). To change the designated account to receive
wire redemption proceeds, send a written request to Kemper Service Company with
signatures guaranteed as described above or contact the firm through which
shares of the fund were purchased. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed by wire transfer
until such shares have been owned for at least 10 days. Account holders may not
use this privilege to redeem shares held in certificated form. During periods
when it is difficult to contact Kemper Service Company by telephone, it may be
difficult to use the expedited redemption privilege. The fund reserves the right
to terminate or modify this privilege at any time.
Reinvestment privilege
Under certain circumstances, a shareholder who has redeemed Class A shares may
reinvest up to the full amount redeemed at net asset value at the time of the
reinvestment. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares. The reinvestment privilege may be terminated or modified at any
time. The reinvestment privilege can be used only once as to any specific shares
and reinvestment must be effected within six months of the redemption.
22
<PAGE>
Distributions and taxes
Dividends and capital gains distributions
The 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 the 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 fund will reinvest dividend
checks (and future dividends) in shares of that same fund and class if checks
are returned as undeliverable. Dividends and other distributions 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.
23
<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.
The fund sends shareholders detailed tax information about the amount and type
of its distributions by January 31 of the following year.
The 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 their
tax advisors 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 fund as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading.
Market prices are used to determine the value of the fund's assets. If market
prices are not readily available for a security or if a security's price is not
considered to be market indicative, that security may be valued by another
method that the Board or its delegate believes accurately reflects fair value.
In those circumstances where a security's price is not considered to be market
indicative, the security's valuation may differ from an available market
quotation.
The net asset value per share of the fund is the value of one share and is
determined separately for each class by dividing the value of the fund's 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 the fund will generally be lower than that of the
Class A shares of the fund because of the higher annual expenses borne by the
Class B and Class C shares.
24
<PAGE>
Processing time
All requests to buy and sell shares that are received in good order by the
fund's transfer agent by the close of regular trading on the New York Stock
Exchange are executed at the net asset value per share calculated at the close
of trading that day (subject to any applicable sales load or contingent deferred
sales charge). Orders received by dealers or other financial services firms
prior to the determination of net asset value and received by the fund's
transfer agent prior to the close of its business 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 worth of shares or
less 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 fund will normally send you
the proceeds within one business day following your request, but may take up to
seven business days (or longer in the case of shares recently purchased by
check).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
fund and its distributor each reserve the right to reject purchases of fund
shares (including exchanges) for any reason, including when there is evidence of
a pattern of frequent purchases and sales made in response to short-term
fluctuations in a fund's share price. The fund reserves the right to withdraw
all or any part of the offering made by this prospectus and to reject purchase
orders. Also, from time to time, the fund may temporarily suspend the offering
of its shares or a class of its shares to new investors. During the period of
such suspension, persons who are already shareholders normally are permitted to
continue to purchase additional shares and to have dividends reinvested.
25
<PAGE>
Minimum balances
The minimum initial investment for the fund is $1,000 and the minimum subsequent
investment is $100. The minimum initial investment for an Individual Retirement
Account is $250 and the minimum subsequent investment is $50. Under an automatic
investment plan, such as Bank Direct Deposit, Payroll Direct Deposit or
Government Direct Deposit, the minimum initial and subsequent investment is $50.
These minimum amounts may be changed at any time in management's discretion.
Because of the high cost of maintaining small accounts, the fund may assess a
quarterly fee of $9 on an account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment 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 the fund through a member of the National
Association of Securities Dealers, Inc. (other than the fund' distributor,
Kemper Distributors, Inc.), that member may charge a fee for that service. This
prospectus should be read in connection with such firms' material regarding
their fees and services.
Redemption-in-kind
The fund reserves the right to honor any request for redemption or repurchase
order by making payment in whole or in part in readily marketable securities
("redemptions in kind"). These securities will be chosen by the fund and valued
as they are for purposes of computing the fund's net asset value. A shareholder
may incur transaction expenses in converting these securities to cash.
Householding
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-621-1048.
26
<PAGE>
FINANCIAL HIGHLIGHTS
The table below is intended to help you understand the fund's 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 the 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 the fund's
annual report, which is available upon request by calling Kemper at
1-800-621-1048.
Kemper Small Cap Value+Growth Fund
<TABLE>
<CAPTION>
--------------------------------------
Class A
--------------------------------------
From December 31,
Year ended 1998 (commencement
August 31, of operations) to
2000 August 31, 1999
-------------------------------------------------- ---------------- ---------------------
<S> <C> <C>
Net assets value, beginning of period $9.48 9.50
-------------------------------------------------- ---------------- ---------------------
Income (loss) from investment operations:
-------------------------------------------------- ---------------- ---------------------
Net investment income (loss) (a) (0.06) (0.04)
-------------------------------------------------- ---------------- ---------------------
Net realized and unrealized gain (loss) on
investment transactions 0.52 0.02
-------------------------------------------------- ---------------- ---------------------
Total from investment operations 0.46 (0.02)
-------------------------------------------------- ---------------- ---------------------
Less distribution from:
-------------------------------------------------- ---------------- ---------------------
Net realized gains on investment transactions (0.01) --
-------------------------------------------------- ---------------- ---------------------
Total distributions (0.01) --
-------------------------------------------------- ---------------- ---------------------
Net asset value, end of period $9.93 9.48
-------------------------------------------------- ---------------- ---------------------
Total return(%) (b)(c) 4.86 (.21)**
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-----------------------------------------------------------------------------------------
Net Assets, end of period ($ in thousands) 349 332
-------------------------------------------------- ---------------- ---------------------
Ratio of expenses before expense reductions(%) 10.52 4.49*
-------------------------------------------------- ---------------- ---------------------
Ratio of expenses after expense reductions(%) 1.61 1.63*
-------------------------------------------------- ---------------- ---------------------
Ratio of net investment income (loss)(%) (.65) (.62)*
-------------------------------------------------- ---------------- ---------------------
Portfolio turnover rate (%) 54 36*
-------------------------------------------------- ---------------- ---------------------
27
<PAGE>
--------------------------------------
Class B
--------------------------------------
From December 31,
Year ended 1998 (commencement
August 31, of operations) to
2000 August 31, 1999
-------------------------------------------------- ---------------- ---------------------
Net assets value, beginning of period $9.42 9.50
-------------------------------------------------- ---------------- ---------------------
Income (loss) from investment operations:
-------------------------------------------------- ---------------- ---------------------
Net investment income (loss) (a) (0.14) (0.09)
-------------------------------------------------- ---------------- ---------------------
Net realized and unrealized gain (loss) on
investment transactions 0.51 0.01
-------------------------------------------------- ---------------- ---------------------
Total from investment operations 0.37 (0.08)
-------------------------------------------------- ---------------- ---------------------
Less distribution from:
-------------------------------------------------- ---------------- ---------------------
Net realized gains on investment transactions (0.01) --
-------------------------------------------------- ---------------- ---------------------
Total distributions (0.01) --
-------------------------------------------------- ---------------- ---------------------
Net asset value, end of period $9.78 9.42
-------------------------------------------------- ---------------- ---------------------
Total return(%) (b)(c) 3.94 (.84)**
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-----------------------------------------------------------------------------------------
Net Assets, end of period ($ in thousands) 344 331
-------------------------------------------------- ---------------- ---------------------
Ratio of expenses before expense reductions(%) 11.27 5.38*
-------------------------------------------------- ---------------- ---------------------
Ratio of expenses after expense reductions(%) 2.51 2.52*
-------------------------------------------------- ---------------- ---------------------
Ratio of net investment income (loss)(%) (1.55) (1.51)*
-------------------------------------------------- ---------------- ---------------------
Portfolio turnover rate (%) 54 36*
-------------------------------------------------- ---------------- ---------------------
28
<PAGE>
--------------------------------------
Class C
--------------------------------------
From December 31,
Year ended 1998 (commencement
August 31, of operations) to
2000 August 31, 1999
-------------------------------------------------- ---------------- ---------------------
Net assets value, beginning of period $9.42 9.50
-------------------------------------------------- ---------------- ---------------------
Income (loss) from investment operations:
-------------------------------------------------- ---------------- ---------------------
Net investment income (loss) (a) (0.14) (0.09)
-------------------------------------------------- ---------------- ---------------------
Net realized and unrealized gain (loss) on
investment transactions 0.51 0.01
-------------------------------------------------- ---------------- ---------------------
Total from investment operations 0.37 (0.08)
-------------------------------------------------- ---------------- ---------------------
Less distribution from:
-------------------------------------------------- ---------------- ---------------------
Net realized gains on investment transactions (0.01) --
-------------------------------------------------- ---------------- ---------------------
Total distributions (0.01) --
-------------------------------------------------- ---------------- ---------------------
Net asset value, end of period $9.78 9.42
-------------------------------------------------- ---------------- ---------------------
Total return(%) (b)(c) 3.94 (.84)**
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
-----------------------------------------------------------------------------------------
Net Assets, end of period ($ in thousands) 344 331
-------------------------------------------------- ---------------- ---------------------
Ratio of expenses before expense reductions(%) 11.25 5.38*
-------------------------------------------------- ---------------- ---------------------
Ratio of expenses after expense reductions(%) 2.51 2.52*
-------------------------------------------------- ---------------- ---------------------
Ratio of net investment income (loss)(%) (1.55) (1.51)*
-------------------------------------------------- ---------------- ---------------------
Portfolio turnover rate (%) 54 36*
-------------------------------------------------- ---------------- ---------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been
reduced.
(c) Total return does not reflect the effect of any sales charges.
* Annualized
** Not annualized
29
<PAGE>
Additional information about the fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries can be made by calling the toll-free telephone
number listed below. The Statement of Additional Information contains more
information on fund investments and operations. The Shareholder Services Guide
contains more information about purchases and sales of fund shares. The
semiannual and annual shareholder reports contain a discussion of the market
conditions and the investment strategies that significantly affected the fund's
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. 20549-0102
(a duplication fee is charged)
--------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-202-942-8090 for more information.)
--------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.kemper.com
http://www.publicinfo.gov (a duplicating fee is charged)
--------------------------------------------------------------------------------
The Statement of Additional Information dated January 1, 2001 is incorporated by
reference into this prospectus (is legally a part of this prospectus).
Scudder Investors Trust
Investment Company Act file number: 811-09057
<PAGE>
SCUDDER
INVESTMENTS (SM)
[LOGO]
January 1, 2001
Prospectus
Scudder S&P 500 Stock Fund
Advisor Classes A, B and C
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Contents
--------------------------------------------------------------------------------
How the Fund Works How to Invest in the Fund
4 The Fund's Investment Strategy 12 Choosing a Share Class
5 The Main Risks of Investing 17 How to Buy Shares
in the Fund
18 How to Exchange or Sell
6 The Fund's Performance History Shares
7 How Much Investors Pay 19 Policies You Should Know
About
8 Other Policies and Risks
26 Understanding Distributions
9 Who Manages and Oversees and Taxes
the Fund
10 Financial Highlights
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of the McGraw-Hill Companies, Inc., and have been licensed
for use by Zurich Scudder Investments, Inc. The Scudder S&P 500 Stock Fund is
not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard &
Poor's makes no representation regarding the advisability of investing in the
fund. Additional information may be found in the fund's Statement of Additional
Information.
<PAGE>
How the Fund Works
On the next few pages, you'll find information about this fund's investment
goal, the main strategies it uses to pursue that goal, and the main risks that
could affect its performance.
Whether you are considering investing in the fund or are already a shareholder,
you'll probably want to look this information over carefully. You may want to
keep it on hand for reference as well.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
<PAGE>
--------------------------------------------------------------------------------
Class A Class B Class C
ticker symbol KSAAX KSABX KSACX
fund number 155 255 355
Scudder S&P 500 Stock Fund
--------------------------------------------------------------------------------
The Fund's Investment Strategy
The fund seeks returns that, before expenses, correspond to the total return of
U.S. common stocks as represented by the Standard & Poor's 500 Composite Stock
Price Index (S&P 500 Index).
The fund seeks to match, as closely as possible before expenses, the performance
of the S&P 500 Index, which emphasizes stocks of large U.S. companies. It does
this by investing at least 80% of total assets in common stocks included in the
Index.
In choosing stocks, the fund uses an indexing strategy. The fund buys the
largest stocks of the S&P 500 Index in roughly the same proportion as the index.
With the smaller stocks of the S&P 500 Index, the portfolio managers use a
statistical process known as sampling to select stocks whose overall performance
is expected to be similar to that of the smaller companies in the S&P 500 Index.
The fund seeks to keep the composition of its portfolio similar to the S&P 500
Index in industry distribution, market capitalization and significant
fundamental characteristics (such as price-to-book ratios and dividend yields).
Over the long term, the portfolio managers seek a correlation between the
performance of the fund, before expenses, and the S&P 500 Index of 98% or
better. A figure of 100% would indicate perfect correlation.
The fund will normally sell a stock when it is removed from the S&P 500 Index or
as a result of the fund's statistical process.
--------------------------------------------------------------------------------
OTHER INVESTMENTS The fund may invest up to 20% of total assets in stock index
futures and options, as well as short-term debt securities. The fund typically
invests new flows of money in index futures in order to gain immediate exposure
to the S&P 500 Index.
4
<PAGE>
The Main Risks of Investing in the Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the large company portion of the U.S. market.
When large company stock prices fall, you should expect the value of your
investment to fall as well. Large company stocks at times may not perform as
well as stocks of smaller or mid-size companies. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
The fund's index strategy involves several risks. The fund could underperform
the index during short periods or over the long term, either because its
selection of stocks failed to track the index or because of the effects of fund
expenses or shareholder transactions.
The fund's index strategy also means that it does not have the option of using
defensive investments or other management actions to reduce the fund's exposure
to a declining market.
Another factor that could affect performance is that:
o derivatives could produce disproportionate losses
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
This fund is designed for long-term investors interested in a fund that is
designed to avoid substantially underperforming the overall large-cap stock
market.
5
<PAGE>
The Fund's Performance History
Because this is a new fund, it did not have a full calendar year of performance
to report as of the date of this prospectus.
6
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
--------------------------------------------------------------------------------
Fee Table Class A Class B Class C
--------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
--------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On
Purchases (% of offering price) 4.50% None None
--------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge (Load)
(% of redemption proceeds) None* 4.00% 1.00%
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee 0.39% 0.39% 0.39%
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
--------------------------------------------------------------------------------
Other Expenses 2.80 3.04 2.99
--------------------------------------------------------------------------------
Total Annual Operating Expenses 3.19 4.18 4.13
--------------------------------------------------------------------------------
Expense Reimbursement 2.19 2.38 2.35
--------------------------------------------------------------------------------
Net Annual Operating Expenses** 1.00 1.80 1.78
--------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large
Order NAV Purchase Privilege (see "Policies You Should Know About --
Policies about transactions") may be subject to a contingent deferred
sales charge of 1.00% if redeemed within one year of purchase and 0.50% if
redeemed during the second year following purchase.
** By contract, total operating expenses are capped at 1.00%, 1.75% and 1.75%
through 4/3/2001 for Class A, B and C shares, respectively. Additionally,
by contract, total operating expenses are capped at 1.00%, 1.80% and 1.78%
through 1/1/2002 for Class A, B and C shares, respectively.
Based on the costs above (including one year of capped expenses in each period),
this example is designed to help you compare the expenses of each share class to
those of other funds. The example assumes operating expenses remain the same and
that you invested $10,000, earned 5% annual returns and reinvested all dividends
and distributions. This is only an example; actual expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
--------------------------------------------------------------------------------
Class A shares $547 $1,193 $1,861 $3,642
--------------------------------------------------------------------------------
Class B shares 583 1,353 2,137 3,807
--------------------------------------------------------------------------------
Class C shares 281 1,041 1,916 4,171
--------------------------------------------------------------------------------
Expenses, assuming you kept your shares
--------------------------------------------------------------------------------
Class A shares $547 $1,193 $1,861 $3,642
--------------------------------------------------------------------------------
Class B shares 183 1,053 1,937 3,807
--------------------------------------------------------------------------------
Class C shares 181 1,041 1,916 4,171
--------------------------------------------------------------------------------
7
<PAGE>
Other Policies and Risks
While the previous pages describe the main points of the fund's strategy and
risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, the fund's Board could
change the fund's investment goal without seeking shareholder approval.
For more information
This prospectus doesn't tell you about every policy or risk of investing in the
fund.
If you want more information on the fund's allowable securities and investment
practices and the characteristics and risks of each one, you may want to request
a copy of the Statement of Additional Information (the back cover tells you how
to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
8
<PAGE>
Who Manages and Oversees the Fund
The investment advisor
The fund's investment advisor is Zurich Scudder Investments, Inc., 345 Park
Avenue, New York, NY. The advisor has more than 80 years of experience managing
mutual funds and currently has more than $290 billion in assets under
management.
The advisor's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists, located
in offices across the United States and around the world.
The advisor receives a management fee from the fund as shown below. For the most
recent fiscal period, the actual amount the fund paid in management fees was
0.00%* of its average daily net assets.
* Reflecting the effect of expense limitations and/or fee waivers then in
effect.
--------------------------------------------------------------------------------
Investment Management Fee Schedule
--------------------------------------------------------------------------------
Fund Net Assets Annual Rate
--------------------------------------------------------------------------------
$0-$100 million 0.40%
--------------------------------------------------------------------------------
$100 million-$200 million 0.36
--------------------------------------------------------------------------------
More than $200 million 0.34
--------------------------------------------------------------------------------
The fund's subadvisor is Bankers Trust Company, 885 Third Avenue, 32nd Floor,
New York, NY. Bankers Trust Company provides a full range of investment advisory
services to institutional clients. Bankers Trust Company serves as investment
advisor to ten other investment companies and as subadvisor to five other
investment companies. Bankers Trust Company receives a subadvisory fee from
Zurich Scudder as shown below.
--------------------------------------------------------------------------------
Subadvisor Management Fee Schedule
--------------------------------------------------------------------------------
Fund Net Assets Annual Rate
--------------------------------------------------------------------------------
$0-$100 million 0.07%
--------------------------------------------------------------------------------
$100 million-$200 million 0.03
--------------------------------------------------------------------------------
More than $200 million 0.01
--------------------------------------------------------------------------------
9
<PAGE>
Financial Highlights
This table is designed to help you understand the fund's financial performance.
The figures in the first part of the table are for a single share. The total
return figures represent the percentage that an investor in the fund would have
earned (or lost), assuming all dividends and distributions were reinvested. This
information has been audited by Ernst & Young LLP, whose report, along with the
fund's financial statements, is included in the annual report (see "Shareholder
reports" on the back cover).
Scudder S&P 500 Stock Fund(1)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Per share operating performance Class A Class B Class C
---------------------------------------------------------------------------------------------
2000(a) 2000(a) 2000(a)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $9.50 $9.50 $9.50
Income from investment operations:
Net investment income (b) 0.03 0.00 0.00
Net realized and unrealized gain (loss) on
investment transactions 0.06 0.07 0.07
--------------------------------------
Total from investment operations 0.09 0.07 0.07
Net asset value, end of period $9.59 $9.57 $9.57
--------------------------------------
Total return (%) (c) (d) 0.95** 0.74** 0.74**
---------------------------------------------------------------------------------------------
Ratios to average net assets and supplemental data
---------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 21,781 2,525 2,331
Ratio of expenses before expense reductions (%) 3.19* 4.18* 4.13*
Ratio of expenses after expense reductions (%) 1.00* 1.75* 1.75*
Ratio of net investment income (%) 0.90* 0.09* 0.09*
Portfolio turnover rate (%) 43* 43* 43*
---------------------------------------------------------------------------------------------
</TABLE>
(1) On January 1, 2001, the fund changed its name from Kemper S&P 500 Index
Fund to Scudder S&P 500 Stock Fund.
* Annualized
** Not annualized
(a) For the period April 3, 2000 (commencement of operations) to August 31,
2000.
(b) Based on monthly average shares outstanding during the period.
(c) Total return does not reflect the effect of sales charge.
(d) Total return would have been lower had certain expenses not been waived.
10
<PAGE>
Investing in the Fund
The following pages tell you about many of the services, choices and benefits of
being a shareholder. You'll also find information on how to check the status of
your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.
<PAGE>
Choosing a Share Class
Offered in this prospectus are three share classes for the fund. Each class has
its own fees and expenses, offering you a choice of cost structures. Class A,
Class B and Class C shares are intended for investors seeking the advice and
assistance of a financial representative, who may receive compensation for those
services through sales commissions, service fees and/or distribution fees.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
--------------------------------------------------------------------------------
Classes and features Points to help you compare
--------------------------------------------------------------------------------
Class A
o Sales charges of up to 4.50%, o Some investors may be able to
charged when you buy shares reduce or eliminate their sales
charges; see next page
o In most cases, no charges when you
sell shares o Total annual operating expenses are
lower than those for Class B or
o No distribution fee Class C
--------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge rate
falls to zero after six years
o Deferred sales charge of up to 4.00%,
charged when you sell shares you o Shares automatically convert to
bought within the last six years Class A after six years, which
means lower annual expenses going
o 0.75% distribution fee forward
--------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge rate is
lower, but your shares never
o Deferred sales charge of 1.00%, convert to Class A, so annual
charged when you sell shares you expenses remain higher
bought within the last year
o 0.75% distribution fee
--------------------------------------------------------------------------------
12
<PAGE>
Class A shares
Class A shares have a sales charge that varies with the amount you invest:
Sales charge as a % Sales charge as a %
Your investment of offering price of your net investment
--------------------------------------------------------------------------------
Up to $100,000 4.50 4.71
--------------------------------------------------------------------------------
$100,000-$249,999 3.50 3.63
--------------------------------------------------------------------------------
$250,000-$499,999 2.60 2.67
--------------------------------------------------------------------------------
$500,000-$999,999 2.00 2.04
--------------------------------------------------------------------------------
$1 million or more see below and next page
--------------------------------------------------------------------------------
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $100,000 over the next 24 months ("letter of
intent")
o the amount of shares you already own (including shares in certain other
funds) plus the amount you're investing now is at least $100,000
("cumulative discount")
o you are investing a total of $100,000 or more in several funds at once
("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class A shares may make sense for long-term investors, especially those who are
eligible for reduced or eliminated sales charges.
13
<PAGE>
You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you pay a fee
to an investment advisor or other firm for portfolio management services
There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Kemper Service
Company can answer your questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them. This CDSC is waived under
certain circumstances (see "Policies You Should Know About"). Your financial
representative or Kemper Service Company can answer your questions and help you
determine if you're eligible.
14
<PAGE>
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% is deducted
from fund assets each year. This means the annual expenses for Class B shares
are somewhat higher (and their performance correspondingly lower) compared to
Class A shares, which don't have a 12b-1 fee. After six years, Class B shares
automatically convert to Class A, which has the net effect of lowering the
annual expenses from the seventh year on. However, unlike Class A shares, your
entire investment goes to work immediately.
Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:
Year after you bought shares CDSC on shares you sell
--------------------------------------------------------------------------------
First year 4.00%
--------------------------------------------------------------------------------
Second or third year 3.00
--------------------------------------------------------------------------------
Fourth or fifth year 2.00
--------------------------------------------------------------------------------
Sixth year 1.00
--------------------------------------------------------------------------------
Seventh year and later None (automatic conversion
to Class A)
--------------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class B shares can be a logical choice for long-term investors who would prefer
to see all of their investment go to work right away, and can accept somewhat
higher annual expenses.
15
<PAGE>
Class C shares
Like Class B shares, Class C shares have no up-front sales charges and have a
12b-1 plan under which a distribution fee of 0.75% is deducted from fund assets
each year. Because of this fee, the annual expenses for Class C shares are
similar to those of Class B shares, but higher than those for Class A shares
(and the performance of Class C shares is correspondingly lower than that of
Class A). However, unlike Class A shares, your entire investment goes to work
immediately.
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a contingent deferred sales charge (CDSC), but only on
shares you sell within one year of buying them:
Year after you bought shares CDSC on shares you sell
--------------------------------------------------------------------------------
First year 1.00%
--------------------------------------------------------------------------------
Second year and later None
--------------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper Service Company can answer your
questions and help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.
16
<PAGE>
How to Buy Shares
Once you've chosen a share class, use these instructions to make investments.
Make out any checks to "Kemper Funds."
--------------------------------------------------------------------------------
First investment Additional investments
--------------------------------------------------------------------------------
$1,000 or more for regular accounts $100 or more for regular accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic Investment $50 or more with an Automatic
Plan Investment Plan
--------------------------------------------------------------------------------
Through a financial representative
o Contact your representative using the o Contact your representative
method that's most convenient for you using the method that's most
convenient for you
--------------------------------------------------------------------------------
By mail or express mail (see below)
o Fill out and sign an application o Send a check and an investment
slip to us at the appropriate
o Send it to us at the appropriate address below
address, along with an investment
check o If you don't have an investment
slip, simply include a letter with
your name, account number, the full
name of the fund and the share
class and your investment
instructions
--------------------------------------------------------------------------------
By wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for
instructions
--------------------------------------------------------------------------------
By phone
-- o Call (800) 621-1048 for
instructions
--------------------------------------------------------------------------------
o With an automatic investment plan
-- o To set up regular investments,
call (800) 621-1048
--------------------------------------------------------------------------------
On the Internet
o Follow the instructions at o Follow the instructions at
www.kemper.com www.kemper.com
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Regular mail:
Kemper Funds, PO Box 219153, Kansas City, MO 64121-9153
Express, registered or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
17
<PAGE>
How to Exchange or Sell Shares
Use these instructions to exchange or sell shares in your account.
--------------------------------------------------------------------------------
Exchanging into another fund Selling shares
--------------------------------------------------------------------------------
$1,000 or more to open a new account Some transactions, including most for
over $50,000, can only be ordered in
$100 or more for exchanges between writing with a signature guarantee;
existing accounts if you're in doubt, see page 27
--------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by the o Contact your representative by the
method that's most convenient for you method that's most convenient for
you
--------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for
instructions
--------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes: Write a letter that includes:
o the fund, class and account number o the fund, class and account number
you're exchanging out of from which you want to sell shares
o the dollar amount or number of shares o the dollar amount or number of
you want to exchange shares you want to sell
o the name and class of the fund you o your name(s), signature(s) and
want to exchange into address, as they appear on your
account
o your name(s), signature(s) and
address, as they appear on your o a daytime telephone number
account
o a daytime telephone number
--------------------------------------------------------------------------------
With a systematic exchange plan With a systematic withdrawal plan
o To set up regular exchanges from a o To set up regular cash payments
Kemper fund account, call from a Kemper fund account, call
(800) 621-1048 (800) 621-1048
--------------------------------------------------------------------------------
On the Internet
o Follow the instructions at o Follow the instructions at
www.kemper.com www.kemper.com
--------------------------------------------------------------------------------
18
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder. Some of this information, such as the section on dividends
and taxes, applies to all investors, including those investing through
investment providers.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open. The
fund calculates its share price every business day, as of the close of regular
trading on the Exchange (typically 3 p.m. Central time, but sometimes earlier,
as in the case of scheduled half-day trading or unscheduled suspensions of
trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Kemper or Scudder funds generally and on accounts held directly at Kemper. You
can also use it to make exchanges and sell shares.
19
<PAGE>
EXPRESS-Transfer lets you set up a link between a Kemper or Scudder account and
a bank account. Once this link is in place, you can move money between the two
with a phone call. You'll need to make sure your bank has Automated Clearing
House (ACH) services. Transactions take two to three days to be completed, and
there is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the
account application; to add it to an existing account, call (800) 621-1048.
Share certificates are available on written request. However, we don't recommend
them unless you want them for a specific purpose, because they can only be sold
by mailing them in, and if they're ever lost they're difficult and expensive to
replace.
Since many transactions may be initiated by telephone or electronically, it's
important to understand that as long as we take reasonable steps to ensure that
an order to purchase or redeem shares is genuine, such as recording calls or
requesting personalized security codes or other information, we are not
responsible for any losses that may occur. For transactions conducted over the
Internet, we recommend the use of a secure Internet browser. In addition, you
should verify the accuracy of your confirmation statements immediately after you
receive them.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The fund can only send or
accept wires of $1,000 or more.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
The Kemper Web site can be a valuable resource for shareholders with Internet
access. Go to www.kemper.com to get up-to-date information, review balances or
even place orders for exchanges.
20
<PAGE>
Exchanges are a shareholder privilege, we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject or limit purchase orders, for
these or other reasons.
When you want to sell more than $50,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
When you sell shares that have a CDSC, we calculate the CDSC as a percentage of
what you paid for the shares or what you are selling them for -- whichever
results in the lowest charge to you. In processing orders to sell shares, we
turn to the shares with the lowest CDSC first. Exchanges from one fund into
another don't affect CDSCs: for each investment you make, the date you first
bought shares is the date we use to calculate a CDSC on that particular
investment.
21
<PAGE>
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns of
excess contributions from retirement plans
o for Class A shares purchased through the Large Order NAV Purchase
Privilege
o redemption of shares whose dealer of record at the time of the investment
notifies Kemper Distributors that the dealer waives the applicable
commission
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Kemper Service Company can answer your questions and help you determine if you
are eligible.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.
22
<PAGE>
If you sell shares in a Scudder fund offering multiple classes or a Kemper fund
and then decide to invest with Scudder or Kemper again within six months, you
can take advantage of the "reinstatement feature." With this feature, you can
put your money back into the same class of a Scudder or Kemper fund at its
current NAV and for purposes of sales charges it will be treated as if it had
never left Scudder or Kemper. You'll be reimbursed (in the form of fund shares)
for any CDSC you paid when you sold. Future CDSC calculations will be based on
your original investment date, rather than your reinstatement date. There is
also an option that lets investors who sold Class B shares buy Class A shares
with no sales charge, although they won't be reimbursed for any CDSC they paid.
You can only use the reinstatement feature once for any given group of shares.
To take advantage of this feature, contact Kemper Service Company or your
financial representative.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
23
<PAGE>
How the fund calculates share price
The price at which you buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing A Share Class")
Class B and Class C shares-- net asset value per share, or NAV
To calculate NAV, each share class of the fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES / TOTAL NUMBER OF SHARES OUTSTANDING = NAV
For each share class, the price at which you sell shares is also the NAV,
although for Class B and Class C investors a contingent deferred sales charge
may be taken out of the proceeds (see "Choosing A Share Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by the fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
24
<PAGE>
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if we have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened,
we may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below
$1,000 for the entire quarter; this policy doesn't apply to most
retirement accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for
you to liquidate) rather than cash; the fund generally won't make a
redemption in kind unless your requests over a 90-day period total more
than $250,000 or 1% of the value of the fund's net assets, whichever is
less
o change, add or withdraw various services, fees and account policies (for
example, we may change or terminate the exchange privilege at any time)
25
<PAGE>
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The fund intends to pay dividends and distributions to its shareholders in
November or December, and if necessary may do so at other times as needed.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares (at NAV), all sent to you by
check, have one type reinvested and the other sent to you by check or have them
invested in a different fund. Tell us your preference on your application. If
you don't indicate a preference, your dividends and distributions will all be
reinvested without sales charges. For retirement plans, reinvestment is the only
option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences.
26
<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
--------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o taxable income dividends you receive from the fund
--------------------------------------------------------------------------------
o short-term capital gains distributions received from the fund
--------------------------------------------------------------------------------
Generally taxed at capital gains rates
--------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
--------------------------------------------------------------------------------
o long-term capital gains distributions received from the fund
--------------------------------------------------------------------------------
The fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before the fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
27
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
Notes
--------------------------------------------------------------------------------
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from the fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. They also have detailed performance figures, a list of everything
the fund owns, and the fund's financial statements. Shareholders get the reports
automatically. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about the
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus). If you'd like to ask for copies of these documents, please
contact Kemper or the SEC (see below). If you're a shareholder and have
questions, please contact Kemper. Materials you get from Kemper are free; those
from the SEC involve a copying fee. If you like, you can look over these
materials at the SEC's Public Reference Room in Washington, DC or request them
electronically at [email protected].
SEC Scudder Funds c/o
450 Fifth Street, N.W. Kemper Distributors, Inc.
Washington, DC 20549-0102 222 South Riverside Plaza
www.sec.gov Chicago, IL 60606-5808
Tel (202) 942-8090 www.kemper.com
Tel (800) 621-1048
SEC File Number
Scudder S&P 500 Stock Fund 811-09057
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
[RECYCLE LOGO] Printed on recycled paper. SSPF-1 (1/1/2001) 516739
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
January 1, 2001
Scudder Focus Growth Fund
Scudder Research Fund
each a series of
Scudder Investors 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,
2001. 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, 2000 for Scudder
Focus Growth Fund and Scudder Research Fund (formerly Kemper Large Company
Growth Fund and Kemper Research Fund, respectively) 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 OF CONTENTS
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.........................................................28
PERFORMANCE.............................................................30
OFFICERS AND TRUSTEES...................................................31
PRINCIPAL HOLDERS OF SECURITIES.........................................33
SHAREHOLDER RIGHTS......................................................34
FINANCIAL STATEMENTS....................................................35
printed on recycled paper
<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 1940 Act, 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 1940 Act, 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 1940 Act, 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 1940 Act, 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) borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes;
(2) purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with futures
contracts, options or other permitted investments, (iv) that
transactions in futures contracts and options shall not be deemed to
constitute selling securities short, and (v) that the Fund may
obtain such short-term credits as may be necessary for the clearance
of securities transactions;
2
<PAGE>
(3) purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its total
assets; or sell put options, if as a result, the aggregate value of
the obligations underlying such put options would exceed 50% of its
total assets;
(4) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to such futures contracts entered into on behalf
of the Fund and the premiums paid for such options on futures
contracts does not exceed 5% of the fair market value of the Fund's
total assets; provided that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be
excluded in computing the 5% limit;
(5) purchase warrants if as a result, such securities, taken at the
lower of cost or market value, would represent more than 5% of the
value of the Fund's total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed to have
no value);
(6) lend portfolio securities in an amount greater than 5% of its total
assets; and
(7) invest more than 15% of 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.
INVESTMENT POLICIES AND TECHNIQUES
General. Each Fund is a series of shares of beneficial interest of Scudder
Investors Trust (the "Trust"), an open-end, registered management investment
company. Scudder Research Fund is a diversified series, Scudder Focus Growth
Fund is a non-diversified series.
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 Zurich Scudder Investments, Inc. (the "Advisor"), in its
discretion, might, but is not required to, use in managing the Fund's portfolio
assets. The Advisor 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.
Investment of Uninvested Cash Balances. Each Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and
3
<PAGE>
new cash received from investors. Uninvested Cash may be invested directly in
money market instruments or other short-term debt obligations. Pursuant to an
Exemptive Order issued by the SEC, each Fund may use Uninvested Cash to purchase
shares of affiliated funds including money market funds, short-term bond funds
and Scudder Cash Management Investment Trust, or one or more future entities for
which the Advisor acts as trustee or investment advisor that operate as cash
management investment vehicles and that are excluded from the definition of
investment company pursuant to section 3(c)(1) or 3(c)(7) of the 1940 Act
(collectively, the "Central Funds") in excess of the limitations of Section
12(d)(1) of the 1940 Act. Investment by each Fund in shares of the Central Funds
will be in accordance with each Fund's investment policies and restrictions as
set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance each Fund's ability to
manage Uninvested Cash.
Each Fund will invest Uninvested Cash in Central Funds only to the extent that
each Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
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 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
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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 Advisor 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
Advisor 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
Advisor believes that diversification of assets on an international basis may
decrease the degree to which events in any one country, including the U.S., will
affect an investor's entire investment holdings. In certain periods since World
War II, many leading foreign economies and foreign stock market indices have
grown more rapidly than the U.S. economy and leading U.S. stock market indices,
although there can be no assurance that this will be true in the future.
Investors should recognize that investing in foreign securities involves certain
special considerations, including those set forth below, which are not typically
associated with investing in U.S. securities and which may favorably or
unfavorably affect 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
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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
Advisor believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction.
Lending of Portfolio Securities. Each Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers, and are required to be secured continuously by collateral in
cash, U.S. Government securities and high grade debt obligations, maintained on
a current basis at an amount at least equal to the market value and accrued
interest of the securities loaned. A Fund has the right to call a loan and
obtain the securities loaned on no more than five days' notice. During the
existence of a loan, a Fund continues to receive the equivalent of any
distributions paid by the issuer on the securities loaned and also receives
compensation based on investment of the collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans may be made only to firms deemed by the Advisor 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).
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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 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
Advisor will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Advisor 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
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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 Funds 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 Funds will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, the Funds 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.
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.
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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 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
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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.
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 Advisor 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.
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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 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
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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 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 Advisor considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Funds holds securities denominated in schillings and the Advisor believes
that the value of schillings will decline against the U.S. dollar, the Advisor
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.
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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 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 Advisor 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
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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 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.
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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 may purchase the securities of small companies.
The Advisor 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.
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. Each Fund has received exemptive relief
from the SEC which permits the Funds to participate in an interfund lending
program among certain investment companies advised by the Manager. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is 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
may 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 may extend overnight,
but could have a maximum duration of seven days. Loans may 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).
BROKERAGE COMMISSIONS
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Allocation of brokerage is supervised by the Adviser.
The primary objective of the Advisor 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
Advisor 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 Advisor
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 Advisor with primary market makers for these securities on a net basis,
without any brokerage commission being paid by a Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Advisor 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
Advisor 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 Advisor 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 Advisor or a Fund in exchange for the direction by the Advisor of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Advisor 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 Advisor 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 Advisor 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 Advisor in providing services to clients other than a Fund, and
not all such information is used by the Advisor in connection with a Fund.
Conversely, such information provided to the Advisor by broker/dealers through
whom other clients of the Advisor effect securities transactions may be useful
to the Advisor 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 fiscal period ended August 31, 2000, Scudder Focus Growth Fund paid
brokerage commissions of $_________. ( % 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 fiscal period ended August
31, 2000, was $_____, of which $________ (_____%) of all brokerage transactions
were transactions which included research commissions.
For the eight month fiscal period ended August 31, 1999, Scudder Focus Growth
Fund paid brokerage commissions of $1,852.15. For the eight month fiscal period
ended August 31, 1999, the Fund paid brokerage
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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 fiscal period ended August 31, 2000, Scudder Research Fund paid
brokerage commissions of $_________. ( % 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 fiscal period ended August
31, 2000, was $_____, of which $________ (_____%) of all brokerage transactions
were transactions which included research commissions.
For the eight month fiscal period ended August 31, 1999, Scudder 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.
INVESTMENT MANAGER AND UNDERWRITER
Investment Manager. Zurich Scudder Investments, Inc. (the ""Adviser"), 345 Park
Avenue, New York, New York, is each Fund's investment manager. The Advisor is
approximately 70% owned by Zurich Financial Services, Inc. a newly formed global
insurance and financial services company. The balance of the Advisor is owned by
its officers and employees. Pursuant to investment management agreements, the
Advisor 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 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
The investment management agreements provide that the Advisor 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
the Advisor 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.
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<PAGE>
In certain cases the investments for the Funds are managed by the same
individuals who manage one or more other mutual funds advised by the Advisor
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 January 1, 2001, Scudder Kemper Investments Inc. changed its name to Zurich
Scudder Investments, Inc.
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.
Scudder Research Fund and Scudder Focus Growth Fund each pay the Advisor 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:
Applicable Assets ($) Annual Fee Rate
--------------------- ---------------
0 - 250,000,000 0.70%
250,000,000 - 1,000,000,000 0.67%
1,000,000,000 - 2,500,000,000 0.65%
More than 2,500,000,000 0.63%
For Scudder Focus Growth Fund , the Fund incurred a management fee of $_____ for
the fiscal year period ended August 31, 2000. [The Advisor agreed to absorb
temporarily certain operating expenses of the Fund. Under this arrangement, the
Advisor absorbed expenses of $_____ for the period ended August 31, 2000.] The
Fund incurred a management fee of $9,516 for the eight month period ended August
31, 1999. The Advisor agreed to absorb temporarily certain operating expenses of
the Fund. Under this arrangement, the Advisor absorbed expenses of $6,641 for
the eight month period ended August 31, 1999.
For Scudder Research Fund , the Fund incurred a management fee of $_____ for the
fiscal year ended August 31, 2000, [The Advisor agreed to absorb temporarily
certain operating expenses of the Fund. Under this arrangement, the Advisor
absorbed expenses of $_____ for the period ended August 31, 2000.] The Fund
incurred a management fee of $14,509 for the eight month period ended August 31,
1999. The Advisor agreed to absorb temporarily certain operating expenses of the
Fund. Under this arrangement, the Advisor absorbed expenses of $17,712 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.
Scudder Focus Growth Fund , incurred accounting fees of $____ for the fiscal
year ended August 31, 2000, 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.
Scudder Research Fund incurred accounting fees of $_____ for the fiscal year
ending August 31, 2000. The Fund incurred accounting fees of $7,971 for the
eight month period ending August 31, 1999.
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<PAGE>
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.
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.
19
<PAGE>
<TABLE>
<CAPTION>
Fund Class B Shares
-------------------
Research Research LCGF LCGF
2000 1999* 2000 1999*
---- ----- ---- -----
<S> <C> <C> <C> <C>
Distribution Fees Paid by Fund to KDI $5,160 $3,395
Contingent Deferred Sales Charges to KDI $4,900 0
Total Commissions Paid by KDI to Firms $2,374 $2311
Distribution Fees Paid by KDI to Affiliated Firms 0 0
Advertising and Literature $2,994 $1,995
Other Distribution Expenses Paid by KDI
Prospectus Printing $289 192
Marketing and Sales Expenses $8,303 $5,535
Misc. Operating Expenses $4,751 $4535
Interest Expenses $427 $494
<CAPTION>
Fund Class C Shares
-------------------
Research Research LCGF LCGF
2000 1999* 2000 1999*
---- ----- ---- -----
<S> <C> <C> <C> <C>
Distribution Fees Paid by Fund to KDI $5,160 $3,394
Contingent Deferred Sales Charges to KDI 0 0
Total Distribution Fees Paid by KDI to Firms $5,861 $6,696
Distribution Fees Paid by KDI to Affiliated Firms 0 0
Distribution Fees Paid by KDI to Affiliated Firms 0 0
Advertising and Literature $3,037 $2,024
Other Distribution Expenses Paid by KDI
Prospectus Printing $267 $177
Marketing and Sales Expenses $7,587 $5,058
Misc. Operating Expenses $4,815 $4,578
Interest Expenses $870 $698
</TABLE>
* For the period December 31, 1999 (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.
20
<PAGE>
Scudder Focus Growth Fund incurred administrative services fees of $_____ for
the fiscal year ended August 31, 2000. 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.
Scudder Research Fund incurred administrative services fees of $_____ for the
fiscal year ended August 31, 2000. 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.
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 the
Advisor 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 Scudder Focus Growth Fund , KSvC earned transfer agency fees of $____ for
the fiscal year ended August 31, 2000 and $763 for the eight month period ended
August 31, 1999.
For Scudder Research Fund , KSvC earned transfer agency fees of $____ for the
fiscal year ended August 31, 2000 and $4,517 for the eight month period ending
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 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
21
<PAGE>
purchase of shares that is accompanied by a check drawn on a foreign bank (other
than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in
proper form and will not be processed unless and until the Fund determines that
it has received payment of the proceeds of the check. The time required for such
a determination will vary and cannot be determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by the Fund at the applicable net asset value
per share of such Fund as described in the Funds' prospectus.
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.
Sales Charge
------------
As a As a Allowed to
Percentage Percentage of Dealers as a
of Offering Net Amount Percentage of
Amount of Purchase Price Invested* Offering Price
------------------ ----------- ------------- --------------
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over 0.00** 0.00** ***
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
*** Commission is payable by KDI as discussed below.
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
22
<PAGE>
such notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the 1933
Act.
Class A shares of each Fund can be purchased at net asset value 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.
23
<PAGE>
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Funds. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Funds, or other funds underwritten by
KDI.
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day ("trade
date"). The Funds reserve the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly. Collection may take
significantly longer for a check drawn on a foreign bank than for a check drawn
on a domestic bank. Therefore, if an order is accompanied by a check drawn on a
foreign bank, funds must normally be collected before shares will be purchased.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Funds' shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Funds' shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Funds' transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Funds through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Funds through the Shareholder Service Agent for
these services. This Statement of Additional Information should be read in
connection with such firms' material regarding their fees and services.
The Funds reserve the right to withdraw all or any part of the offering made
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.
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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 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.
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An individual may make a deductible IRA contribution for any taxable year only
if (i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,050 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,250 to IRAs for an individual and his or her nonearning spouse) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, contributions may be made to a spousal
IRA even if the spouse has earnings in a given year, if the spouse elects to be
treated as having no earnings (for IRA contribution purposes) for the year.
Distributions by a Fund result in a reduction in the net asset value of that
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a partial return of capital upon
the distribution, which will nevertheless be taxable to them.
If a Fund invests in stock of certain foreign investment companies, the Fund may
be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
Each Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U.S. federal income taxation.
At the end of each taxable year to which the election applies, the Fund would
report as ordinary income the amount by which the fair market value of the
foreign company's stock exceeds the Fund's adjusted basis in these shares. Any
mark-to-market losses and any loss from an actual disposition of shares would be
deductible as ordinary losses to the extent of any net mark-to-market gains
included in income in prior years. The effect of the election would be to treat
excess distributions and gain on dispositions as ordinary income which is not
subject to a fund level tax when distributed to shareholders as a dividend.
Alternatively, the Fund may elect to include as income and gain its share of the
ordinary earnings and net capital gain of certain foreign investment companies
in lieu of being taxed in the manner described above.
Equity options (including covered call options written on portfolio stock) and
over-the-counter options on debt securities written or purchased by a Fund will
be subject to tax under Section 1234 of the Code. In general, no loss will be
recognized by the Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
the exercise of a put option, on the Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in the Fund's
portfolio.
If a Fund writes a covered call option on portfolio stock, no gain is recognized
upon its receipt of a premium. If the option lapses or is closed out, any gain
or loss is treated as short-term capital gain or loss. If the option is
exercised, the character of the gain or loss depends on the holding period of
the underlying stock.
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"
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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 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
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<PAGE>
after October 3, 1989 and were held less than 91 days, then the lesser of (a)
the sales charge waived on the reinvested shares, or (b) the sales charge
incurred on the redeemed shares, is included in the basis of the reinvested
shares and is not included in the basis of the redeemed shares. If a shareholder
realized a loss on the redemption or exchange of a Fund's shares and reinvests
in shares of the same Fund 30 days before or after the redemption or exchange,
the transactions may be subject to the wash sale rules resulting in a
postponement of the recognition of such loss for federal income tax purposes. An
exchange of a Fund's shares for shares of another fund is treated as a
redemption and reinvestment for federal income tax purposes upon which gain or
loss may be recognized.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain futures contracts, forward
contracts and options, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
Income received by a Fund from sources within a foreign country may be subject
to foreign and other withholding taxes imposed by that country.
Each Fund will be required to report to the IRS all distributions of taxable
income and capital gains as well as gross proceeds from the redemption or
exchange of Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code
distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
nonexempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if a
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Shareholders may be subject to state and local taxes on distributions received
from a Fund and on redemptions of the Fund's shares. Each distribution is
accompanied by a brief explanation of the form and character of the
distribution. By January 31 of each year each Fund issues to each shareholder a
statement of the federal income tax status of all distributions.
The Trust is organized as a Massachusetts business trust. Neither the Trust nor
any Fund is expected to be liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that each Fund qualifies as a regulated
investment company under the Code.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Shareholders should consult their tax advisers about the application of the
provisions of tax law described in this statement of additional information in
light of their particular tax situations.
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
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because of the higher expenses borne by the Class B and Class C shares. The net
asset value of shares of a Fund is computed as of the close of regular trading
(the "value time") on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.
With respect to the Funds with securities listed primarily on foreign exchanges,
such securities may trade on days when the Fund's net asset value is not
computed; and therefore, the net asset value of a Fund may be significantly
affected on days when the investor has no access to the Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market, Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the investment manager of the particular fund may calculate the price
of that debt security, subject to limitations established by the Board.
An exchange-traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate on the
valuation date.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board of Trustees, the
value of a portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the portfolio asset, the value of
the portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner which, in the discretion of the Valuation Committee, most fairly
reflects market value of the property on the valuation date.
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.
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PERFORMANCE
The Funds may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return." Performance
information will be computed separately for Class A, Class B and Class C shares
of a Fund. Each of these figures is based upon historical results and is not
representative of the future performance of any class of the Funds.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in a Fund
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter (or
if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Fund for performance purposes). Average annual
total return figures represent the average annual percentage change over the
period in question. Total return figures represent the aggregate percentage or
dollar value change over the period in question.
Each Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the Fund's shares on the first day of the period, adjusting to deduct the
maximum sales charge (in the case of Class A shares), and computing the
"redeemable value" of that investment at the end of the period. The redeemable
value in the case of Class B or Class C shares includes the effect of the
applicable contingent deferred sales charge that may be imposed at the end of
the period. The redeemable value is then divided by the initial investment, and
this quotient is taken to the Nth root (N representing the number of years in
the period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value on the reinvestment
dates during the period. Average annual total return may also be calculated
without deducting the maximum sales charge.
Calculation of a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the Fund's "Financial Highlights" table
in the Fund's financial statements and prospectus. Total return performance for
a specific period is calculated by first taking an investment (assumed below to
be $10,000) ("initial investment") in a Fund's shares on the first day of the
period, either adjusting or not adjusting to deduct the maximum sales charge (in
the case of Class A shares), and computing the "ending value" of that investment
at the end of the period. The total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The ending value in the case of Class B and Class C shares may or may not
include the effect of the applicable contingent deferred sales charge that may
be imposed at the end of the period. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Total return may also be shown as
the increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge for Class
A shares or the contingent deferred sales charge for Class B and Class C shares
would be reduced if such charge were included.
A Fund's performance figures are based upon historical results and are not
representative of future performance. Each Fund's Class A shares are sold at net
asset value plus a maximum sales charge of 5.75% of the offering price. While
the maximum sales charge is normally reflected in the Fund's Class A performance
figures, certain total return calculations may not include such charge and those
results would be reduced if it were included. Class B shares and Class C shares
are sold at net asset value. Redemptions of Class B shares within the first six
years after purchase may be subject to a contingent deferred sales charge that
ranges from 4% during the first year to 0% after six years. Redemption of Class
C shares within the first year after purchase may be subject to a 1% contingent
deferred sales charge. Average annual total return figures do, and total return
figures may, include the effect of the contingent deferred sales charge for the
Class B shares and Class C shares that 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.
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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 Scudder Focus Growth Fund and Scudder
Research 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 Advisor and KDI are listed
below:
JAMES E. AKINS (10/15/26), Trustee, 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs; formerly, a
career United States Foreign Service Officer, Energy Adviser for the White
House; United States Ambassador to Saudi Arabia, 1973-76.
JAMES R. EDGAR ( 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.
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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, Advisor.
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.
LINDA C. COUGHLIN, (1/1/52), Trustee
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, Advisor; 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,
Advisor.
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Advisor.
JOHN R. HEBBLE (6/27/58), Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Advisor.
BRENDA LYONS (2/21/63) Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Advisor.
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Senior Vice President, Advisor; formerly, Associate,
Dechert Price & Rhoads (law firm) 1989 to 1997.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Advisor; 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, Advisor.
ELIZABETH D. SMITH (10/27/46), Vice President*, Two International Place, Boston,
Massachusetts; Managing Director, Advisor.
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WILLIAM F. TRUSCOTT (9/14/60), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Advisor.
KATHLEEN MILLARD ( ), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Advisor.
JAMES M. EYSENBACH(____), Vice President*, 101 California Street, San Francisco,
California; Managing Director, Advisor.
* "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.
Total Compensation
Aggregate Compensation Paid to
Name of Board Member from the Trust* Board Members(3)
-------------------- ---------------------- -------------------
James E. Akins $140,800
James R. Edgar (1) $0
Arthur R. Gottschalk(2) $146,300
Frederick T. Kelsey $141,300
Fred B. Renwick $141,300
John G. Weithers $146,300
* Estimated
(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 fiscal period
ending August 31, 2000, payable from the Funds to Mr. Gottschalk was
$_____.
(3) Includes compensation for service on the Boards of Kemper funds, with fund
portfolios. Each trustee currently serves as a board member of Kemper
Funds with 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 the Advisor
Code of Ethics
The Funds, the Investment Manager and principal underwriter have each adopted
codes of ethics under rule 17j-1 of the Investment Company Act. Board members,
officers of the Funds and employees of the Investment Manager and principal
underwriter are permitted to make personal securities transactions, including
transactions in securities that may be purchased or held by the Funds, subject
to requirements and restrictions set forth in the applicable Code of Ethics. The
Investment Manager's Code of Ethics contains provisions and requirements
designed to identify and address certain conflicts of interest between personal
investment activities and the interests of the Funds. Among other things, the
Investment Manager's Code of Ethics prohibits certain types of transactions
absent prior approval, imposes time periods during which personal transactions
may not be made in certain securities, and requires the submission of duplicate
broker confirmations and quarterly reporting of securities transactions.
Additional restrictions apply to portfolio managers, traders, research analysts
and others involved in the investment advisory process. Exceptions to these and
other provisions of the Investment Manager's Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
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PRINCIPAL HOLDERS OF SECURITIES
TO BE UPDATED As of November 30, 2000, the trustees and officers, as a group,
owned less than 1% of the then outstanding shares of each Fund and no person
owned of record 5% or more of the outstanding shares of any class of any Fund.
SHAREHOLDER RIGHTS
Each Fund is a series of Scudder Investors Trust, (formerly 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.
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Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of a Fund stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, each
Fund has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
The Trust's Declaration of Trust provides that the presence at a shareholder
meeting in person or by proxy of at least 30% of the shares entitled to vote on
a matter shall constitute a quorum. Thus, a meeting of shareholders of a Fund
could take place even if less than a majority of the shareholders were
represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
auditors. Some matters requiring a larger vote under the Declaration of Trust,
such as termination or reorganization of the Trust and certain amendments of the
Declaration of Trust, would not be affected by this provision; nor would matters
which under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act.
The Trust's Declaration of Trust specifically authorizes the Board of Trustees
to terminate a Fund or class by notice to the shareholders without shareholder
approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of a
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of each Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by a
Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of a Fund and each Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by The Advisor 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
Scudder Focus Growth Fund and Scudder Research Fund dated August 31, 2000 are
incorporated herein by reference and are hereby deemed to be a part of this
Statement of Additional Information.
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STATEMENT OF ADDITIONAL INFORMATION
January 1, 2001
Kemper Small Cap Value+Growth Fund
a series of
Scudder Investors Trust
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for the Fund listed above (the "Fund"). It
should be read in conjunction with the Fund's prospectus dated January 1, 2001.
The prospectus may be obtained without charge from the Fund at the address or
telephone number on this cover or from the firm from which this Statement of
Additional Information was obtained and is also available along with other
related materials at the SEC's Internet web site (http://www.sec.gov). The
Annual Report, dated August 31, 2000 Kemper Small Cap Value+Growth Fund is
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 OF CONTENTS
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......................................21
DIVIDENDS AND TAXES.....................................................24
NET ASSET VALUE.........................................................28
PERFORMANCE ............................................................29
OFFICERS AND TRUSTEES...................................................31
PRINCIPAL HOLDERS OF SECURITIES.........................................33
SHAREHOLDER RIGHTS......................................................33
FINANCIAL STATEMENTS....................................................34
THE FUND IS AVAILABLE ONLY TO EMPLOYEES OF ZURICH SCUDDER INVESTMENTS, INC. IN
THE FOLLOWING STATES: CALIFORNIA, CONNECTICUT, FLORIDA, ILLINOIS, KANSAS,
MASSACHUSETTS, MISSOURI, NEW HAMPSHIRE, NEW JERSEY AND NEW YORK.
printed on recycled paper
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions which cannot be
changed without approval of a majority of 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, the Fund's investment objective and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objective will be
met.
As a matter of fundamental policy, the Fund has elected to be classified as a
diversified series of a registered open-end management investment company.
The Fund may not, as a fundamental policy:
(a) borrow money, except as permitted under the 1940 Act, 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 1940 Act, 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 1940 Act, 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 1940 Act, 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 Fund's 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, the Fund may not:
(1) borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes;
(2) purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with futures
contracts, options or other permitted investments, (iv) that
transactions in futures contracts and options shall not be deemed to
constitute selling securities short, and (v) that the Fund may
obtain such short-term credits as may be necessary for the clearance
of securities transactions;
2
<PAGE>
(3) purchase options, unless the aggregate premiums paid on all such
options held by the Fund at any time do not exceed 20% of its total
assets; or sell put options, if as a result, the aggregate value of
the obligations underlying such put options would exceed 50% of its
total assets;
(4) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to such futures contracts entered into on behalf
of the Fund and the premiums paid for such options on futures
contracts does not exceed 5% of the fair market value of the Fund's
total assets; provided that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be
excluded in computing the 5% limit;
(5) purchase warrants if as a result, such securities, taken at the
lower of cost or market value, would represent more than 5% of the
value of the Fund's total assets (for this purpose, warrants
acquired in units or attached to securities will be deemed to have
no value);
(6) lend portfolio securities in an amount greater than 5% of its total
assets; and
(7) Invest more than 15% of 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.
INVESTMENT POLICIES AND TECHNIQUES
The Fund is available only to Zurich Scudder 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, the 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. The Fund is a diversified series of shares of beneficial interest of
Scudder Investors Trust (the "Trust"), an open-end, registered management
investment company. There is no assurance that the investment objective of the
Fund will be achieved and investment in the Fund includes risks that vary in
kind and degree depending upon the investment policies of the Fund. The returns
and net asset value of the Fund will fluctuate.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which 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 Zurich Scudder Investments, Inc. (the "Advisor"), in its
discretion, might, but is not required to, use in managing the Fund's portfolio
assets. The Advisor 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, the Fund invests primarily in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore, the
Fund participates in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception and general
economic and financial market movements. Despite the risk of price volatility,
however, common stocks have traditionally offered a greater potential for gain
on investment, compared to other classes of financial assets such as bonds or
cash equivalents.
Warrants. The Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants
3
<PAGE>
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.
Investment of Uninvested Cash Balances. The Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the SEC, the Fund may use
Uninvested Cash to purchase shares of affiliated funds including money market
funds, short-term bond funds and Scudder Cash Management Investment Trust, or
one or more future entities for which the Advisor acts as trustee or investment
advisor that operate as cash management investment vehicles and that are
excluded from the definition of investment company pursuant to section 3(c)(1)
or 3(c)(7) of the Investment Company Act of 1940 (collectively, the "Central
Funds") in excess of the limitations of Section 12(d)(1) of the Investment
Company Act. Investment by the Fund in shares of the Central Funds will be in
accordance with the Fund's investment policies and restrictions as set forth in
its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Fund's ability to
manage Uninvested Cash.
The Fund will invest Uninvested Cash in Central Funds only to the extent that
the Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
Convertible Securities. The Fund may invest in convertible securities, that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stock. Investments in convertible securities can provide
an opportunity for capital appreciation and/or income through interest and
dividend payments by virtue of their conversion or exchange features.
The convertible securities in which 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 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.
4
<PAGE>
Repurchase Agreements. The Fund may enter into repurchase agreements with member
banks of the Federal Reserve System, any foreign bank, if the repurchase
agreement is fully secured by government securities of the particular foreign
jurisdiction, or with any domestic or foreign broker/dealer which is recognized
as a reporting government securities dealer if the creditworthiness of the bank
or broker/dealer has been determined by the Advisor 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
Advisor 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. The Fund may invest in foreign securities. The Advisor
believes that diversification of assets on an international basis may decrease
the degree to which events in any one country, including the U.S., will affect
an investor's entire investment holdings. In certain periods since World War II,
many leading foreign economies and foreign stock market indices have grown more
rapidly than the U.S. economy and leading U.S. stock market indices, although
there can be no assurance that this will be true in the future. Investors should
recognize that investing in foreign securities involves certain special
considerations, including those set forth below, which are not typically
associated with investing in U.S. securities and which may favorably or
unfavorably affect 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
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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 Fund may hold foreign
currencies and forward contracts, futures contracts and options on foreign
currencies and foreign currency futures contracts, the value of the assets of 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 Fund will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Fund 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 Fund
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. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
maintains a segregated account in connection with outstanding reverse repurchase
agreements. A Fund will enter into reverse repurchase agreements only when the
Advisor believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers, and are required to be secured continuously by collateral in
cash, U.S. Government securities and high grade debt obligations, maintained on
a current basis at an amount at least equal to the market value and 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 Advisor to be of good standing and
will not be made unless, in the judgment of the Advisor, the consideration to be
earned from such loans would justify the risk.
Indexed Securities. The Fund may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). Most indexed securities have
maturities of three years or less.
Indexed securities differ from other types of debt securities in which 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
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reference instrument increases. Further, the change in the principal amount
payable or the interest rate of an indexed security may be a multiple of the
percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to the
credit risk of the security's issuer and the normal risks of price changes in
response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying the indexed
securities.
Real Estate Investment Trusts ("REITs"). The Fund may invest in REITs. REITs are
sometimes informally characterized as equity REITs, mortgage REITs and hybrid
REITs. Investment in REITs may subject 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. The Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as 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 the Fund's policy that
illiquid securities (including repurchase agreements of more than seven days
duration, certain restricted securities, and other securities which are not
readily marketable) may not constitute, at the time of purchase, more than 15%
of the value of the Fund's net assets. A security is deemed illiquid if so
determined pursuant to procedures adopted by the Board of Trustees.
Generally speaking, restricted securities may be sold (i) only to qualified
institutional buyers; (ii) in a privately negotiated transaction to a limited
number of purchasers; (iii) in limited quantities after they have been held for
a specified period of time and other conditions are met pursuant to an exemption
from registration; or (iv) in a public offering for which a registration
statement is in effect under the 1933 Act. Issuers of restricted securities may
not be subject to the disclosure and other investor protection requirements that
would be applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between 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.
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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
Advisor will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Advisor 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.
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 Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the
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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 Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other instruments, purchase and sell futures
contracts and options thereon, enter into various transactions such as swaps,
caps, floors, collars, currency forward contracts, currency futures contracts,
currency swaps or options on currencies, or currency futures and various other
currency transactions (collectively, all the above are called "Strategic
Transactions"). In addition, strategic transactions may also include new
techniques, 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 Fund to utilize these Strategic Transactions successfully will
depend on the Advisor's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter fundamental investment purposes and
characteristics of the Fund, and the Fund will segregate assets (or as provided
by applicable regulations, enter into certain offsetting positions) to cover its
obligations under options, futures and swaps to limit leveraging of the Fund.
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 Advisor's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of 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 Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, 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 Fund
the right to sell such
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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 Fund against an increase in
the price of the underlying instrument that it intends to purchase in the future
by fixing the price at which it may purchase such instrument. An American style
put or call option may be exercised at any time during the option period while a
European style put or call option may be exercised only upon expiration or
during a fixed period prior thereto. The Fund is authorized to purchase and sell
exchange listed options and over-the-counter options ("OTC options"). Exchange
listed options are issued by a regulated intermediary such as the Options
Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to such options. The discussion below uses the OCC as
an example, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Advisor must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Advisor. The staff of the
SEC currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to the Fund's limitation on investing no
more than 15% of its net assets in illiquid securities.
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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 Fund 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 Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, foreign sovereign debt,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
Fund will not sell put options if, as a result, more than 50% of 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 Fund may be required to buy the
underlying security at a disadvantageous price above the market price.
General Characteristics of Futures. The Fund may enter into 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 firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio and return enhancement management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund 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 Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of a Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other
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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 Fund 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 Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Advisor.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
The Fund generally will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund have or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which 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 Advisor considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Advisor believes
that the value of schillings will decline against the U.S. dollar, the Advisor
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund 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.
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Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Advisor, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Advisor's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipate purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as a Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Advisor and the Fund believes such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Advisor. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
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although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in 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 Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid 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 Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
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 Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sell a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
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 Fund 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 Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
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<PAGE>
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if the
Fund held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than the
price of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Small Company Risk. The Fund, may purchase the securities of small companies.
The Advisor 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 Fund may
invest without limit in cash and cash equivalents, U.S. Government Securities,
money market instruments and high quality debt securities without equity
features. In such case, the Fund would not be pursuing, and may not achieve,
their objective.
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 Fund has received exemptive relief
from the SEC which permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Manager. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is 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
may 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 may extend overnight,
but could have a maximum duration of seven days. Loans may 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 Fund is actually engaged in borrowing
through the interfund lending program, the Fund, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes (and not
for leveraging).
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BROKERAGE COMMISSIONS
Allocation of brokerage is supervised by the Advisor.
The primary objective of the Advisor 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
Advisor 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 Advisor
routinely reviews commission rates, execution and settlement services performed
and makes internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally placed
by the Advisor with primary market makers for these securities on a net basis,
without any brokerage commission being paid by a Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Advisor's practice to place such orders with
broker/dealers who supply brokerage and research services to the Advisor 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
Advisor 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 Advisor 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 Advisor or a Fund in exchange for the direction by the Advisor of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Advisor 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 Advisor 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 Advisor; SIS will place orders on behalf of the Fund with issuers,
underwriters or other brokers and dealers. The SIS will not receive any
commission, fee or other remuneration from the Fund for this service.
Although certain research services from broker/dealers may be useful to a Fund
and to the Advisor, it is the opinion of the Advisor that such information only
supplements the Advisor's own research effort since the information must still
be analyzed, weighed, and reviewed by the Advisor's staff. Such information may
be useful to the Advisor in providing services to clients other than a Fund, and
not all such information is used by the Advisor in connection with a Fund.
Conversely, such information provided to the Advisor by broker/dealers through
whom other clients of the Advisor effect securities transactions may be useful
to the Advisor in providing services to a Fund.
The Trustees review, from time to time, whether the recapture for the benefit of
the Fund of some portion of the brokerage commissions or similar fees paid by
the Fund on portfolio transactions is legally permissible and advisable.
For the fiscal period ended August 31, 2000, Kemper Small Cap Value+Growth Fund
paid brokerage commissions of $_____________. 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 Advisor. The total amount of brokerage transactions aggregated, for
the fiscal year ended August 31, 2000 and for the eight month fiscal period
ended August 31, 1999, was $______________ and $1,415,236.77, respectively,
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<PAGE>
of which &________ ( %) and $626,717.98 (44.28%), respectively, of all brokerage
transactions were transactions which included research commissions.
INVESTMENT MANAGER AND UNDERWRITER
Investment Advisor. Zurich Scudder Investments, Inc. ("he "Advisor"), 345 Park
Avenue, New York, New York, is the Fund's investment advisor. The advisor is
approximately 70% owned by Zurich Financial Services, Inc. a newly formed global
insurance and financial services company. The balance of the Advisor is owned by
its officers and employees. Pursuant to investment management agreements, the
Advisor, 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 the Fund pays the charges and expenses of its
operations, including the fees and expenses of the trustees (except those who
are affiliated with officers or employees of Zurich Scudder Investments, Inc.),
independent auditors, counsel, custodian and transfer agent and the cost of
share certificates, reports and notices to shareholders, brokerage commissions
or transaction costs, costs of calculating net asset value and maintaining all
accounting records related thereto, taxes and membership dues. The Fund bears
the expenses of registration of its shares with the Securities and Exchange
Commission and pays the cost of qualifying and maintaining the qualification of
the Fund's shares for sale under the securities laws of the various states
("Blue Sky expenses
The investment management agreements provide that the Advisor 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
the Advisor in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under each agreement.
The Fund's investment management agreement continues in effect from year to year
so long as its continuation is approved at least annually (a) by a majority of
the trustees who are not parties to such agreement or interested persons of any
such party except in their capacity as trustees of the Fund and (b) by the
shareholders or the Board of Trustees of the Fund. The Fund's investment
management agreement may be terminated at any time upon 60 days notice by either
party, or by a majority vote of the outstanding shares of the Fund, and will
terminate automatically upon assignment. If additional Funds become subject to
an investment management agreement, the provisions concerning continuation,
amendment and termination shall be on a Fund by Fund basis. Additional Funds may
be subject to a different agreement.
In certain cases the investments for the Fund are managed by the same
individuals who manage one or more other mutual funds advised by the Advisor
that have similar names, objectives and investment styles as a Fund. You should
be aware that the Fund are likely to differ from these other mutual funds in
size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of the Fund 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 Advisor, with the balance owned by the Advisor'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 Small Cap Value+Growth Fund pays the Advisor 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:
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Applicable Assets ($) Annual Fee Rate
--------------------- ---------------
0 - 250,000,000 0.75%
250,000,000 - 1,000,000,000 0.72%
1,000,000,000 - 2,500,000,000 0.70%
More than 2,500,000,000 0.68%
The Fund incurred a management fee of $_____ for the fiscal year ended August
31, 2000. [The Advisor agreed to absorb temporarily certain operating expenses
of the Fund. Under this arrangement, the Advisor absorbed expenses of $_____ for
the period ended August 31, 2000].
The Fund incurred a management fee of $5,000 for the eight month period ended
August 31, 1999. the Advisor agreed to absorb temporarily certain operating
expenses of the Fund. Under this arrangement, the Advisor 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 the Advisor, is responsible for determining the daily net asset
value per share of the Fund and maintaining all accounting records related
thereto. Currently, SFAC receives an annual fee of 2.50 of 1% of average daily
net assets for the first $150 million of fund net assets, 0.75 of 1% of average
daily net assets for the next $850 million of fund net assets, and 0.45 of 1% of
average daily net assets for the excess over $1 billion of fund net assets for
its services to the Fund.
The Fund incurred accounting fees of $_____ for the fiscal year ended August 31,
2000 and $5,000 for the eight month period ended August 31, 1999, which were not
imposed after an expense absorption by Advisor.
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 Advisor, is the principal underwriter and distributor for the shares of the
Fund and acts as agent of the Fund in the continuous offering of its shares. KDI
bears all of its expenses of providing services pursuant to the distribution
agreement, including the payment of any commissions. The Fund pays the cost for
the prospectus and shareholder reports to be set in type and printed for
existing shareholders, and KDI, as principal underwriter, pays for the printing
and distribution of copies thereof used in connection with the offering of
shares to prospective investors. KDI also pays for supplementary sales
literature and advertising costs.
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 the Fund on a class
by class basis.
Rule 12b-1 Plans. The Trust has adopted on behalf of the Fund, in accordance
with Rule 12b-1 under the 1940 Act, separate Rule 12b-1 distribution plans
pertaining to the 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,
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<PAGE>
including the printing of prospectuses and reports for persons other than
existing shareholders and the preparation, printing and distribution of sales
literature and advertising materials.
Among other things, each Plan provides that KDI will prepare reports for the
Board on a quarterly basis for each class showing amounts paid to the various
Firms and such other information as the Board may reasonably request. Each Plan
will continue in effect indefinitely, provided that such continuance is approved
at least annually by vote of a majority of the Board of Trustees, and a majority
of the Trustees who are not "interested persons" (as defined in the 1940 Act) of
the Fund and who have no direct or indirect financial interest in the operation
of the Plan ("Qualified Board Members"), cast at an in-person meeting called for
such purpose, or by vote of at least a majority of the outstanding voting
securities of the applicable class. Any material amendment to a Plan must be
approved by vote of a majority of the Board of Trustees, and of the Qualified
Board Members. An amendment to a Plan to increase materially the amount to be
paid to KDI by 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. The 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 Fund 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.
Fund Class B Shares
-------------------
2000 1999
---- ----
Distribution Fees Paid by Fund to KDI $1,580
-------------------------------------
Contingent Deferred Sales Charges to KDI $11,220
Total Commissions Paid by KDI to Firms $40,867
Distribution Fees Paid by KDI to Affiliated Firms 0
Advertising and Literature $998
Other Distribution Expenses Paid by KDI
Prospectus Printing $97
Marketing and Sales Expenses $2768
Misc. Operating Expenses $4306
Interest Expenses $214
Fund Class C Shares
-------------------
2000 1999*
---- -----
Distribution Fees Paid by Fund to KDI $1,580
-------------------------------------
Contingent Deferred Sales Charges to KDI $1,049
Total Distribution Fees Paid by KDI to Firms $1,296
Distribution Fees Paid by KDI to Affiliated Firms 0
Distribution Fees Paid by KDI to Affiliated Firms 0
Advertising and Literature $1,013
Other Distribution Expenses Paid by KDI
Prospectus Printing $90
Marketing and Sales Expenses $2,530
Misc. Operating Expenses $4,327
Interest Expenses $224
19
<PAGE>
* For the period December 31, 1999 (commencement of operations) through
August 31, 1999.
Administrative Services. Administrative services are provided to the Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all of its expenses of providing services pursuant to the administrative
agreement between KDI and the Fund, including the payment of service fees. The
Fund pays KDI an administrative services fee, payable monthly, at an annual rate
of up to 0.25% of average daily net assets of Class A, B and C shares of the
Fund.
KDI has entered into related arrangements with various broker-dealer firms and
other service or administrative firms ("firms"), that provide services and
facilities for their customers or clients who are shareholders of 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.
The Fund incurred administrative services fees of $_____ for the fiscal year
ended August 31, 2000 and $2,000 for the eight month period ended August 31,
1999, which were not imposed after an expense absorption by Advisor.
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 the 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 the 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 Fund.
Certain trustees or officers of the Trust are also directors or officers of
Advisor 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 the Fund. State Street attends to the
collection of principal and income, and payment for and collection of proceeds
of securities bought and sold by the Fund.
Pursuant to an agency agreement between the Fund and Kemper Service Company
("KSvC"), 811 Main Street, Kansas City, Missouri, an affiliate of Advisor, 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.
From the Fund, KSvC earned transfer agency fees of $____ for the fiscal year
ended August 31, 2000 and $978 for the eight month period ended August 31, 1999.
20
<PAGE>
Independent Auditors and Reports to Shareholders. The Fund's independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Fund's annual financial statements, review certain
regulatory reports and the Fund's federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Fund. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
Legal Counsel. Dechert, Ten Post Office Square - South, Boston, Massachusetts
02109, serves as legal counsel to the Fund.
PURCHASE AND REDEMPTION OF SHARES
As described in the Fund's prospectus, shares of the Fund are sold at their
public offering price, which is the net asset value per share of the Fund next
determined after an order is received in proper form plus, with respect to Class
A shares, an initial sales charge. The minimum initial investment is $1,000 and
the minimum subsequent investment is $100 but such minimum amounts may be
changed at any time. See the prospectus for certain exceptions to these
minimums. An order for the purchase of shares that is accompanied by a check
drawn on a foreign bank (other than a check drawn on a Canadian bank in U.S.
Dollars) will not be considered in proper form and will not be processed unless
and until the Fund determines that it has received payment of the proceeds of
the check. The time required for such a determination will vary and cannot be
determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by the Fund at the applicable net asset value
per share of such Fund as described in the Fund's prospectus.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B or Class C shares, by certain classes of persons or
through certain types of transactions as described in the prospectus, are
provided because of anticipated economies in sales and sales related efforts.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange, Inc. (the
"Exchange") is closed other than customary weekend and holiday closings or
during any period in which trading on the Exchange is restricted, (b) during any
period when an emergency exists as a result of which (i) disposal of 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 the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
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.
21
<PAGE>
Sales Charge
------------
As a As a Allowed to
Percentage Percentage of Dealers as a
of Offering Net Amount Percentage of
Amount of Purchase Price Invested* Offering Price
------------------ ----------- ------------- --------------
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over 0.00** 0.00** ***
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all of its Class A shares sold.
KDI, the Fund's principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow up to the full applicable sales charge, as
shown in the above table, during periods and for transactions specified in such
notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the 1933
Act.
Class A shares of the Fund can be purchased at net asset value in certain
circumstances. (See the Fund's prospectus for details).
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of 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 the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Purchase of Class C Shares. The public offering price of the Class C shares of 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
22
<PAGE>
to pay firms for sales of Class C shares a distribution fee, payable quarterly,
at an annual rate of 0.75% of net assets attributable to Class C shares
maintained and serviced by the firm. KDI is compensated by the Fund for services
as distributor and principal underwriter for Class C shares. See "Investment
Manager and Underwriter."
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of 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 Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund, or other funds underwritten by
KDI.
Orders for the purchase of shares of 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 Fund reserve the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly. Collection may take
significantly longer for a check drawn on a foreign bank than for a check drawn
on a domestic bank. Therefore, if an order is accompanied by a check drawn on a
foreign bank, funds must normally be collected before shares will be purchased.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services. This Statement of Additional Information should be read in
connection with such firms' material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering made
pursuant to the prospectus and to reject purchase orders. Also, from time to
time, the Fund may temporarily suspend the offering of any class of its shares
to new investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
23
<PAGE>
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
the prospectus.
DIVIDENDS AND TAXES
Dividends. The Fund normally distributes annual dividends of net investment
income as follows. The Fund distributes any net realized short-term and
long-term capital gains at least annually.
A Fund may at any time vary its foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and
long-term capital gains as the Board of Trustees of the Fund 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.
Taxes. The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code or a predecessor statute and has qualified as
such from inception. The Fund intends to qualify for such 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.
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions at least equal to the sum
of 98% of the Fund's ordinary income for the calendar year, at least 98% of the
excess of its capital gains over capital losses (adjusted for certain ordinary
losses as prescribed in the Code) realized during the one-year period ending
October 31 during such year, and all ordinary income and capital gains for prior
years that were not previously distributed.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income.
Dividends from domestic corporations are expected to comprise a substantial part
of the Fund's gross income. To the extent that such dividends constitute a
portion of 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
24
<PAGE>
or less will be treated as a long-term capital loss to the extent of any amounts
treated as long-term capital gain distributions during such six-month period.
If any net capital gains are retained by a Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a relative share of the federal income taxes paid
by the Fund on such gains as a credit against personal federal income tax
liabilities, and will be entitled to increase the adjusted tax basis on Fund
shares by the difference between such reported gains and the individual tax
credit. However, retention of such gains by the Fund may cause the Fund to be
liable for an excise tax on all or a portion of those gains.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether made in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gains, whether received in shares or cash, must be reported by each shareholder
on his or her federal income tax return. Dividends declared in October, November
or December with a record date in such a month and paid during the following
January will be treated by shareholders for federal income tax purposes as if
received on December 31 of the calendar year declared. Redemptions of shares,
including exchanges for shares of another Kemper Mutual fund, may result in tax
consequences (gain or loss) to the shareholder and are also subject to these
reporting requirements.
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.
The Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U.S. federal income taxation.
At the end of each taxable year to which the election applies, the Fund would
report as ordinary
25
<PAGE>
income the amount by which the fair market value of the foreign company's stock
exceeds the Fund's adjusted basis in these shares. Any mark-to-market losses and
any loss from an actual disposition of shares would be deductible as ordinary
losses to the extent of any net mark-to-market gains included in income in prior
years. The effect of the election would be to treat excess distributions and
gain on dispositions as ordinary income which is not subject to a fund level tax
when distributed to shareholders as a dividend. Alternatively, the Fund may
elect to include as income and gain its share of the ordinary earnings and net
capital gain of certain foreign investment companies in lieu of being taxed in
the manner described above.
Equity options (including covered call options written on portfolio stock) and
over-the-counter options on debt securities written or purchased by a Fund will
be subject to tax under Section 1234 of the Code. In general, no loss will be
recognized by the Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
the exercise of a put option, on the Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying security or a substantially identical security in the Fund's
portfolio.
If a Fund writes a covered call option on portfolio stock, no gain is recognized
upon its receipt of a premium. If the option lapses or is closed out, any gain
or loss is treated as short-term capital gain or loss. If the option is
exercised, the character of the gain or loss depends on the holding period of
the underlying stock.
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
Fund's fiscal year (as well as on October 31 for purposes of the 4% excise tax),
all outstanding Section 1256 positions will be marked to market (i.e. treated as
if such positions were sold at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term capital
gain or loss. Under Section 988 of the Code, discussed below, foreign currency
gain or loss from foreign currency-related forward contracts, certain futures
and options, and similar financial instruments entered into or acquired by the
Fund will be treated as ordinary income 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.
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Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
A portion of the difference between the issue price of zero coupon securities
and their face value ("original issue discount") is considered to be income to a
Fund each year, even though the Fund will not receive cash interest payments
from these securities. This original issue discount imputed income will comprise
a part of the investment company taxable income of the Fund which must be
distributed to shareholders in order to maintain the qualification of the Fund
as a regulated investment company and to avoid federal income tax at the Fund's
level.
Upon the sale or other disposition of shares of a Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as long-term capital loss to
the extent of any distributions of net capital gains received by the shareholder
with respect to such shares.
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.
The Fund will be required to report to the IRS all distributions of taxable
income and capital gains as well as gross proceeds from the redemption or
exchange of Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code
distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
nonexempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if 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.
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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 the Fund issues to each shareholder a
statement of the federal income tax status of all distributions.
The Trust is organized as a Massachusetts business trust. Neither the Trust nor
any Fund is expected to be liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that the Fund qualifies as a regulated
investment company under the Code.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Shareholders should consult their tax advisers about the application of the
provisions of tax law described in this statement of additional information in
light of their particular tax situations.
NET ASSET VALUE
The net asset value per share of 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 Fund 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
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Calculated Mean, the options contract is valued at the most recent bid quotation
in the case of a purchased options contract, or the most recent asked quotation
in the case of a written options contract. An options contract on securities,
currencies and other financial instruments traded over-the-counter is valued at
the most recent bid quotation in the case of a purchased options contract and at
the most recent asked quotation in the case of a written options contract.
Futures contracts are valued at the most recent settlement price. Foreign
currency exchange forward contracts are valued at the value of the underlying
currency at the prevailing exchange rate on the valuation date.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board of Trustees, the
value of a portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the portfolio asset, the value of
the portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner which, in the discretion of the Valuation Committee, most fairly
reflects market value of the property on the valuation date.
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 Fund may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return." Performance
information will be computed separately for Class A, Class B and Class C shares
of a Fund. Each of these figures is based upon historical results and is not
representative of the future performance of any class of the Fund.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in 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.
The Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for 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
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<PAGE>
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. The Fund's Class A shares are sold at net
asset value plus a maximum sales charge of 5.75% of the offering price. While
the maximum sales charge is normally reflected in the Fund's Class A performance
figures, certain total return calculations may not include such charge and those
results would be reduced if it were included. Class B shares and Class C shares
are sold at net asset value. Redemptions of Class B shares within the first six
years after purchase may be subject to a contingent deferred sales charge that
ranges from 4% during the first year to 0% after six years. Redemption of Class
C shares within the first year after purchase may be subject to a 1% contingent
deferred sales charge. Average annual total return figures do, and total return
figures may, include the effect of the contingent deferred sales charge for the
Class B shares and Class C shares that may be imposed at the end of the period
in question. Performance figures for the Class B shares and Class C shares not
including the effect of the applicable contingent deferred sales charge would be
reduced if it were included. Returns and net asset value will fluctuate. Factors
affecting the Fund's performance include general market conditions, operating
expenses and investment management. Any additional fees charged by a dealer or
other financial services firm would reduce the returns described in this
section. Shares of the Fund are redeemable at the then current net asset value,
which may be more or less than original cost.
In connection with communicating its performance to current or prospective
shareholders, the 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.
The 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 the Fund's performance appears in the Statement of
Additional Information. Additional information about the Fund's performance also
appears in its Annual Report to Shareholders, which is available without charge
from the Fund.
Investors may want to compare the performance of 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 Fund is incorporated herein by reference to the
Fund's annual report filed with the SEC.
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OFFICERS AND TRUSTEES
The officers and trustees of the Fund, their birthdates, their principal
occupations and their affiliations, if any, with the Advisor and KDI are listed
below:
JAMES E. AKINS (10/15/26), Trustee, 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs; formerly, a
career United States Foreign Service Officer, Energy Adviser for the White
House; United States Ambassador to Saudi Arabia, 1973-76.
JAMES R. EDGAR ( 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, Advisor; 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, Advisor.
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.
LINDA C. COUGHLIN, ( ), Trustee
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, Advisor; 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,
Advisor.
ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Advisor.
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Advisor.
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JOHN R. HEBBLE (6/27/58), Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Advisor.
BRENDA LYONS (2/21/63) Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Advisor.
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Senior Vice President, Advisor; formerly, Associate,
Dechert Price & Rhoads (law firm) 1989 to 1997.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Advisor; 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, Advisor.
ELIZABETH D. SMITH (10/27/46), Vice President*, Two International Place, Boston,
Massachusetts; Managing Director, Advisor.
WILLIAM F. TRUSCOTT (9/14/60), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Advisor.
KATHLEEN MILLARD ( ), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Advisor.
JAMES M. EYSENBACH ( ), Vice President*, 101 California Street, San
Francisco, California; Managing Director, Advisor.
* "Interested persons" as defined in the 1940 Act.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Fund. 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.
Total Compensation
Aggregate Compensation Kemper Funds Paid
Name of Board Member from the Trust* to Board Members(3)
-------------------- --------------- -------------------
James E. Akins $140,800
James R. Edgar(1) $0
Arthur R. Gottschalk(2) $146,300
Frederick T. Kelsey $141,300
Fred B. Renwick $141,300
John G. Weithers $146,300
* Estimated
(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 fiscal period
ending August 31, 2000, payable from the Fund to Mr. Gottschalk was $____.
(3) Includes compensation for service on the Boards of Kemper funds, with
fund portfolios. Each trustee currently serves as a board member of
Kemper Funds with fund portfolios.
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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 Zurich
Scudder Investments, Inc.
Code of Ethics
The Fund, the Investment Manager and principal underwriter have each adopted
codes of ethics under rule 17j-1 of the Investment Company Act. Board members,
officers of the Fund and employees of the Investment Manager and principal
underwriter are permitted to make personal securities transactions, including
transactions in securities that may be purchased or held by the Fund, subject to
requirements and restrictions set forth in the applicable Code of Ethics. The
Investment Manager's Code of Ethics contains provisions and requirements
designed to identify and address certain conflicts of interest between personal
investment activities and the interests of the Fund. Among other things, the
Investment Manager's Code of Ethics prohibits certain types of transactions
absent prior approval, imposes time periods during which personal transactions
may not be made in certain securities, and requires the submission of duplicate
broker confirmations and quarterly reporting of securities transactions.
Additional restrictions apply to portfolio managers, traders, research analysts
and others involved in the investment advisory process. Exceptions to these and
other provisions of the Investment Manager's Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
PRINCIPAL HOLDERS OF SECURITIES
As of November 30, 2000, the trustees and officers, as a group, owned less than
1% of the then outstanding shares of the Fund and no person owned of record 5%
or more of the outstanding shares of any class of any Fund. TO BE UPDATED
SHAREHOLDER RIGHTS
The Fund is a series of Scudder Investors Trust, a registered open-end
management investment company organized as a business trust under the laws of
Massachusetts on October 14, 1998. On January 1, 2001, the Trust changed it name
to Scudder Investors Trust, from Kemper Funds Trust.
The Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "funds," all having $.01 par value, which may be divided by
the Board of Trustees into classes of shares. The Board of Trustees of the Trust
may authorize the issuance of additional classes and additional funds if deemed
desirable, each with its own investment objective, policies and restrictions.
Since the Trust may offer multiple funds, it is known as a "series company."
Shares of a fund have equal noncumulative voting rights and equal rights with
respect to dividends, assets and liquidation of such fund and are subject to any
preferences, rights or privileges of any classes of shares of the Portfolio.
Currently, the Trust, on behalf of the Fund, offers three classes of shares.
These are Class A, Class B and Class C shares, which have different expenses,
that may affect performance. Shares of the Fund have equal noncumulative voting
rights except that Class B and Class C shares have separate and exclusive voting
rights with respect to the Fund's Rule 12b-1 Plans. Shares of each class also
have equal rights with respect to dividends, assets and liquidation subject to
any preferences (such as resulting from different Rule 12b-1 distribution fees),
rights or privileges of any classes of shares of the Fund. Shares of the Fund
are fully paid and nonassessable when issued, are transferable without
restriction and have no preemptive or conversion rights.
The Fund is not required to hold meetings of their shareholders and have no
current intention to do so. Under the Agreement and Declaration of Trust of the
Trust ("Declaration of Trust"), however, shareholder meetings will be held in
connection with the following matters: (a) the election or removal of trustees
if a meeting is called for such purpose; (b) the adoption of any contract for
which shareholder approval is required by the 1940 Act; (c) any termination of
the Trust or a class to the extent and as provided in the Declaration of Trust;
(d) any amendment of the Declaration of Trust (other than amendments changing
the name of the Trust, supplying any omission, curing any ambiguity or curing,
correcting or supplementing any defective or inconsistent provision thereof);
and (e) such additional matters as may be required by law, the Declaration of
Trust, the By-laws of the Trust, or any registration of the Trust with the
Securities and Exchange Commission or any state, or as the trustees may consider
necessary or desirable. The shareholders also would vote upon changes in
fundamental investment objectives, policies or restrictions.
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
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connection with general matters affecting the Fund and all additional portfolios
(e.g., election of directors), means the vote of the lesser of (i) 67% of the
Trust's Shares represented at a meeting if the holders of more than 50% of the
outstanding Shares are present in person or by proxy, or (ii) more than 50% of
the Trust's outstanding Shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single portfolio (e.g., annual approval of investment
management contracts), means the vote of the lesser of (i) 67% of the Shares of
the portfolio represented at a meeting if the holders of more than 50% of the
outstanding Shares of the portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding Shares of the portfolio.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) the Trust will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of 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, the
Fund has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
The Trust's Declaration of Trust provides that the presence at a shareholder
meeting in person or by proxy of at least 30% of the shares entitled to vote on
a matter shall constitute a quorum. Thus, a meeting of shareholders of 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 the 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 the Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by Advisor 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
Small Cap Value+Growth Fund dated August 31, 2000 is incorporated herein by
reference and are hereby deemed to be a part of this Statement of Additional
Information.
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SCUDDER S&P 500 STOCK FUND
STATEMENT OF ADDITIONAL INFORMATION
January 1, 2001
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus for the Fund, as amended from time to time, a
copy of which may be obtained without charge by contacting Kemper Distributors,
Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, 1-800-621-1048, or
from the firm from which this Statement of Additional Information was obtained.
The Annual Report to Shareholders of the Fund, dated August 31, 2000 is
incorporated by reference and is hereby deemed to be part of this Statement of
Additional Information.
This Statement of Additional Information is incorporated by reference into the
prospectus.
<PAGE>
Table of Contents
Page
INVESTMENT OBJECTIVE AND POLICIES............................................1
General...................................................................1
Additional Information Regarding the S&P 500 Index........................1
General Investment Policies and Techniques................................1
INVESTMENT RESTRICTIONS......................................................8
NET ASSET VALUE.............................................................10
PURCHASE AND REDEMPTION OF SHARES...........................................11
Purchase of Shares.......................................................11
Repurchase and Redemption of Shares......................................16
Special Features.........................................................20
Additional Transaction Information.......................................23
PERFORMANCE.................................................................25
Officers and Trustees....................................................27
Shareholder Rights.......................................................29
Master/feeder Fund Structure.............................................31
INVESTMENT MANAGER..........................................................31
AMA InvestmentLink(SM) Program...........................................36
Code of Ethics...........................................................36
TAXES.......................................................................38
PORTFOLIO TRANSACTIONS......................................................41
Portfolio Turnover.......................................................42
FINANCIAL STATEMENTS........................................................42
APPENDIX -- RATINGS OF INVESTMENTS
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INVESTMENT OBJECTIVE AND POLICIES
General
The Fund is a diversified series of Kemper Funds Trust, an open-end, registered
management investment company. There is no assurance that the investment
objective of the Fund will be achieved. The return and net asset value of the
Fund will fluctuate. Kemper S&P 500 Index Fund will seek to match, as closely as
possible, before expenses, the performance of the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"), which emphasizes stocks of
large U.S. companies.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Fund may engage (such as hedging,
etc.) or a financial instrument which the Fund may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. (the "Advisor") and Bankers
Trust Company L.L.C (the "Sub-advisor"), in their discretion, might, but are not
required to, use in managing the Fund's assets. The Advisor employs such
practice, technique or instrument at its discretion. Furthermore, it is possible
that certain types of financial instruments or investment techniques described
herein may not be available, permissible, economically feasible or effective for
their intended purposes in all markets. Certain practices, techniques, or
instruments may not be principal activities of the Fund, but, to the extent
employed, could, from time to time, have a material impact on the Fund's
performance.
Additional Information Regarding the S&P 500 Index
The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation
or warranty, express or implied, to the shareholders of the Fund or any member
of the public regarding the advisability of investing in securities generally,
or in the Fund particularly, or the ability of the S&P 500 Index to track
general stock market performance. S&P's only relationship to the Fund is the
licensing of certain trademarks and trade names of S&P and of the S&P 500 Index,
which is determined, composed and calculated by S&P without regard to the Fund.
S&P has no obligation to take the needs of the shareholders of the Fund into
consideration in determining, composing or calculating the S&P 500 Index. S&P is
not responsible for and has not participated in the determination of the prices
and amount of the Fund, or the timing of the issuance or sale of shares of the
Fund, or in the determination or calculation of the equation by which the Fund
is to be converted into cash. S&P has no obligation or liability in connection
with the administration, marketing or trading of the Fund.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN, AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY THE ADVISER, THE FUND, SHAREHOLDERS OF THE FUND,
OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
General Investment Policies and Techniques
Equity Securities. The Fund may invest in equity securities listed on any
domestic securities exchange or traded in the over-the-counter market. Common
stocks, the most familiar type of equity security, represent an equity
(ownership) interest in a corporation. They may or may not pay dividends or
carry voting rights. Common stock occupies the most junior position in a
company's capital structure. Although equity securities have a history of
long-term growth in value, their prices fluctuate based on changes in a
company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.
<PAGE>
Short-Term Instruments. When the Fund experiences large cash inflows through the
sale of securities or desirable equity securities that are consistent with the
Fund's investment objective are unavailable in sufficient quantities or at
attractive prices, the Fund may hold short-term investments (or shares of money
market mutual funds) for a limited time pending availability of such equity
securities. Short-term instruments consist of foreign and domestic: (i)
short-term obligations of sovereign governments, their agencies,
instrumentalities, authorities or political subdivisions; (ii) other short-term
debt securities rated AA or higher by S&P or Aa or higher by Moody's Investors
Service, Inc. ("Moody's") or, if unrated, of comparable quality in the opinion
of the Sub-advisor; (iii) commercial paper; (iv) bank obligations, including
negotiable certificates of deposit, time deposits and bankers' acceptances; and
(v) repurchase agreements. At the time the Fund invests in commercial paper,
bank obligations or repurchase agreements, the issuer or the issuer's parent
must have outstanding debt rated AA or higher by S&P or Aa or higher by Moody's
or outstanding commercial paper or bank obligations rated A-1 by S&P or Prime-1
by Moody's; or, if no such ratings are available, the instrument must be of
comparable quality in the opinion of the Sub-advisor.
Certificates Of Deposit and Bankers' Acceptances. Certificates of deposit are
receipts issued by a depository institution in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity. Bankers' acceptances
typically arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually from 1 to 270
days) unsecured promissory notes issued by corporations in order to finance
their current operations. A variable amount master demand note (which is a type
of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
Illiquid Securities. Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "1933 Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the 1933 Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
A large institutional market has developed for certain securities that are not
registered under the 1933 Act, including repurchase agreements, commercial
paper, foreign securities, municipal securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which the
unregistered security can be readily resold or on an issuer's ability to honor a
demand for repayment. The fact that there are contractual or legal restrictions
on resale of such investments to the general public or to certain institutions
may not be indicative of their liquidity.
The SEC has adopted Rule 144A, which allows a broader institutional trading
market for securities otherwise subject to restriction on their resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the 1933 Act of resales of certain securities to qualified
institutional buyers. The Sub-advisor anticipates that the market for certain
restricted securities such as institutional commercial paper will expand further
as a result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc.
2
<PAGE>
Rule 144A Securities are securities in the United States that are not registered
for sale under federal securities laws but which can be resold to institutions
under SEC Rule 144A. Provided that a dealer or institutional trading market in
such securities exists, these restricted securities are treated as exempt from
the 15% limit on illiquid securities. Under the supervision of the Board of
Trustees of the Fund, the Advisor determines the liquidity of restricted
securities and, through reports from the Advisor, the Board will monitor trading
activity in restricted securities. If institutional trading in restricted
securities were to decline, the liquidity of the Fund could be adversely
affected.
In reaching liquidity decisions, the Advisor will consider, among other things,
the following factors: (i) the frequency of trades and quotes for the security;
(ii) the number of dealers and other potential purchasers wishing to purchase or
sell the security; (iii) dealer undertakings to make a market in the security
and (iv) the nature of the security and of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).
When-Issued and Delayed Delivery Securities. The Fund may purchase securities on
a when-issued or delayed delivery basis. Delivery of and payment for these
securities can take place a month or more after the date of the purchase
commitment. The purchase price and the interest rate payable, if any, on the
securities are fixed on the purchase commitment date or at the time the
settlement date is fixed. The value of such securities is subject to market
fluctuation and no interest accrues to the Fund until settlement takes place. At
the time the Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, it will record the transaction, reflect the value
each day of such securities in determining its net asset value and, if
applicable, calculate the maturity for the purposes of average maturity from
that date. At the time of settlement a when-issued security may be valued at
less than the purchase price. To facilitate such acquisitions, the Fund
identifies, as part of a segregated account, cash or liquid securities, in an
amount at least equal to such commitments. On delivery dates for such
transactions, the Fund will meet its obligations from maturities or sales of the
securities held in the segregated account and/or from cash flow. If the Fund
chooses to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other portfolio
obligation, incur a gain or loss due to market fluctuation. It is the current
policy of the Fund not to enter into when-issued commitments exceeding in the
aggregate 15% of the market value of the Fund's total assets, less liabilities
other than the obligations created by when-issued commitments.
Lending Of Portfolio Securities. The Fund has the authority to lend up to 5% of
the total value of its portfolio securities to brokers, dealers and other
financial organizations. By lending its securities, the Fund may increase its
income by continuing to receive payments in respect of dividends and interest on
the loaned securities as well as by either investing the cash collateral in
short-term securities or obtaining yield in the form of a fee paid by the
borrower when irrevocable letters of credit and U.S. Government Obligations are
used as collateral. The Fund will adhere to the following conditions whenever
its securities are loaned: (i) the Fund must receive at least 100% collateral
from the borrower; (ii) the borrower must increase this collateral whenever the
market value of the securities including accrued interest rises above the level
of the collateral; (iii) the Fund must be able to terminate the loan at any
time; (iv) the Fund must substitute payments in respect of all dividends,
interest or other distributions on the loaned securities; and (v) voting rights
on the loaned securities may pass to the borrower; provided, however, that if a
material event adversely affecting the investment occurs, the Board of Trustees
must retain the right to terminate the loan and recall and vote the securities.
Cash collateral may be invested in a money market fund managed by the
Sub-advisor (or its affiliates) and the Sub-advisor may serve as the Fund's
lending agent and may share in revenue received from securities lending
transactions as compensation for this service.
Repurchase Agreements. In a repurchase agreement, the Fund buys a security at
one price and simultaneously agrees to sell it back at a higher price at a
future date. In the event of the bankruptcy of the other party to a repurchase
agreement, the Fund could experience delays in recovering either its cash or
selling securities subject to the repurchase agreement. To the extent that, in
the meantime, the value of the securities repurchased had decreased or the value
of the securities had increased, the Fund could experience a loss. In all cases,
the Advisor must find the creditworthiness of the other party to the transaction
satisfactory.
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
3
<PAGE>
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.
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.
Investment of Uninvested Cash Balances. The Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the SEC, the Fund may use
Uninvested Cash to purchase shares of affiliated funds including money market
funds, short-term bond funds and Scudder Cash Management Investment Trust, or
one or more future entities for which Scudder Kemper Investments acts as trustee
or investment advisor that operate as cash management investment vehicles and
that are excluded from the definition of investment company pursuant to section
3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (collectively, the
"Central Funds") in excess of the limitations of Section 12(d)(1) of the
Investment Company Act. Investment by the Fund in shares of the Central Funds
will be in accordance with the Fund's investment policies and restrictions as
set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Fund's ability to
manage Uninvested Cash.
4
<PAGE>
The Fund will invest Uninvested Cash in Central Funds only to the extent that
the Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of fixed-income securities in the Fund's portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other instruments, purchase and sell futures
contracts and options thereon, enter into various transactions such as swaps,
caps, floors, collars, currency forward contracts, currency futures contracts,
currency swaps or options on currencies, or currency futures and various other
currency transactions (collectively, all the above are called "Strategic
Transactions"). In addition, strategic transactions may also include new
techniques, 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 the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Fund's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Advisor's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of the Fund, and
the Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of the Fund.
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 Advisor's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In
5
<PAGE>
addition, many Strategic Transactions involving options require segregation of
Fund assets in special accounts, as described below under "Use of Segregated and
Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Advisor must assess the creditworthiness of each
such Counterparty or any guarantor
6
<PAGE>
or credit enhancement of the Counterparty's credit to determine the likelihood
that the terms of the OTC option will be satisfied. The Fund will engage in OTC
option transactions only with U.S. government securities dealers recognized by
the Federal Reserve Bank of New York as "primary dealers" or broker/dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
nationally recognized statistical rating organization ("NRSRO") or, in the case
of OTC currency transactions, are determined to be of equivalent credit quality
by the Advisor. The staff of the SEC currently takes the position that OTC
options purchased by the Fund, and portfolio securities "covering" the amount of
the Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Fund's limitation on investing no more than 15% of its net assets in
illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, 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 Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, foreign sovereign debt,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
Fund will not sell put options if, as a result, more than 50% of the Fund's
total assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into 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 firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio and return enhancement management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
7
<PAGE>
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the Securities and Exchange Commission ("SEC") which permits the Fund to
participate in an interfund lending program among certain investment companies
advised by the Advisor. The interfund lending program allows 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, the 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. The 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. The Fund
may borrow only for temporary or emergency purposes (and not for leveraging)
through the program.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed with respect to the Fund without
the approval of a majority of the outstanding voting securities of the Fund
which, under the 1940 Act and the rules thereunder and as used in this Statement
of Additional Information, means the lesser of (i) 67% of the shares of the Fund
present at a meeting if the holders of more than 50% of the outstanding shares
of the Fund are present in person or by proxy, or (ii) more than 50% of the
outstanding shares of the Fund.
As a matter of fundamental policy, the Fund has elected to be classified as a
diversified series of an open-end, management investment company.
In addition, as a matter of fundamental policy, the Fund will not:
(1) 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;
(2) 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;
(3) purchase physical commodities or contracts relating to
physical commodities;
8
<PAGE>
(4) 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;
(5) 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;
(6) 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; or
(7) 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.
With regard to Item (6) above, to the extent the Fund holds real estate acquired
as a result of the Fund's ownership of securities such holdings would be subject
to the Fund's non-fundamental investment restriction on 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.
The Fund has adopted the following non-fundamental restrictions, which may be
changed by the Board without shareholder approval. The Fund may not:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value);
(7) lend portfolio securities in an amount greater than 5% of its
total assets; and
(8) Invest more than 15% of net assets in illiquid securities.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease beyond the specified limit resulting from a change in
values or net assets will not be considered a violation.
9
<PAGE>
NET ASSET VALUE
The net asset value per share of the Fund is the value of one share and is
determined separately for each class by dividing the value of the Fund's net
assets attributable to the class by the number of shares of that class
outstanding. The per share net asset value of each of Class B and Class C shares
of the Fund will generally be lower than that of the Class A shares of the Fund
because of the higher expenses borne by the Class B and Class C shares. The net
asset value of shares of the Fund is computed as of the close of regular trading
on the Exchange on each day the Exchange is open for trading (the "Value Time").
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on the
preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively. Net asset value per share is determined by
dividing the value of the total assets of the Fund, less all liabilities, by the
total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale price on
the exchange it is traded as of the Value Time. 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") on such exchange as of the
Value Time. Lacking a Calculated Mean the security is valued at the most recent
bid quotation on such exchange as of the Value Time. An equity security which is
traded on the National Association of Securities Dealers Automated Quotation
("Nasdaq") system will be valued at its most recent sale price on such system as
of the Value Time. Lacking any sales, the security is valued at the most recent
bid quotation as of the Value Time. The value of an equity security not quoted
on the Nasdaq System, but traded in another over-the-counter market, is its most
recent sale price if there are any sales of such security on such market as of
the Value Time. Lacking any sales, the security is valued at the Calculated Mean
quotation for such security as of the Value Time. Lacking a Calculated Mean
quotation the security is valued at the most recent bid quotation as of the
Value Time.
Debt securities, other than money market instruments, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Money market instruments
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 market maker. 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, the value of a portfolio asset as
determined in accordance with these procedures does not represent the fair
market value of the portfolio asset, the value of the portfolio asset is taken
to be an amount which, in the opinion of the Valuation Committee, represents
fair market value on the basis of all available information. The value of other
portfolio holdings owned by the Fund is determined in a manner which, in the
discretion of the Valuation Committee most fairly reflects fair market value of
the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
10
<PAGE>
Fund Accounting Agent. Scudder Fund Accounting Corporation, Two International
Place, Boston, Massachusetts, 02110-4103, a subsidiary of the Advisor, computes
net asset value for the Fund. The Fund pays Scudder Fund Accounting Corporation
an annual fee of 0.025% on the first $150 million of average net assets on an
annual basis, 0.0075% on the next $850 million, and 0.0045% over $1 billion
pursuant to the fund accounting agreement.
For the fiscal period ended August 31, 2000, payments to Scudder Fund Accounting
Corporation amounted to $---------.
PURCHASE AND REDEMPTION OF SHARES
As described in the Fund's prospectus, shares of the Fund are sold at their
public offering price, which is the net asset value per share of the Fund next
determined after an order is received in proper form plus, with respect to Class
A shares, an initial sales charge. The minimum initial investment is $1,000 and
the minimum subsequent investment is $100 but such minimum amounts may be
changed at any time. See the prospectus for certain exceptions to these
minimums. An order for the purchase of shares that is accompanied by a check
drawn on a foreign bank (other than a check drawn on a Canadian bank in U.S.
Dollars) will not be considered in proper form and will not be processed unless
and until the Fund determines that it has received payment of the proceeds of
the check. The time required for such a determination will vary and cannot be
determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of the Fund will be redeemed by the Fund at the applicable net asset
value per share of such Fund as described in the Fund's prospectus.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B or Class C shares, by certain classes of persons or
through certain types of transactions as described in the prospectus, are
provided because of anticipated economies in sales and sales related efforts.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange, Inc. (the
"Exchange") is closed other than customary weekend and holiday closings or
during any period in which trading on the Exchange is restricted, (b) during any
period when an emergency exists as a result of which (i) disposal of the Fund's
investments is not reasonably practicable, or (ii) it is not reasonably
practicable for the Fund to determine the value of its net assets, or (c) for
such other periods as the Securities and Exchange Commission may by order permit
for the protection of the Fund's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares 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.
Purchase of Shares
Alternative Purchase Arrangements. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify which class of shares the order is for.
The primary distinctions among the classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. Each
class has distinct advantages and
11
<PAGE>
disadvantages for different investors, and investors may choose the class that
best suits their circumstances and objectives.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Sales Annual 12b-1 Fees (as a %
Charge of average daily net assets) Other Information
------ ------------------------- -----------------
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None Initial sales charge
5.75% of the public offering waived or reduced for
price certain purchases
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Class B Maximum contingent deferred 0.75% Shares convert to
sales charge of 4% of redemption Class A shares six
proceeds; declines to zero after years after issuance
six years
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Class C Contingent deferred sales charge 0.75% No conversion feature
of 1% of redemption proceeds for
redemptions made during first
year after purchase
--------------------------------------------------------------------------------------------------------------------
</TABLE>
The minimum initial investment for the Fund is $1,000 and the minimum subsequent
investment is $100. The minimum initial investment for an Individual Retirement
Account is $250 and the minimum subsequent investment is $50. Under an automatic
investment plan, such as Bank Direct Deposit, Payroll Direct Deposit or
Government Direct Deposit, the minimum initial and subsequent investment is $50.
These minimum amounts may be changed at any time in management's discretion.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond value of 2% or more of the certificate value is normally required).
Initial Sales Charge Alternative -- Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge Allowed
As a Percentage As a Percentage to Dealers as a
of of Net Percentage of
Amount of Purchase Offering Price Asset Value* 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.
The Fund receives the entire net asset value of all its Class A shares sold.
KDI, the Fund's principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales
12
<PAGE>
agreements, KDI may reallow to dealers up to the full applicable sales charge,
as shown in the above table, during periods and for transactions specified in
such notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in such Fund or Kemper Mutual Funds
listed under "Special Features -- Class A Shares -- Combined Purchases" totals
at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features;" or (b) a participant-directed qualified
retirement plan described in Code Section 401(a) or a participant-directed
non-qualified deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 200 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of shares purchased under
the Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge. See "Purchase, Repurchase and Redemption of Shares -- Contingent
Deferred Sales Charge -- Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 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 record keeping system made available
through KSvC. For purposes of determining the appropriate commission percentage
to be applied to a particular sale under the Fund's foregoing schedule, KDI will
consider the cumulative amount invested by the purchaser in the Fund and other
Kemper Mutual Funds listed under "Special Features -- Class A Shares -- Combined
Purchases," including purchases pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features referred to above and including
purchases of class R shares of certain Scudder funds. The privilege of
purchasing Class A shares of the Fund at net asset value under the Large Order
NAV Purchase Privilege is not available if another net asset value purchase
privilege also applies.
Class A shares of the Fund or any other Kemper Mutual Fund listed under "Special
Features -- Class A Shares -- Combined Purchases" may be purchased at net asset
value in any amount by members of the plaintiff class in the proceeding known as
Howard and Audrey Tabankin, et al. v. Kemper Short-Term Global Income Fund, et
al., Case No. 93 C 5231 (N.D. IL). This privilege is generally non-transferable
and continues for the lifetime of individual class members and for a ten year
period for non-individual class members. To make a purchase at net asset value
under this privilege, the investor must, at the time of purchase, submit a
written request that the purchase be processed at net asset value pursuant to
this privilege specifically identifying the purchaser as a member of the
"Tabankin Class." Shares purchased under this privilege will be maintained in a
separate account that includes only shares purchased under this privilege. For
more details concerning this privilege, class members should refer to the Notice
of (1) Proposed Settlement with Defendants; and (2) Hearing to Determine
Fairness of Proposed Settlement, dated August 31, 1995, issued in connection
with the aforementioned court proceeding. For sales of Fund shares at net asset
value pursuant to this privilege, KDI may at its discretion pay investment
dealers and other financial services firms a concession, payable quarterly, at
an annual rate of up to 0.25% of net assets attributable to such shares
maintained and serviced by the firm. A firm becomes eligible for the concession
based upon assets in accounts attributable to shares purchased under this
privilege in the month after the month of purchase and the concession continues
until terminated by KDI. The privilege of purchasing Class A shares of the Fund
at net asset value under this privilege is not available if another net asset
value purchase privilege also applies.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
the Fund, its Manager , its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Fund,
for themselves or their spouses or dependent children; (c) shareholders who
owned shares of Kemper 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; (d) any
trust, pension, profit-sharing or other benefit plan for only such persons; (e)
persons who purchase such shares through bank trust
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departments that process such trades through an automated, integrated mutual
fund clearing program provided by a third party clearing firm; and (f) persons
who purchase shares of the Fund through KDI as part of an automated billing and
wage deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.. Class A shares may be sold at net
asset value in any amount to selected employees (including their spouses and
dependent children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund shares may purchase the Fund's Class A shares at net asset value
hereunder. Class A shares may be sold at net asset value in any amount to unit
investment trusts sponsored by Ranson & Associates, Inc. In addition,
unitholders of unit investment trusts sponsored by Ranson & Associates, Inc. or
its predecessors may purchase the Fund's Class A shares at net asset value
through reinvestment programs described in the prospectuses of such trusts that
have such programs. Class A shares of the Fund may be sold at net asset value
through certain investment Advisors registered under the Investment Advisors Act
of 1940 and other financial services firms that adhere to certain standards
established by KDI, including a requirement that such shares be sold for the
benefit of their clients participating in an investment advisory program under
which such clients pay a fee to the investment advisor or other firm for
portfolio management and other services. Such shares are sold for investment
purposes and on the condition that they will not be resold except through
redemption or repurchase by the Fund. The Fund may also issue Class A shares at
net asset value in connection with the acquisition of the assets of or merger or
consolidation with another investment company, or to shareholders in connection
with the investment or reinvestment of income and capital gain dividends.
Class A shares of the Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of 0.50% of
the amount of Class A shares purchased.
Class A shares of the Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Purchase, Repurchase and Redemption of Shares -- Contingent
Deferred Sales Charge -- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
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Class B shares of the Fund will automatically convert to Class A shares of the
same Fund six years after issuance on the basis of the relative net asset value
per share. The purpose of the conversion feature is to relieve holders of Class
B shares from the distribution services fee when they have been outstanding long
enough for KDI to have been compensated for distribution related expenses. For
purposes of conversion to Class A shares, shares purchased through the
reinvestment of dividends and other distributions paid with respect to Class B
shares in a shareholder's Fund account will be converted to Class A shares on a
pro rata basis.
Purchase of Class C Shares. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Purchase, Repurchase and Redemption of Shares -- Contingent Deferred Sales
Charge -- Class C Shares." KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of such shares. For
periods after the first year, KDI currently intends to pay firms for sales of
Class C shares a distribution fee, payable quarterly, at an annual rate of 0.75%
of net assets attributable to Class C shares maintained and serviced by the
firm. KDI is compensated by the Fund for services as distributor and principal
underwriter for Class C shares. See "Investment Manager and Underwriter."
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. Orders for Class
B shares or Class C shares by employer sponsored employee benefit plans using
the subaccount record keeping system made available through the Shareholder
Service Agent will be invested instead in Class A shares at net asset value
where the combined subaccount value in the Fund or Kemper Mutual Funds listed
under "Special Features -- Class A Shares -- Combined Purchases" is in excess of
$5 million including purchases pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features described under "Special Features."
For more information about the three sales arrangements, consult your financial
representative or the Shareholder Service Agent. Financial services firms may
receive different compensation depending upon which class of shares they sell.
General. Shares of the Fund are sold at their public offering price, which is
the net asset value per share of the Fund next determined after an order is
received in proper form plus, with respect to Class A shares, an initial sales
charge. The minimum initial investment is $1,000 and the minimum subsequent
investment is $100 but such minimum amounts may be changed at any time. An order
for the purchase of shares that is accompanied by a check drawn on a foreign
bank (other than a check drawn on a Canadian bank in U.S. Dollars) will not be
considered in proper form and will not be processed unless and until the Fund
determines that it has received payment of the proceeds of the check. The time
required for such a determination will vary and cannot be determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of the Fund will be redeemed by the Fund at the applicable net asset
value per share of the Fund. The amount received by a shareholder upon
redemption or repurchase may be more or less than the amount paid for such
shares depending on the market value of the Fund's portfolio securities at the
time.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemption of Class B or Class C shares by certain classes of persons or through
certain types of transactions are provided because of anticipated economies in
sales and sales related efforts.
Tax Identification Number. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security
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or tax identification number. A shareholder may avoid involuntary redemption by
providing the applicable Fund with a tax identification number during the 30-day
notice period. Shareholders should direct their inquiries to Kemper Service
Company, 811 Main Street, Kansas City, Missouri 64105-2005 or to the firm from
which they received this Statement of Additional Information.
Repurchase and Redemption of Shares
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange ("Exchange") is
closed other than customary weekend and holiday closings or during any period in
which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of the Fund's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the value of its net assets, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection of
the Fund's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares and the assessment of the administrative services fee with
respect to each class 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.
The Fund has authorized certain members of the National Association of
Securities Dealers, Inc. ("NASD"), other than KDI to accept purchase and
redemption orders for the Fund's shares. Those brokers may also designate other
parties to accept purchase and redemption orders on the Fund's behalf. Orders
for purchase or redemption will be deemed to have been received by the Fund when
such brokers or their authorized designees accept the orders. Subject to the
terms of the contract between the Fund and the broker, ordinarily orders will be
priced at the Fund's net asset value next computed after acceptance by such
brokers or their authorized designees. Further, if purchases or redemptions of
the Fund's shares are arranged and settlement is made at an investor's election
through any other authorized NASD member, that member may, at its discretion,
charge a fee for that service. The Board of Trustees or Directors as the case
may be ("Board") of the Fund and KDI each has the right to limit the amount of
purchases by, and to refuse to sell to, any person. The Board and KDI may
suspend or terminate the offering of shares of the Fund at any time for any
reason.
General. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. When certificates for shares have been
issued, they must be mailed to or deposited with the Shareholder Service Agent,
along with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
The redemption price for shares of the Fund will be the net asset value per
share of that Fund next determined following receipt by the Shareholder Service
Agent of a properly executed request with any required documents as described
above. Payment for shares redeemed will be made in cash as promptly as
practicable but in no event later than seven days after receipt of a properly
executed request accompanied by any outstanding share certificates in proper
form for transfer. When the Fund is asked to redeem shares for which it may not
have yet received good payment (i.e., purchases by check, EXPRESS-Transfer or
Bank Direct Deposit), it may delay transmittal of redemption proceeds until it
has determined that collected funds have been received for the purchase of such
shares, which may be up to 10 days from receipt by the Fund of the purchase
amount. The redemption within two years of
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<PAGE>
Class A shares purchased at net asset value under the Large Order NAV Purchase
Privilege may be subject to a contingent deferred sales charge (see "Purchase,
Repurchase and Redemption of Shares -- Initial Sales Charge Alternative -- Class
A Shares"), the redemption of Class B shares within six years may be subject to
a contingent deferred sales charge (see "Contingent Deferred Sales Charge --
Class B Shares" below), and the redemption of Class C shares within the first
year following purchase may be subject to a contingent deferred sales charge
(see "Contingent Deferred Sales Charge -- Class C Shares" below).
Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on an account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount record keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephone instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, as long
as the reasonable verification procedures are followed. The verification
procedures include recording instructions, requiring certain identifying
information before acting upon instructions and sending written confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor, guardian and custodial account
holders, provided the trustee, executor, guardian or custodian is named in the
account registration. Other institutional account holders may exercise this
special privilege of redeeming shares by telephone request or written request
without signature guarantee subject to the same conditions as individual account
holders and subject to the limitations on liability described under "General"
above, provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Funds reserve the right to terminate or modify
this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the applicable Fund next determined after receipt
of a request by KDI. However, requests for repurchases received by dealers or
other firms prior to the determination of net asset value (see "Net Asset
Value") and received by KDI prior to the close of KDI's business day will be
confirmed at the net asset value effective on that day. The offer to repurchase
may be suspended at any time. Requirements as to stock powers, certificates,
payments and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value of the Fund
effective on that day and normally the proceeds will be sent to the designated
account the following
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<PAGE>
business day. Delivery of the proceeds of a wire redemption of $250,000 or more
may be delayed by the Fund for up to seven days if the Fund or the Shareholder
Servicing Agent deems it appropriate under then current market conditions. Once
authorization is on file, the Shareholder Service Agent will honor requests by
telephone at 1-800-621-1048 or in writing, subject to the limitations on
liability described under "General" above. The Funds are not responsible for the
efficiency of the federal wire system or the account holder's financial services
firm or bank. The Funds currently do not charge the account holder for wire
transfers. The account holder is responsible for any charges imposed by the
account holder's firm or bank. There is a $1,000 wire redemption minimum
(including any contingent deferred sales charge). To change the designated
account to receive wire redemption proceeds, send a written request to the
Shareholder Service Agent with signatures guaranteed as described above or
contact the firm through which shares of the Fund were purchased. Shares
purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may not be
redeemed by wire transfer until such shares have been owned for at least 10
days. Account holders may not use this privilege to redeem shares held in
certificated form. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the expedited
wire transfer redemption privilege. The Funds reserve the right to terminate or
modify this privilege at any time.
Contingent Deferred Sales Charge -- Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year following purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a) or a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent;] (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the commission applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge -- Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
Contingent Deferred
Year of Redemption After Purchase Sales Charge
--------------------------------- ------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic Withdrawal Plan" below) and (d) for redemptions made pursuant to
any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2; and (e)
for redemptions to satisfy required minimum distributions after age 70 1/2 from
an IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's Kemper IRA accounts). The contingent deferred sales
charge will
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<PAGE>
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent: (a) redemptions
to satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund), (c) redemptions in connection with distributions
qualifying under the hardship provisions of the Internal Revenue Code and (d)
redemptions representing returns of excess contributions to such plans.
Contingent Deferred Sales Charge - Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived in the event of: (a)
redemptions by a participant-directed qualified retirement plan described in
Code Section 401(a) or a participant-directed non-qualified deferred
compensation plan described in Code Section 457; (b) redemptions by employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent;] (c) redemption of shares of a
shareholder (including a registered joint owner) who has died; (d) redemption of
shares of a shareholder (including a registered joint owner) who after purchase
of the shares being redeemed becomes totally disabled (as evidenced by a
determination by the federal Social Security Administration); (e) redemptions
under the Fund's Systematic Withdrawal Plan at a maximum of 10% per year of the
net asset value of the account; (f) any participant-directed redemption of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent; (g) redemption of shares by an employer sponsored employee benefit plan
that offers funds in addition to Kemper Funds and whose dealer of record has
waived the advance of the first year administrative service and distribution
fees applicable to such shares and agrees to receive such fees quarterly; and
(h) 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.
Contingent Deferred Sales Charge -- General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of the Fund's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and by an additional $1,000 of share appreciation to a
total of $12,000. If the investor were then to redeem the entire $12,000 in
share value, the contingent deferred sales charge would be payable only with
respect to $10,000 because neither the $1,000 of reinvested dividends nor the
$1,000 of share appreciation is subject to the charge. The charge would be at
the rate of 3% ($300) because it was in the second year after the purchase was
made.
The rate of the contingent deferred sales charge under the schedule above 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. In the event no
specific order is requested when redeeming shares subject to a contingent
deferred sales charge, the redemption will be made first from shares
representing reinvested dividends and then from the earliest purchase of shares.
KDI receives any contingent deferred sales charge directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of the
Fund or any Kemper Mutual Fund listed under "Special Features -- Class A Shares
-- Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
the Fund or of the listed Kemper Mutual Funds. A shareholder of the Fund or
Kemper Mutual Fund who redeems Class A shares purchased under the Large Order
NAV Purchase Privilege (see "Purchase, Repurchase and Redemption of Shares --
Initial Sales Charge Alternative -- Class A Shares") or Class B shares or Class
C shares and incurs a contingent deferred sales charge may reinvest up to the
full amount redeemed at net asset value at the time of the reinvestment in Class
A shares, Class B shares or Class C shares, as the case may be, of the Fund or
of Kemper Mutual Funds. The amount of any contingent deferred sales charge also
will be reinvested. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares of the Fund or of the Kemper Mutual Funds listed under "Special
Features -- Class A Shares -- Combined Purchases." Purchases through the
reinvestment privilege
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are subject to the minimum investment requirements applicable to the shares
being purchased and may only be made for Kemper Mutual Funds available for sale
in the shareholder's state of residence as listed under "Special Features --
Exchange Privilege." The reinvestment privilege can be used only once as to any
specific shares and reinvestment must be effected within six months of the
redemption. If a loss is realized on the redemption of the Funds' shares, the
reinvestment in the same Fund may be subject to the "wash sale" rules if made
within 30 days of the redemption, resulting in a postponement of the recognition
of such loss for federal income tax purposes. In addition, upon a reinvestment,
the shareholder may not be permitted to take into account sales charges incurred
on the original purchase of shares in computing their taxable gain or loss. The
reinvestment privilege may be terminated or modified at any time.
Special Features
Class A Shares -- Combined Purchases. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following funds: Kemper Aggressive Growth Fund, Kemper Asian Growth Fund, Kemper
Blue Chip Fund, Kemper California Tax-Free Income Fund, Kemper Cash Reserves
Fund, Kemper Contrarian Fund, Kemper Emerging Markets Growth Fund, Kemper
Florida Tax-Free Income Fund, Kemper Global Blue Chip Fund, Kemper Global Income
Fund, Kemper Growth Fund, Kemper High Yield Fund, Kemper High Yield Fund II,
Kemper High Yield Opportunity Fund, Kemper Horizon 10+ Portfolio, Kemper Horizon
20+ Portfolio, Kemper Horizon 5 Portfolio, Kemper Income and Capital
Preservation Fund, Kemper Intermediate Municipal Bond Fund, Kemper International
Fund, Kemper International Research Fund, Kemper Large Company Growth Fund
(currently available only to employees of Scudder Kemper Investments, Inc.; not
available in all states), Kemper Latin America Fund, Kemper Municipal Bond Fund,
Kemper New York Tax-Free Income Fund, Kemper Ohio Tax-Free Income Fund, Kemper
Research Fund (currently available only to employees of Scudder Kemper
Investments, Inc.; not available in all states), Kemper Retirement Fund --
Series II, Kemper Retirement Fund -- Series III, Kemper Retirement Fund --
Series IV, Kemper Retirement Fund -- Series V, Kemper Retirement Fund -- Series
VI, Kemper Retirement Fund -- Series VII, Kemper S&P 500 Index Fund, Kemper
Short-Term U.S. Government Fund, Kemper Small Cap Value Fund, Kemper Small Cap
Value+Growth Fund (currently available only to employees of Scudder Kemper
Investments, Inc.; not available in all states), Kemper Small Capitalization
Equity Fund, Kemper Strategic Income Fund, Kemper Target 2010 Fund, Kemper
Technology Fund, Kemper Total Return Fund, Kemper U.S. Government Securities
Fund, Kemper U.S. Growth and Income Fund, Kemper U.S. Mortgage Fund, Kemper
Value+Growth Fund, Kemper Worldwide 2004 Fund, Kemper-Dreman Financial Services
Fund, Kemper-Dreman High Return Equity Fund ("Kemper Mutual Funds"). Except as
noted below, there is no combined purchase credit for direct purchases of shares
of Zurich Money Funds, Cash Equivalent Fund, Tax-Exempt California Money Market
Fund, Cash Account Trust, Investors Municipal Cash Fund or Investors Cash Trust
("Money Market Funds"), which are not considered "Kemper Mutual Funds" for
purposes hereof. For purposes of the Combined Purchases feature described above
as well as for the Letter of Intent and Cumulative Discount features described
below, employer sponsored employee benefit plans using the subaccount record
keeping system made available through the Shareholder Service Agent or its
affiliates may include: (a) Money Market Funds as "Kemper Mutual Funds," (b) all
classes of shares of any Kemper Mutual Fund, and (c) the value of any other plan
investments, such as guaranteed investment contracts and employer stock,
maintained on such subaccount record keeping system.
Class A Shares -- Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date
20
<PAGE>
under the Letter as an "accumulation credit" toward the completion of the
Letter, but no price adjustment will be made on such shares. Only investments in
Class A shares of the Fund are included for this privilege.
Class A Shares -- Cumulative Discount. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Kemper Mutual Funds (computed at the maximum offering
price at the time of the purchase for which the discount is applicable) already
owned by the investor.
Class A Shares -- Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of Kemper Mutual
Funds in accordance with the provisions below. [For Kemper New Europe Fund Only:
Shareholders of Class M shares may also exchange their shares for Class A shares
of Kemper Mutual Funds.
Class A Shares. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features -- Class A Shares -- Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI.
Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of any Kemper Mutual Fund or a
Money Market Fund under the exchange privilege described above without paying
any contingent deferred sales charge at the time of exchange. If the Class A
shares received on exchange are redeemed thereafter, a contingent deferred sales
charge may be imposed in accordance with the foregoing requirements provided
that the shares redeemed will retain their original cost and purchase date for
purposes of the contingent deferred sales charge.
Class B Shares. Class B shares of the Fund and Class B shares of any Kemper
Mutual Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class B shares may be exchanged without any contingent deferred sales charge
being imposed at the time of exchange. For purposes of the contingent deferred
sales charge that may be imposed upon the redemption of the shares received on
exchange, amounts exchanged retain their original cost and purchase date.
Class C Shares. Class C shares of the Fund and Class C shares of any Kemper
Mutual Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class C shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For determining whether there is a contingent
deferred sales charge that may be imposed upon the redemption of the Class C
shares received by exchange, amounts exchanged retain their cost and purchase.
General. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15 Day Hold Policy"). The Fund reserves
the right to invoke the 15-Day Hold Policy of exchanges of $1,000,000 or less
if, in the Investment Manager's judgment, the exchange activity may have an
adverse effect on the fund. In particular, a pattern of exchanges that coincides
with a "market timing" strategy may be disruptive to the Kemper 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. The total value of
shares being exchanged must at least equal the minimum investment requirement of
the Kemper Fund into which they are being
21
<PAGE>
exchanged. Exchanges are made based on relative dollar values of the shares
involved in the exchange. There is no service fee for an exchange; however,
dealers or other firms may charge for their services in effecting exchange
transactions. Exchanges will be effected by redemption of shares of the fund
held and purchase of shares of the other fund. For federal income tax purposes,
any such exchange constitutes a sale upon which a gain or loss may be realized,
depending upon whether the value of the shares being exchanged is more or less
than the shareholder's adjusted cost basis. Shareholders interested in
exercising the exchange privilege may obtain prospectuses of the other funds
from dealers, other firms or KDI. Exchanges may be accomplished by a written
request to KSvC, Attention: Exchange Department, P.O. Box 419557, Kansas City,
Missouri 64141-6557, or by telephone if the shareholder has given authorization.
Once the authorization is on file, the Shareholder Service Agent will honor
requests by telephone at 1-800-621-1048, subject to the limitations on liability
under "Purchase, Repurchase and Redemption of Shares -- General." Any share
certificates must be deposited prior to any exchange of such shares. During
periods when it is difficult to contact the Shareholder Service Agent by
telephone, it may be difficult to use the telephone exchange privilege. The
exchange privilege is not a right and may be suspended, terminated or modified
at any time. Except as otherwise permitted by applicable regulations, 60 days'
prior written notice of any termination or material change will be provided.
Exchanges may only be made for Kemper Funds that are eligible for sale in the
shareholder's state of residence. Currently, Tax-Exempt California Money Market
Fund is available for sale only in California and the portfolios of Investors
Municipal Cash Fund are available for sale only in certain states.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of the Fund, a Kemper Mutual Fund or Money Market Fund may authorize the
automatic exchange of a specified amount ($100 minimum) of such shares for
shares of the same class of another Kemper Fund. If selected, exchanges will be
made automatically until the privilege is terminated by the shareholder or the
other Kemper Fund. Exchanges are subject to the terms and conditions described
above under "Exchange Privilege" except that the $1,000 minimum investment
requirement for the Kemper Fund acquired on exchange is not applicable. This
privilege may not be used for the exchange of shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Purchase, Repurchase and Redemption of Shares -- General." Once
enrolled in EXPRESS-Transfer, a shareholder can initiate a transaction by
calling Kemper Shareholder Services toll free at 1-800-621-1048 Monday through
Friday, 8:00 a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this
privilege by sending written notice to KSvC, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable time to act upon the request.
EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("Bank Direct Deposit"), investments are made automatically (minimum $50
and maximum $50,000) from the shareholder's account at a bank, savings and loan
or credit union into the shareholder's Fund account. By enrolling in Bank Direct
Deposit, the shareholder authorizes the Fund and its agents to either draw
checks or initiate Automated Clearing House debits against the designated
account at a bank or other financial institution. This privilege may be selected
by completing the appropriate section on the Account Application or by
contacting the Shareholder Service Agent for appropriate forms. A shareholder
may terminate his or her Plan by sending written notice to KSvC, P.O. Box
419415, Kansas City, Missouri 64141-6415. Termination by a shareholder will
become effective within thirty days after the Shareholder Service Agent has
received the request. The Fund may immediately terminate a shareholder's Plan in
the event that any item is unpaid by the shareholder's financial institution.
The Funds may terminate or modify this privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or
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<PAGE>
government check is automatically invested in the Fund account each payment
period. A shareholder may terminate participation in these programs by giving
written notice to the shareholder's employer or government agency, as
appropriate. (A reasonable time to act is required.) The Fund is not responsible
for the efficiency of the employer or government agency making the payment or
any financial institutions transmitting payments.
Systematic Withdrawal Plan. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount up to $50,000 to be paid to the owner or
a designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to Individual Retirement Accounts. The
minimum periodic payment is $100. The maximum annual rate at which Class B
shares, Class A shares purchased under the Large Order NAV Purchase Privilege
and Class C shares in their first year following the purchase may be redeemed
under a systematic withdrawal plan is 10% of the net asset value of the account.
Shares are redeemed so that the payee will receive payment approximately the
first of the month. Any income and capital gain dividends will be automatically
reinvested at net asset value. A sufficient number of full and fractional shares
will be redeemed to make the designated payment. Depending upon the size of the
payments requested and fluctuations in the net asset value of the shares
redeemed, redemptions for the purpose of making such payments may reduce or even
exhaust the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B shares and Class C shares made pursuant to a systematic withdrawal plan. The
right is reserved to amend the systematic withdrawal plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Fund.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
Traditional, Roth and Education Individual Retirement Accounts ("IRAs").
This includes Savings Incentive Match Plan for Employees of Small Employers
("SIMPLE"), IRA accounts and Simplified Employee Pension Plan ("SEP") IRA
accounts and prototype documents.
403(b)(7) Custodial Accounts. This type of plan is available to employees
of most non-profit organizations.
Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. The brochures for plans with the Fund's custodian describe the current
fees payable for its services as custodian. Investors should consult with their
own tax advisers before establishing a retirement plan.
Additional Transaction Information
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks or other financial services firms may be subject to
various federal and state laws regarding the services described above and may be
required to register as dealers pursuant to state law. If banking firms were
prohibited from acting in any capacity or providing any of the described
services, management would consider what action, if any, would be appropriate.
KDI does not believe that termination of a relationship with a bank would result
in any material adverse consequences to the Fund.
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<PAGE>
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold by the firm under the following conditions: (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct "roll over" of a distribution from a qualified retirement plan
account maintained on a participant subaccount record keeping system provided by
Kemper Service Company ("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 Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund or other funds underwritten by
KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day ("trade
date"). Dealers and other financial services firms are obligated to transmit
orders promptly. Collection may take significantly longer for a check drawn on a
foreign bank than for a check drawn on a domestic bank. Therefore, if an order
is accompanied by a check drawn on a foreign bank, funds must normally be
collected before shares will be purchased. See "Purchase and Redemption of
Shares."
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services. This Statement of Additional Information should be read in
connection with such firms' material regarding their fees and services.
The Funds reserve the right to withdraw all or any part of the offering made by
this Statement of Additional Information and to reject purchase orders. Also,
from time to time, the Fund may temporarily suspend the offering of shares of
any Fund or class of the Fund to new investors. During the period of such
suspension, persons who are already shareholders of a class of the Fund normally
are permitted to continue to purchase additional shares of such class or Fund
and to have dividends reinvested.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this Statement of Additional Information.
Dividends. The Fund intends to follow the practice of distributing substantially
all of its investment company taxable income which includes any excess of net
realized short-term capital gains over net realized long-term capital losses.
The Fund may follow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses.
However, the Fund may retain all or part of such gain for reinvestment, after
paying the related federal taxes for which shareholders may then be able to
claim a credit against their federal tax liability. If the Fund does not
distribute the amount of capital gain and/or net investment income required to
be distributed by an excise tax provision of the Code, the Fund may be subject
to that excise tax. In certain circumstances, the Fund may determine that it is
in the interest of shareholders to distribute less than the required amount.
(See "TAXES.")
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<PAGE>
The Fund normally distributes annually dividends of net investment income. The
Fund distributes any net realized short-term and long-term capital gains at
least annually. Income and capital gain dividends of the Fund may be
automatically reinvested in additional shares of the Fund, without a sales
charge, unless the investor makes an election otherwise. Distributions of net
capital gains realized during each fiscal year will be made at least annually in
November or December. Additional distributions, including distributions of net
short-term capital gains in excess of net long-term capital losses, may be made,
if necessary.
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
proportion for each class.
YIELD = 2 [ (a - b +1 )^6 - 1]
-----
cd
PERFORMANCE
The Fund may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return." Performance
information will be computed separately for each class. Each of these figures is
based upon historical results and is not representative of the future
performance of any class of the Fund. The Fund with fees or expenses being
waived or absorbed by Scudder Kemper may also advertise performance information
before and after the effect of the fee waiver or expense absorption.
The Fund's historical performance or return for a class of shares may be shown
in the form of "average annual total return" and "total return" figures. These
various measures of performance are described below. Performance information
will be computed separately for each class.
The Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the SEC. The average annual total
return for the Fund for a specific period is found by first taking a
hypothetical $1,000 investment ("initial investment") in the Fund's shares on
the first day of the period, adjusting to deduct the maximum sales charge (in
the case of Class A shares), and computing the "redeemable value" of that
investment at the end of the period. The redeemable value in the case of Class B
or Class C shares includes the effect of the applicable contingent deferred
sales charge that may be imposed at the end of the period. The redeemable value
is then divided by the initial investment, and this quotient is taken to the Nth
root (N representing the number of years in the period) and 1 is subtracted from
the result, which is then expressed as a percentage. The calculation assumes
that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Average annual total return may also be calculated without deducting the maximum
sales charge.
Calculation of the Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the Fund's "Financial Highlights" table
in the Fund's financial statements and prospectus. Total return performance for
a specific period is calculated by first taking an investment (assumed below to
be $10,000) ("initial investment") in the Fund's shares on the first day of the
period, either adjusting or not adjusting to deduct the maximum sales charge (in
the case of Class A shares), and computing the "ending value" of that investment
at the end of the period. The total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The ending value in the case of Class B and Class C shares may or may not
include the effect of the applicable contingent deferred sales charge that may
be imposed at the end of the period. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Total return may also be shown as
the increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge for Class
A shares or the contingent deferred sales charge for Class B and Class C shares
would be reduced if such charge were included. Total return figures for Class A
shares for various periods are set forth in the tables below.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in the Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in the Fund
during a specified period. Average annual total return will be quoted for at
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<PAGE>
least the one-, five- and ten-year periods ending on a recent calendar quarter
(or if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Fund for performance purposes). Average annual
total return figures represent the average annual percentage change over the
period in question. Total return figures represent the aggregate percentage or
dollar value change over the period in question.
The Fund's performance figures are based upon historical results and are not
representative of future performance. The Fund's Class A shares are sold at net
asset value plus a maximum sales charge of 5.75% of the offering price. Class B
shares and Class C shares are sold at net asset value. Redemptions of Class B
shares may be subject to a contingent deferred sales charge that is 4% in the
first year following the purchase, declines by a specified percentage thereafter
and becomes zero after six years. Redemption of Class C shares may be subject to
a 1% contingent deferred sales charge in the first year following purchase.
Average annual total return figures do, and total return figures may, include
the effect of the contingent deferred sales charge for the Class B shares and
Class C shares that may be imposed at the end of the period in question.
Performance figures for the Class B shares and Class C shares not including the
effect of the applicable contingent deferred sales charge would be reduced if it
were included. Returns and net asset value will fluctuate. Factors affecting the
Fund's performance include general market conditions, operating expenses and
investment management. Any additional fees charged by a dealer or other
financial services firm would reduce the returns described in this section.
Shares of the Fund are redeemable at the then current net asset value, which may
be more or less than original cost.
The Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged bond indexes including, but not limited to, the Salomon
Brothers High Grade Corporate Bond Index, the Lehman Brothers Adjustable Rate
Index, the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Government/
Corporate Bond Index, the Salomon Brothers Long-Term High Yield Index, the
Salomon Brothers 30 Year GNMA Index and the Merrill Lynch Market Weighted Index
and may also be compared to the performance of other mutual funds or mutual fund
indexes with similar objectives and policies as reported by independent mutual
fund reporting services such as Lipper Analytical Services, Inc. (""Lipper").
Lipper performance calculations are based upon changes in net asset value with
all dividends reinvested and do not include the effect of any sales charges.
Information may be quoted from publications such as Morningstar, Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit and other bank products, money market
funds and U.S. Treasury obligations. Bank product performance may be based upon,
among other things, the BANK RATE MONITOR National Index(TM) or various
certificate of deposit indexes. Money market fund performance may be based upon,
among other things, the IBC/Donoghue's Money Fund Report(R) or Money Market
Insight(R), reporting services on money market funds. Performance of U.S.
Treasury obligations may be based upon, among other things, various U.S.
Treasury bill indexes. Certain of these alternative investments may offer fixed
rates of return and guaranteed principal and may be insured. Economic indicators
may include, without limitation, indicators of market rate trends and cost of
funds, such as Federal Home Loan Bank Board 11th District Cost of Funds Index
("COFI").
The Fund may depict the historical performance of the securities in which the
Fund may invest over periods reflecting a variety of market or economic
conditions either alone or in comparison with alternative investments,
performance indexes of those investments or economic indicators. The Fund may
also describe its portfolio holdings and depict its size or relative size
compared to other mutual funds, the number and make-up of its shareholder base
and other descriptive factors concerning the Fund.
The Fund's returns and net asset value will fluctuate and shares of the Fund are
redeemable by an investor at the then current net asset value, which may be more
or less than original cost. Redemption of Class B shares and Class C shares may
be subject to a contingent deferred sales charge as described above. Additional
information about the Fund's performance also appears in its Annual Report to
Shareholders, which is available without charge from the applicable Fund.
The figures below show performance information for various periods. The net
asset values and returns of each class of shares of the Funds will fluctuate. No
adjustment has been made for taxes payable on dividends. The periods indicated
were ones of fluctuating securities prices and interest rates.
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Average Annual Class A Class B Class C
Total Returns (1)(2) Shares Shares Shares
-------------------- ------ ------ ------
Life of Class (+) -3.62% 0.74% 0.74%
(+) Since April 3, 2000.
(1) The Initial Investment and adjusted amounts for Class A shares were
adjusted for the maximum initial sales charge at the beginning of the
period, which is 5.75%. The Initial Investment for Class B and Class C
shares was not adjusted. Amounts were adjusted for Class B shares for the
contingent deferred sales charge that may be imposed at the end of the
period based upon the schedule for shares sold currently, see "Redemption
or Repurchase of Shares" in the prospectus. No adjustments were made to
Class C shares. Amounts were adjusted for Class C shares for the contingent
deferred sales charge that may be imposed for periods less than one year.
(2) Includes short-term capital gain dividends, if any.
Officers and Trustees
The officers and trustees of the Funds, their birth dates, their principal
occupations and their affiliations, if any, with the Adviser and KDI are listed
below:
JAMES E. AKINS (10/15/26), Trustee, 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs; formerly, a
career United States Foreign Service Officer, Energy Adviser for the White
House; United States Ambassador to Saudi Arabia, 1973-76.
JAMES R. EDGAR ( 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.
LINDA C. COUGHLIN (1/1/52), Trustee*, Two International Place, Boston,
Massachusetts; Managing Director, Scudder Kemper.
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.
27
<PAGE>
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.
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.
KATHLEEN MILLARD ( ), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser.
JAMES M. EYSENBACH (4/1/62), Vice President, 333 South Hope Street, Los Angeles,
California; Senior Vice President, Scudder Kemper.
* "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 $140,800
James R. Edgar (1) $0
Arthur R. Gottschalk (2) $146,300
Frederick T. Kelsey $141,300
Fred B. Renwick $141,300
John G. Weithers $146,300
</TABLE>
28
<PAGE>
* Estimated
(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 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 Kemper funds, with
fund portfolios. Each trustee currently serves as a board member of
Kemper Funds with fund portfolios.
The Board of Trustees is responsible for the general oversight of the Fund's
business. A majority of the Board's members are not affiliated with Scudder
Kemper Investments, Inc.
As of November 30, 2000, the officers and trustees of the Fund, as a group,
owned less than 1% of the then outstanding shares of the Fund and no person
owned of record 5% or more of the outstanding shares of any class of the Fund,
except the persons indicated in the chart below:.
<TABLE>
<CAPTION>
----------------------------------------- --------------------------------------- --------------------------------------
KEMPER S&P 500 INDEX FUND
----------------------------------------- --------------------------------------- --------------------------------------
<S> <C> <C>
Scudder Trust Company
FBO Credence Systems
11 Northeastern Blvd.
Salem, NH 03079-1953 A 10.57
----------------------------------------- --------------------------------------- --------------------------------------
SSC Investment Corporation
345 Park Avenue
New York, NY 10154 A 5.95
----------------------------------------- --------------------------------------- --------------------------------------
SSC Investment Corporation
345 Park Avenue
New York, NY 10154 B 54.18
----------------------------------------- --------------------------------------- --------------------------------------
SSC Investment Corporation
345 Park Avenue
New York, NY 10154 C 53.72
----------------------------------------- --------------------------------------- --------------------------------------
</TABLE>
Shareholder Rights
The Fund is a series of Kemper Funds Trust, an open-end Massachusetts business
trust established under an Agreement and Declaration of Trust of the Trust (the
"Declaration of Trust") dated October 14, 1998.
The Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having a par value of $.01, which may be
divided by the Board of Trustees into classes of shares. The Board of Trustees
of the Fund may authorize the issuance of additional classes and additional
Portfolios if deemed desirable, each with its own investment objective, policies
and restrictions. Since the Trust may offer multiple Portfolios, it is known as
a "series company." Currently, the Fund offers three classes of shares. These
are Class A, Class B, and Class C. 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 each such class' Rule 12b-1 Plan. Shares of each
class also have equal rights with respect to dividends, assets and liquidation
of the Fund subject to any preferences (such as resulting from different Rule
12b-1 distribution fees), rights or privileges of any classes of shares of the
Fund. Shares are fully paid and nonassessable when issued, are transferable
without restriction and have no preemptive or conversion rights. If shares of
more than one Portfolio are outstanding, shareholders will vote by Portfolio and
not in
29
<PAGE>
the aggregate or by class except when voting in the aggregate is required under
the 1940 Act, such as for the election of trustees, or when voting by class is
appropriate.
The Fund generally is not required to hold meetings of its shareholders. Under
the Declaration of Trust, however, shareholder meetings will be held in
connection with the following matters: (a) the election or removal of trustees
if a meeting is called for such purpose; (b) the adoption of any contract for
which approval by shareholders is required by the 1940 Act; (c) any termination
of the Fund or a class to the extent and as provided in the Declaration of
Trust; (d) any amendment of the Declaration of Trust (other than amendments
changing the name of the Fund, supplying any omission, curing any ambiguity or
curing, correcting or supplementing any defective or inconsistent provision
thereof); and (e) such additional matters as may be required by law, the
Declaration of Trust, the By-laws of the Trust, or any registration of the Fund
with the SEC or any state, or as the trustees may consider necessary or
desirable. The shareholders also would vote upon changes in fundamental policies
or restrictions.
Any matter shall be deemed to have been effectively acted upon with respect to
the Fund if acted upon as provided in Rule 18f-2 under the 1940 Act, or any
successor rule, and in the Trust's Declaration of Trust. As used in this
Statement of Additional Information, the term "majority," when referring to the
approvals to be obtained from shareholders in connection with general matters
affecting the Fund and all additional portfolios (e.g., election of trustees),
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 only the 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 Fund will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Any of the Trustees may be removed (provided the aggregate number of Trustees
after such removal shall not be less than one) with cause, by the action of
two-thirds of the remaining Trustees. Any Trustee may be removed at any meeting
of shareholders by vote of two-thirds of the Outstanding Shares. The Trustees
shall promptly call a meeting of the shareholders for the purpose of voting upon
the question of removal of any such Trustee or Trustees when requested in
writing to do so by the holders of not less than ten percent of the Outstanding
Shares, and in that connection, the Trustees will assist shareholder
communications to the extent provided for in Section 16(c) under the 1940 Act. A
majority of the Trustees shall be present in person at any regular or special
meeting of the Trustees in order to constitute a quorum for the transaction of
business at such meeting and, except as otherwise required by law, the act of a
majority of the Trustees present at any such meetings, at which a quorum is
present, shall be the act of the Trustees.
The Trust's Declaration of Trust specifically authorizes the Board of Trustees
to terminate the Fund or any class by notice to the shareholders without
shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of the
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund and the Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by the Manager remote and
not material, since it is limited to circumstances in which a disclaimer is
inoperative and the Fund itself is unable to meet its obligations.
30
<PAGE>
The assets of the Trust received for the issue or sale of the shares of each
series and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
are entitled to receive as a class the underlying assets of such shares
available for distribution to shareholders.
The Fund's activities are supervised by the Trust's Board of Trustees. The Trust
has adopted a plan pursuant to Rule 18f-3 (the "Plan") under the 1940 Act to
permit the Trust to establish a multiple class distribution system. Under the
Plan, shares of each class represent an equal pro rata interest in the Fund and,
generally, shall have identical voting, dividend, liquidation, and other rights,
preferences, powers, restrictions, limitations, qualifications and terms and
conditions, except that: (1) each class shall have a different designation; (2)
each class of shares shall bear its own "class expenses;" (3) each class shall
have exclusive voting rights on any matter submitted to shareholders that
relates to its administrative services, shareholder services or distribution
arrangements; (4) each class shall have separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class; (5) each class may have separate and distinct
exchange privileges; (6) each class may have different conversion features, and
(7) each class may have separate account size requirements. Expenses currently
designated as "Class Expenses" by the Trust's Board of Trustees under the Plan
include, for example, transfer agency fees attributable to a specific class, and
certain securities registration fees.
Master/feeder Fund Structure
The Board has the discretion to retain the current distribution arrangement for
the Fund while investing in a master fund in a master/feeder structure fund as
described below.
A master/feeder fund structure is one in which the Fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
INVESTMENT MANAGER
Scudder Kemper Investments, Inc. (the "Investment Manager"), an investment
counsel firm, acts as investment adviser to the Fund. This organization, the
predecessor of which is Scudder, Stevens & Clark, Inc., is one of the most
experienced investment counsel firms in the U. S. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual fund to the public. In 1953 the Investment Manager introduced Scudder
International Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985.
On December 31, 1997, Zurich Insurance Company ("Zurich") acquired a majority
interest in the Investment Manager, and Zurich Kemper Investments, Inc., a
Zurich subsidiary, became part of the Investment Manager. The Investment
Manager's name changed to Scudder Kemper Investments, Inc.
31
<PAGE>
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 Group. By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Investment Manager's income is professional fees
received from providing continuous investment advice. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations as well as providing investment advice to over [XX] open and
closed-end mutual funds.
The Investment Manager maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Investment Manager receives
published reports and statistical compilations from issuers and other sources,
as well as analyses from brokers and dealers who may execute portfolio
transactions for the Investment Manager's clients. However, the Investment
Manager regards this information and material as an adjunct to its own research
activities. The Investment Manager's international investment management team
travels the world, researching hundreds of companies. In selecting the
securities in which the Fund may invest, the conclusions and investment
decisions of the Investment Manager with respect to the Funds are based
primarily on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other clients
advised by the Investment Manager. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Investment Manager to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale orders for the Fund may be
combined with those of other clients of the Investment Manager in the interest
of achieving the most favorable net results to that fund.
In certain cases, the investments for the Fund are managed by the same
individuals who manage one or more other mutual funds advised by the Investment
Manager, that have similar names, objectives and investment styles. You should
be aware that the Fund is likely to differ from these other mutual funds in
size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of the Fund can be expected to vary from those of these other mutual
funds.
Pursuant to an investment management agreement (the "Agreement"), the Advisor
acts as the investment manager of the Fund, manages its investments, administers
its business affairs, furnishes office facilities and equipment, provides
clerical, bookkeeping and administrative services, and permits any of its
officers or employees to serve without compensation as trustees or officers of
KFT if elected to such positions. The investment management agreement provides
that the Fund pays the charges and expenses of its operations, including the
fees and expenses of the trustees (except those who are affiliates of the
Advisor or its affiliates), independent auditors, counsel, custodian and
transfer agent and the cost of share certificates, reports and notices to
shareholders, brokerage commissions or transaction costs, costs of calculating
net asset value and maintaining all accounting records therefor, taxes and
membership dues. The Fund bears the expenses of registration of its shares with
the SEC and pays the cost of qualifying and maintaining the qualification of the
Fund's shares for sale under the securities laws of the various states ("Blue
Sky expenses").
32
<PAGE>
The Agreement will continue in effect until September 30, 2001, and from year to
year thereafter only if its continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreement or interested
persons of the Advisor or the Fund, cast in person at a meeting called for the
purpose of voting on such approval, and either by a vote of the Trust's Trustees
or of a majority of the outstanding voting securities of the Fund. The Agreement
may be terminated at any time without payment of penalty by either party on
sixty days' notice and automatically terminates in the event of its assignment.
Under the Agreement, the Advisor provides the Fund with continuing investment
management for the Fund's portfolio consistent with the Fund's investment
objectives, policies and restrictions and determines which securities shall be
purchased for the portfolio of the Fund, which portfolio securities shall be
held or sold by the Fund and what portion of the Fund's assets shall be held
uninvested, subject always to the provisions of the Trust's Declaration of Trust
and By-Laws, the 1940 Act and the Internal Revenue Code of 1986, as amended (the
"Code") and to the Fund's investment objectives, policies and restrictions and
subject, further, to such policies and instructions as the Trustees may from
time to time establish. The Advisor also advises and assists the officers of the
Fund in taking such steps as are necessary or appropriate to carry out the
decisions of its Trustees and the appropriate committees of the Trustees
regarding the conduct of the business of the Fund.
The Advisor also renders significant administrative services (not otherwise
provided by third parties) necessary for the Fund's operations as a series of an
open-end investment company including, but not limited to, preparing reports and
notices to the Trustees and shareholders; supervising, negotiating contractual
arrangements with, and monitoring various third-party service providers to the
Fund (such as the Fund's transfer agent, pricing agents, custodian, accountants
and others); preparing and making filings with the SEC and other regulatory
agencies; assisting in the preparation and filing of the Fund's federal, state
and local tax returns; preparing and filing the Fund's federal excise tax
returns; assisting with investor and public relations matters; monitoring the
valuation of securities and the calculation of net asset value; monitoring the
registration of shares of the Fund under applicable federal and state securities
laws; maintaining the Fund's books and records to the extent not otherwise
maintained by a third party; assisting in establishing accounting policies of
the Fund; assisting in the resolution of accounting and legal issues;
establishing and monitoring the Fund's operating budget; processing the payment
of the Fund's bills; assisting the Fund in, and otherwise arranging for, the
payment of distributions and dividends; and otherwise assisting the Fund in the
conduct of its business, subject to the direction and control of the Trustees.
The Advisor pays the compensation and expenses of all Trustees, officers and
executive employees of KFT affiliated with the Advisor and makes available,
without expense to KFT, the services of such Trustees, officers and employees of
the Advisor as may duly be elected officers or Trustees of KFT, subject to their
individual consent to serve and to any limitations imposed by law, and provides
KFT's office space and facilities.
Under the Agreement, the Fund is responsible for all of its other expenses
including organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; the calculation of net asset value; taxes and
governmental fees; the fees and expenses of the transfer agent; the cost of
preparing stock certificates and any other expenses including clerical expenses
of issue, redemption or repurchase of shares; the fees and expenses of Trustees,
officers and employees of KFT who are not affiliated with the Advisor; the cost
of printing and distributing reports and notices to shareholders; and the fees
and disbursements of custodians. The Fund may arrange to have third parties
assume all or part of the expenses of sale, underwriting and distribution of
shares of the Fund. The Fund is also responsible for its expenses incurred in
connection with litigation, proceedings and claims and the legal obligation it
may have to indemnify its officers and Trustees with respect thereto.
The Agreement expressly provides that the Advisor shall not be required to pay a
pricing agent of the Fund for portfolio pricing services, if any.
The Fund pays the Advisor an investment management fee at the annual rate of
.40% for the first $100 million of net assets, .36% on the next $100 million of
net assets, and .34% on net assets over $200 million. The fee is payable
monthly, provided that the Fund will make such interim payments as may be
requested by the Advisor not to exceed 75% of the amount of the fee then accrued
on the books of the Fund and unpaid. All of the Fund's expenses are paid out of
gross investment income.
33
<PAGE>
In reviewing the terms of the Agreement and in discussions with the Advisor
concerning such Agreement, the Trustees of KFT who are not "interested persons"
of KFT have been represented by Vedder, Price, Kaufman & Kammholz, as
independent counsel at the Fund's expense.
The Agreement provides that the Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Advisor in
the performance of its duties or from reckless disregard by the Advisor of its
obligations and duties under the Agreement.
Officers and employees of the Advisor from time to time may enter into
transactions with various banks, including the Fund's custodian bank. It is the
Advisor's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Fund
relationships.
None of the officers or Trustees of KFT may have dealings with KFT as principals
in the purchase or sale of securities, except as individual subscribers or
holders of shares of the Fund.
The Fund, Advisor, Sub-advisor and Distributor have each adopted a Code of
Ethics. Access persons (as defined in the Code) are permitted to make personal
securities transactions, subject to requirements and restrictions set forth in
the Codes of Ethics. The Codes of Ethics contain provisions and requirements
designed to identify and address certain conflicts of interest between personal
investment activities and the interests of investment advisory clients such as
those of the Fund. Among other things, the Codes of Ethics, which generally
comply with standards recommended by the Investment Company Institute's Advisory
Group on Personal Investing, prohibit certain types of transactions absent prior
approval, impose time periods during which personal transactions may not be made
in certain securities, and require the submission of duplicate broker
confirmations and monthly reporting of securities transactions. Additional
restrictions apply to portfolio managers, traders, research analysts and others
involved in the investment advisory process. Exceptions to these and other
provisions of the Codes of Ethics may be granted in particular circumstances
after review by appropriate personnel.
The term Scudder Investments is the designation given to the services provided
by Scudder Kemper Investments, Inc. and its affiliates to the Scudder Family of
Funds.
The Manager may serve as adviser to other funds with investment objectives and
policies similar to those of the Funds that may have different distribution
arrangements or expenses, which may affect performance.
Principal Underwriter. Pursuant to an underwriting and distribution services
agreement ("distribution agreement"), Kemper Distributors, Inc. ("KDI"), 222
South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the Advisor, is
the principal underwriter and distributor for the shares of KFT and acts as
agent of KFT 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. KFT pays the cost for the prospectus and
shareholder reports to be set in type and printed for existing shareholders, and
KDI, as principal underwriter, pays for the printing and distribution of copies
thereof used in connection with the offering of shares to prospective investors.
KDI also pays for supplementary sales literature and advertising costs.
Class A Shares. KDI receives no compensation from the Fund as principal
underwriter for Class A shares and pays all expenses of distribution of the
Fund's Class A shares under the distribution agreements not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of Class A shares and
pays out a portion of this sales charge or allows concessions or discounts to
firms for the sale of the Fund's Class A shares.
Class B And C Shares. Since the 12b-1 Plan provides for fees payable as an
expense of each of the Class B shares and the Class C shares that are used by
KDI to pay for distribution services for those classes, each agreement is
approved and reviewed separately for the Class B shares and the Class C shares
in accordance with Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"), which regulates the manner in which an investment company may,
directly or indirectly, bear the expenses of distributing its shares.
For its services under the 12b-1 Plan, KDI receives a fee from the Fund, payable
monthly, at the annual rate of 0.75% of average daily net assets of the Fund
attributable to its Class B shares. This fee is accrued daily as an
34
<PAGE>
expense of Class B shares. KDI also receives any contingent deferred sales
charges received on redemptions of Class B shares. See "Redemption or Repurchase
of Shares -- Contingent Deferred Sales Charge -- Class B Shares." KDI currently
compensates firms for sales of Class B shares at a commission rate of 3.75%.
For its services under the 12b-1 Plan, KDI receives a fee from the Fund, payable
monthly, at the annual rate of 0.75% of average daily net assets of the Fund
attributable to its Class C shares. This fee is accrued daily as an expense of
Class C shares. KDI currently advances to firms the first year distribution fee
at a rate of 0.75% of the purchase price of Class C shares. For periods after
the first year, KDI currently pays firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm and the fee
continues until terminated by KDI or the Fund. KDI also receives any contingent
deferred sales charges. See "Redemption or Repurchase of Shares -- Contingent
Deferred Sales Charges -- Class C Shares."
Rule 12b-1 Plan. The Fund has adopted a plan under Rule 12b-1 (the "Rule 12b-1
Plan") that provides for fees payable as an expense of the Class B shares and
Class C shares that are used by KDI to pay for distribution and services for
those classes. Because 12b-1 fees are paid out of fund assets on an ongoing
basis they will, over time, increase the cost of an investment and cost more
than other types of sales charges.
Since the distribution agreement provides for fees payable as an expense of the
Class B shares and the Class C shares that are used by KDI to pay for
distribution services for those classes, that agreement will be approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares. The Fund's Rule 12b-1 Plan is separate from its
distribution agreement.
If a Rule 12b-1 Plan (the "Plan") for a class is terminated in accordance with
its terms, the obligation of the Fund to make payments to KDI pursuant to such
Plan will cease and the Fund will not be required to make any payments past the
termination date. Thus, there is no legal obligation for the Fund to pay any
expenses incurred by KDI in excess of its fees under a Plan, if for any reason
the Plan is terminated in accordance with its terms. Future fees under a Plan
may or may not be sufficient to reimburse KDI for its expenses incurred.
The distribution agreement and Rule 12b-1 Plan continues in effect from year to
year so long as such continuance is approved for each class at least annually by
a vote of the Board of Trustees of KFT, including the Trustees who are not
interested persons of KFT and who have no direct or indirect financial interest
in the agreement. The agreement automatically terminates in the event of its
assignment and may be terminated for a class at any time without penalty by the
Fund for that Fund or by KDI upon 60 days' notice. Termination by the 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 KFT 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 12b-1 Plan may not be amended for a class to increase the fee to
be paid by the Fund with respect to such class without approval by a majority of
the outstanding voting securities of such class of the Fund and all material
amendments must in any event be approved by the Board of Trustees in the manner
described above with respect to the continuation of the agreement.
Sub-Advisor. Bankers Trust Company is located at 885 Third Avenue, 32nd Floor,
New York, New York 10022. The Sub-advisor serves as sub-advisor pursuant to the
terms of a sub-advisory agreement between it and the Advisor. Bankers Trust, a
New York banking corporation with principal offices at 130 Liberty Street, New
York, New York, 10006, is a wholly owned subsidiary of Deutsche Bank AG, and one
of the nation's leading managers of index funds
Under the terms of the Sub-Advisory Agreement, the Sub-advisor manages the
investment and reinvestment of the Fund's portfolio and will provide such
investment advice, research and assistance as the Advisor may, from time to
time, reasonably request. The Advisor pays the Sub-advisor for its services a
sub-advisory fee, payable monthly, at the annual rate of .07% on the first $100
million of net assets, .03% on the next $100 million of net assets, and .01% on
the balance over $200 million. The minimum annual sub-advisor fees will be
$50,000 in the first year of operation, $75,000 the second year and $100,000
thereafter.
The Sub-Advisory Agreement provides that the Sub-advisor will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Sub-Advisory Agreement
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<PAGE>
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Sub-advisor in the performance of its duties or
from reckless disregard by the Sub-advisor of its obligations and duties under
the Sub-Advisory Agreement.
The Sub-Advisory Agreement dated March 31, 2000, was approved by the Trustees on
March 22, 2000, and remains in effect until September 30, 2001, unless sooner
terminated or not annually approved as described below. Notwithstanding the
foregoing, the Sub-Advisory Agreement shall continue in effect through September
30, 2001, and year to year thereafter, but only as long as such continuance is
specifically approved at least annually (a) by a majority of the trustees who
are not parties to such agreement or interested persons of any such party except
in their capacity as trustees of KFT, and (b) by the shareholders of the Fund or
the Board of Trustees of KFT. The Sub-Advisory Agreement may be terminated at
any time upon 60 days' notice by the Advisor or by the Board of Trustees of the
Fund or by majority vote of the outstanding shares of the Fund, and will
terminate automatically upon assignment or upon termination of the Fund's
investment management agreement. The Sub-advisor may terminate the Sub-Advisory
Agreement upon 60 days' notice to the Advisor.
On March 11, 1999, Bankers Trust Company announced that it had reached an
agreement with the United States Attorney's Office in the Southern District of
New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record keeping problems that occurred between 1994
and early 1996. Pursuant to its agreement with the U.S. Attorney's Office,
Bankers Trust Company pleaded guilty to misstating entries in its books and
records, and agreed to pay a $60 million fine to federal authorities.
Separately, Bankers Trust Company agreed to pay a $3.5 million fine to the State
of New York. The events leading up to the guilty pleas did not arise out of the
investment advisory or mutual fund management activities of Bankers Trust
Company or its affiliates.
As a result of the plea, absent an order from the SEC, Bankers Trust Company
would not be able to continue to provide investment advisory services to the
Fund. The SEC has granted a temporary order to permit Bankers Trust Company and
its affiliates to continue to provide investment advisory services to registered
investment companies. Bankers Trust Company has submitted an application for a
permanent order; however, there is no assurance that the SEC will grant a
permanent order.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Investment Manager and AMA Solutions, Inc.,
a subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
Scudder has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by Scudder with respect to assets invested by AMA members in Scudder
funds in connection with the AMA InvestmentLink(SM) Program. Scudder will also
pay AMA Solutions, Inc. a general monthly fee, currently in the amount of $833.
The AMA and AMA Solutions, Inc. are not engaged in the business of providing
investment advice and neither is registered as an investment adviser or
broker/dealer under federal securities laws. Any person who participates in the
AMA InvestmentLink(SM) Program will be a customer of Scudder (or of a subsidiary
thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLink(SM) is a
service mark of AMA Solutions, Inc.
Code of Ethics
The Fund, the Investment Manager and principal underwriter have each adopted
codes of ethics under rule 17j-1 of the Investment Company Act. Board members,
officers of the Fund and employees of the Investment Manager and principal
underwriter are permitted to make personal securities transactions, including
transactions in securities that may be purchased or held by the Fund, subject to
requirements and restrictions set forth in the applicable Code of Ethics. The
Investment Manager's Code of Ethics contains provisions and requirements
designed to identify and address certain conflicts of interest between personal
investment activities and the interests of the Fund. Among other things, the
Investment Manager's Code of Ethics prohibits certain types of transactions
absent prior approval, imposes time periods during which personal transactions
may not be made in certain securities, and requires the submission of duplicate
broker confirmations and quarterly reporting of securities transactions.
Additional restrictions apply to portfolio managers, traders, research analysts
and others involved in the investment advisory process. Exceptions to these and
other provisions of the Investment Manager's Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
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<PAGE>
Administrative Services. Administrative services are provided to the Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all its expenses of providing services pursuant to the administrative
agreement between KDI and the Fund, including the payment of service fees. For
the services under the administrative agreement, the Fund pays KDI an
administrative services fee, payable monthly, at the annual rate of up to 0.25%
of average daily net assets of each class of the Fund.
KDI has entered into related arrangements with various broker-dealer firms and
other service or administrative firms ("firms") that provide services and
facilities for their customers or clients who are investors of the Fund. The
firms provide such office space and equipment, telephone facilities and
personnel as is necessary or beneficial for providing information and services
to their clients. Such services and assistance may include, but are not limited
to, establishing and maintaining accounts and records, processing purchase and
redemption transactions, answering routine inquiries regarding the Fund,
assistance to clients in changing dividend and investment options, account
designations and addresses and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. With respect to Class A shares, KDI pays each firm a service fee,
payable quarterly, at an annual rate of up to 0.25% of the net assets in the
Fund's accounts that it maintains and services attributable to Class A shares,
commencing with the month after investment. With respect to Class B and Class C
shares, KDI currently advances to firms the first-year service fee at a rate of
up to 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 a rate of up to 0.25%
(calculated monthly and normally paid quarterly) of the net assets attributable
to Class B and C shares maintained and serviced by the firm. After the first
year, a firm becomes eligible for the quarterly service fee and the fee
continues until terminated by KDI or KFT. Firms to which service fees may be
paid may include affiliates of KDI. In addition, KDI may, from time to time,
from its own resources, pay certain additional amounts for ongoing
administrative services and assistance provided to their customers and clients
who are shareholders of the Fund.
Administrative services fees paid by the Fund are set forth below:
<TABLE>
<CAPTION>
Administrative Service Fees Paid by Fund
----------------------------------------
-------------------------- ----------- -------------- ------------- ----------- ----------------- -------------------
Service Fees Paid
Total Service by
Fiscal Fees Paid by KDI to KDI
Fund Year Class A Class B Class C KDI to Firms Affiliated Firms
-------------------------- ----------- -------------- ------------- ----------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
S&P 500 Index Fund 2000
-------------------------- ----------- -------------- ------------- ----------- ----------------- -------------------
</TABLE>
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is payable at an annual rate of 0.25%
based upon Fund assets in accounts for which a firm provides administrative
services, and at an annual rate of 0.15% based upon Fund 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 the Fund while this procedure is in effect will depend upon the proportion of
the Fund assets that is in accounts for which there is a firm of record. The
Board of Trustees of the Fund, in its discretion, may approve basing the fee to
KDI 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 Fund.
The effective administrative services fee rate to be charged against all assets
of the Fund while this procedure is in effect will depend upon the proportion of
Fund assets that is in accounts for which a firm of record provides
administrative services, as well as, with respect to Class A shares acquired
prior to October 1, 1993, the date when shares representing such assets were
purchased.
Certain trustees or officers of the Funds are also directors or officers of
Scudder Kemper or KDI as indicated under "Officers and Trustees."
Custodian, Transfer Agent And Shareholder Service Agent. State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts, as custodian has
custody of all securities and cash of the Fund. It attends to
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<PAGE>
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by KFT. Kemper Service Company ("KSvC"),
an affiliate of the Advisor, serves as transfer agent and dividend-paying agent
and "Shareholder Service Agent" of the Fund. 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 charges
(Class B only), an asset-based fee of 0.08% and out-of-pocket reimbursement. For
the fiscal period ended August 31, 2000, the Fund paid fees to KSvc amounting to
$________.
Independent Auditors And Reports To Shareholders. The Fund's independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Fund's annual financial statements, review certain
regulatory reports and the Fund's federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Fund. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
Legal Counsel. The firm of Dechert serves as legal counsel to the Fund.
TAXES
The Fund intends to qualify as a regulated investment company under Subchapter M
of the Code and, if so qualified, generally will not be subject to federal
income taxes to the extent its earnings are distributed. To so qualify, the Fund
must satisfy certain income and asset diversification requirements, and must
distribute to its shareholders at least 90% of its investment company taxable
income (including net short-term capital gain). Distributions of investment
company taxable income are taxable to shareholders as ordinary income.
If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of the Fund's
earnings and profits, and would be eligible for the dividends-received deduction
in the case of corporate shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 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)
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.
Investment company taxable income includes dividends, interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund.
If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by the Fund for reinvestment, requiring federal
income taxes to be paid thereon by the Fund, the Fund intends to elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim a relative share of federal income taxes paid by the Fund on such
gains as a credit against personal federal income tax liability, and will be
entitled to increase the adjusted tax basis on Fund shares by the difference
between such reported gains and the individual tax credit.
Dividends from domestic corporations are expected to comprise a substantial part
of the Fund's gross income. To the extent that such dividends constitute a
portion of the Fund's gross income, a portion of the income distributions of the
Fund may be eligible for the deduction for dividends received by corporations.
Shareholders will be informed of the portion of dividends which so qualify. The
dividends received deduction is reduced to the extent the shares of the Fund
with respect to which the dividends are received are treated as debt-financed
under federal income tax law, and is eliminated if either those shares or the
shares of the Fund are deemed to have been held by 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.
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<PAGE>
Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss, are taxable to shareholders as long-term
capital gains, 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.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Kemper Fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
Distributions by the Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Equity options (including covered call options on portfolio stock) written or
purchased by the Fund will be subject to tax under Section 1234 of the Code. In
general, no loss is 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 an exercise of the option, on the Fund's holding
period for the underlying security. 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 substantially identical security in
the Fund's portfolio. If the Fund writes a call option, no gain is recognized
upon its receipt of a premium. If the option lapses or is closed out, any gain
or loss is treated as a short-term capital gain or loss. If a call option is
exercised, any resulting gain or loss is short-term or long-term capital gain or
loss depending on the holding period of the underlying security. The exercise of
a put option written by the Fund is not a taxable transaction for the Fund.
Many futures and forward contracts entered into by the Fund and all listed
nonequity options written or purchased by the Fund (including covered call
options written on debt securities and options purchased or written on futures
contracts) 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 will be treated as 60% long-term and 40% short-term, and on
the last trading day of the Fund's fiscal year (and generally, 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 closed out at their
closing price on such day), with any resulting gain or loss recognized as 60%
long-term and 40% short-term. Under 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. Under Section 988
of the Code, discussed below, foreign currency gain or loss from foreign
currency-related forward contracts, certain futures and similar financial
instruments entered into by the Fund will be treated as ordinary income or loss.
Positions of the Fund consisting 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 stock
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for any "qualified covered
call options" on stock written by the Fund.
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<PAGE>
Positions of the Fund consisting of at least one position not governed by
Section 1256 and at least one future, forward, or nonequity option contract
which is governed by Section 1256 which substantially diminishes the Fund's risk
of loss with respect to such other position will be treated as a "mixed
straddle." Although mixed straddles are subject to the straddle rules of Section
1092 of the Code, certain tax elections exist for them which reduce or eliminate
the operation of these rules. The Fund will monitor its transactions in options
and futures and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, Section 1259 of the Code may require the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, under Section 1233(h) of the Code, if the Fund enters into a short
sale of property that becomes substantially worthless, the Fund will be required
to recognize gain at that time as though it had closed the short sale. Future
regulations may apply similar treatment to other strategic transactions with
respect to property that becomes substantially worthless.
The Fund will be required to report to the Internal Revenue Service ("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
non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if a
shareholder or the Fund is notified by the IRS or a broker that the taxpayer
identification number furnished by the shareholder is incorrect or that the
shareholder has previously failed to report interest or dividend income. If the
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in additional shares, will be reduced by the
amounts required to be withheld.
A shareholder who redeems shares of the Fund that are held as a capital asset
will recognize capital gain or loss for federal income tax purposes measured by
the difference between the value of the shares redeemed and the adjusted cost
basis of the shares. Any loss recognized on the redemption of Fund shares held
six months or less will be treated as long-term capital loss to the extent that
the shareholder has received any long-term capital gain dividends on such
shares. A shareholder who has redeemed shares of the Fund or any other Kemper
Fund listed under "Special Features -- Class A Shares -- Combined Purchases"
(other than shares of Kemper Cash Reserves Fund not acquired by exchange from
another Kemper Mutual Fund) may reinvest the amount redeemed at net asset value
at the time of the reinvestment in shares of the Fund or in shares of the other
Kemper Mutual Funds within six months of the redemption as described under
"Redemption or Repurchase of Shares -- Reinvestment Privilege." If redeemed
shares were held less than 91 days, then the lesser of (a) the sales charge
waived on the reinvested shares, or (b) the sales charge incurred on the
redeemed shares, is included in the basis of the reinvested shares and is not
included in the basis of the redeemed shares. If a shareholder realizes a loss
on the redemption or exchange of the Fund's shares and reinvests in shares of
the same Fund within 30 days before or after the redemption or exchange, the
transactions may be subject to the wash sale rules resulting in a postponement
of the recognition of such loss for federal income tax purposes. An exchange of
the Fund's shares for shares of another fund is treated as a redemption and
reinvestment for federal income tax purposes upon which gain or loss may be
recognized.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
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The Fund is organized as a Massachusetts business trust and is not liable for
any income or franchise tax in the Commonwealth of Massachusetts, provided that
the Fund continues to be treated as a regulated investment company under
Subchapter M of the Code.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Shareholders should consult their tax advisors about the application of the
provisions of tax law in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Under the sub-advisory agreement between the Advisor and the Sub-advisor, the
Sub-advisor places all orders for purchases and sales of the Fund's securities.
At times investment decisions may be made to purchase or sell the same
investment securities of the Fund and for one or more of the other clients
managed by the Sub-advisor. When two or more such clients are simultaneously
engaged in the purchase or sale of the same security through the same trading
facility, the transactions are allocated as to amount and price in a manner
considered equitable to each. Position limits imposed by national securities
exchanges may restrict the number of options the Fund will be able to write on a
particular security.
The above-mentioned factors may have a detrimental effect on the quantities or
prices of securities, options or future contracts available to the Fund. On the
other hand, the ability of the Fund to participate in volume transactions may
produce better executions for the Fund in some cases. The Board of Trustees
believes that the benefits of the Sub-advisor's organization outweigh any
limitations that may arise from simultaneous transactions or position
limitations.
The Sub-advisor in effecting purchases and sales of portfolio securities for the
account of the Fund, will implement the Fund's policy of seeking best execution
of orders. The Sub-advisor may be permitted to pay higher brokerage commissions
for research services as described below. Consistent with this policy, orders
for portfolio transactions are placed with broker-dealer firms giving
consideration to the quality, quantity and nature of each firm's professional
services, which include execution, financial responsibility, responsiveness,
clearance procedures, wire service quotations and statistical and other research
information provided to the Fund and the Sub-advisor. Subject to seeking best
execution of an order, brokerage is allocated on the basis of all services
provided. Any research benefits derived are available for all clients of the
Sub-advisor. In selecting among firms believed to meet the criteria for handling
a particular transaction, the Sub-advisor may give consideration to those firms
that have sold or are selling shares of the Fund and of other funds managed by
the Advisor and its affiliates, as well as to those firms that provide market,
statistical and other research information to the Fund and the Sub-advisor,
although the Sub-advisor is not authorized to pay higher commissions to firms
that provide such services, except as described below.
The Sub-advisor may in certain instances be permitted to pay higher brokerage
commissions solely for receipt of market, statistical and other research
services as defined in Section 28(e) of the Securities Exchange Act of 1934 and
interpretations thereunder. Such services may include among other things:
economic, industry or company research reports or investment recommendations;
computerized databases; quotation and execution equipment and software; and
research or analytical computer software and services. Where products or
services have a "mixed use," a good faith effort is made to make a reasonable
allocation of the cost of products or services in accordance with the
anticipated research and non-research uses and the cost attributable to
non-research use is paid by the Sub-advisor in cash. Subject to Section 28(e)
and procedures adopted by the Board of Trustees of KFT, the Fund could pay a
firm that provides research services commissions for effecting a securities
transactions for the Fund in excess of the amount other firms would have charged
for the transaction if the Sub-advisor determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing firm viewed in terms either of a particular
transaction or the Sub-advisor's overall responsibilities to the Fund and other
clients. Not all of such research services may be useful or of value in advising
the Fund. Research
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<PAGE>
benefits will be available for all clients of the Sub-advisor. The sub-advisory
fee paid by the Advisor to the Sub-advisor is not reduced because these research
services are received.
The Trustees for the Fund review from time to time whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
Portfolio Turnover
Portfolio turnover rate is defined by the SEC as the ratio of the lesser of
sales or purchases to the monthly average value of such securities owned during
the year, excluding all securities whose remaining maturities at the time of
acquisition were one year or less.
Higher levels of activity by the Fund result in higher transaction costs and may
also result in taxes on realized capital gains to be borne by the Fund's
shareholders. Purchases and sales are made for the Fund whenever necessary, in
management's opinion, to meet the Fund's objective.
The Fund's portfolio turnover rate for the fiscal period ended August 31, 2000
was ___%.
FINANCIAL STATEMENTS
The financial statements appearing in the Fund's Annual Report to Shareholders
are incorporated herein by reference. The Fund's Annual Report accompanies this
Statement of Additional Information.
42
<PAGE>
APPENDIX -- RATINGS OF INVESTMENTS
S&P Bond Ratings
AAA. Debt rated AAA had the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC and C. Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Moody's Bond Ratings
AAA. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
<PAGE>
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Fitch Long-Term Debt Ratings
AAA. Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA. Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A. High credit quality. `A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB. Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
BB. Speculative. `BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B. Highly speculative. `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C. High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A `CC' rating indicates that default of some
kind appears probable. `C' ratings signal imminent default.
DDD, DD, D. Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. `DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. `DD' indicates
potential recoveries in the range of 50%-90%, and `D' the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated `DDD' have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated `DD' and `D' are generally undergoing a formal
reorganization or liquidation process; those rated `DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated `D' have a
poor prospect for repaying all obligations.
2
<PAGE>
Fitch Short-Term Debt Ratings
F1. Highest credit quality. Indicates the Best capacity for timely payment of
financial commitments; may have an added "+" to denote any exceptionally strong
credit feature.
F2. Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3. Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
B. Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C. High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D. Default. Denotes actual or imminent payment default.
Commercial Paper Ratings
Commercial paper rated by Standard & Poor's Ratings Services ("S&P") has the
following characteristics: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated "A" or better. The issuer has
access to at least two additional channels of borrowing. Basic earnings and cash
flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1 or A-2.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service, Inc. ("Moody's"). Among the factors
considered by it in assigning ratings are the following: (1) evaluation of the
management of the issuer; (2) economic evaluation of the issuer's industry or
industries and an appraisal of speculative-type risks which may be inherent in
certain areas; (3) evaluation of the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the issuer;
and (8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations. Relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated Prime-1 or 2.
Municipal Notes
Moody's: The highest ratings for state and municipal short-term obligations are
"MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG 3" in the case of
an issue having a variable rate demand feature). Notes rated "MIG 1" or "VMIG 1"
are judged to be of the "best quality". Notes rated "MIG 2" or "VMIG 2" are of
"high quality," with margins or protection "ample although not as large as in
the preceding group". Notes rated "MIG 3" or "VMIG 3" are of "favorable
quality," with all security elements accounted for but lacking the strength of
the preceding grades.
S&P: The "SP-1" rating reflects a "very strong or strong capacity to pay
principal and interest". Notes issued with "overwhelming safety characteristics"
will be rated "SP-1+". The "SP-2" rating reflects a "satisfactory capacity" to
pay principal and interest.
Fitch: The highest ratings for state and municipal short-term obligations are
"F-1+," "F-1" and "F-2."
3
<PAGE>
KEMPER FUNDS TRUST
PART C
------
OTHER INFORMATION
-----------------
<TABLE>
<CAPTION>
Item 23 Exhibits
------- --------
<S> <C> <C>
(a) Declaration of Trust, dated October 14, 1998, is incorporated by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement.
(1) Certificate of Amendment of Declaration of Trust, dated November
29, 2000, is filed herein.
(b) By-Laws, dated October 14, 1998, is incorporated by reference to
Pre-Effective Amendment No. 1 to the Registration Statement.
(c) (1) Establishment and Designation of Series of Beneficial Interest,
dated October 14, 1998, is incorporated by reference to
Pre-Effective Amendment No. 1 to the Registration Statement.
(1)(a) Redesignation of Series, dated December 14, 2000, is filed herein.
(2) Establishment and Designation of Classes of Shares of Beneficial
Interest, $.01 Par Value dated March 22, 2000, is incorporated by
reference to Post-Effective Amendment No. 8 to the Registration
Statement.
(3) Amended and Restated Establishment and Designation of Series of
Beneficial Interest, dated January 19, 2000, is incorporated by
reference to Post-Effective Amendment No. 8 to the Registration
Statement.
(4) Redesignation of Classes of Shares of Beneficial Interest, dated
November 29, 2000 for Kemper S&P 500 Fund is filed herein.
(5) Redesignation of Classes of Shares of Beneficial Interest, dated
November 29, 2000 for Kemper Research Fund is filed herein.
(6) Redesignation of Classes of Shares of Beneficial Interest, dated
November 29, 2000 for Kemper Large Company Growth Fund is filed
herein.
(d) (1) Investment Management Agreement between the Registrant, on behalf
of Kemper Large Company Growth Fund, and Scudder Kemper
Investments, dated December 28, 1998, is incorporated by reference
to Pre-Effective Amendment No. 1 to the Registration Statement.
(2) Investment Management Agreement between the Registrant, on behalf
of Kemper Research Fund, and Scudder Kemper Investments,
Part C - Page 3
<PAGE>
dated December 28, 1998, is incorporated by reference to Pre-Effective
Amendment No. 1 to the Registration Statement.
(3) Investment Management Agreement between the Registrant, on behalf
of Kemper Small Cap Value+Growth Fund, and Scudder Kemper
Investments, dated December 28, 1998, is incorporated by reference
to Pre-Effective Amendment No. 1 to the Registration Statement.
(4) Investment Management Agreement between the Registrant, on behalf
of Kemper S&P 500 Index Fund, and Scudder Kemper Investments, dated
March 31, 2000, is incorporated by reference to Post-Effective
Amendment No. 8 to the Registration Statement.
(5) Subadvisory Agreement between Scudder Kemper Investments, Inc. and
Bankers Trust Company dated March 31, 2000, is incorporated by
reference to Post-Effective Amendment No. 8 to the Registration
Statement.
(e) (1) Underwriting and Distribution Services Agreement between the
Registrant and Kemper Distributors, Inc., dated December 28, 1998
is incorporated by reference to Pre-Effective Amendment No. 1 to
the Registration Statement.
(e) (2) Underwriting and Distribution Services Agreement between the
Registrant and Kemper Distributors, Inc., dated October 1, 1999, is
incorporated by reference to Post-Effective Amendment No. 8 to the
Registration Statement.
(f) Inapplicable.
(g) Custody Agreement between the Registrant and State Street Bank and
Trust Company is incorporated by reference to Post-Effective
Amendment No. 5 to the Registration Statement, as filed on October
15, 1999.
(g) (1) Amendment, dated April 3, 2000, to Custody Agreement between the
Registrant and State Street Bank and Trust Company, is incorporated
by reference to Post-Effective Amendment No. 8 to the Registration
Statement.
(h) (1) Agency Agreement dated December 28, 1998 is incorporated by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement.
(1)(a) Amendment No. 1 the Agency Agreement dated July 15, 1999 is
incorporated by reference to Post-Effective Amendment No. 5 to the
Registration Statement, as filed on October 15, 1999.
(2) Administrative Services Agreement, dated December 28, 1998, is
incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement.
(3) Fund Accounting Services Agreement between the Registrant, on
behalf of Kemper Large Company Growth Fund, and Scudder Fund
Part C - Page 4
<PAGE>
Accounting Corp., dated December 28, 1998, is incorporated by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement.
(4) Fund Accounting Services Agreement between the Registrant, on
behalf of Kemper Research Fund, and Scudder Fund Accounting Corp.,
dated December 28, 1998, is incorporated by reference to
Pre-Effective Amendment No. 1 to the Registration Statement.
(5) Fund Accounting Services Agreement between the Registrant, on
behalf of Kemper Small Cap Value+Growth Fund, and Scudder Fund
Accounting Corp., dated December 28, 1998, is incorporated by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement.
(6) Fund Accounting Services Agreement between the Registrant, on
behalf of Kemper S&P 500 Index Fund, and Scudder Fund
Accounting Corp., dated March 31, 2000, is incorporated by reference to
Post-Effective Amendment No. 8 to the Registration Statement.
(i) Opinion and Consent of Legal Counsel is filed herein.
(j) Consent of Independent Auditors is filed herein.
(k) Inapplicable.
(l) Inapplicable.
(m) (1) 12b-1 Plan between Kemper Large Company Growth Fund (Class B
shares) and Kemper Distributors, Inc., dated December 28, 1998, is
incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement.
(2) 12b-1 Plan between Kemper Large Company Growth Fund (Class C
shares) and Kemper Distributors, Inc., dated December 28, 1998, is
incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement.
(3) 12b-1 Plan between Kemper Research Fund (Class B shares)and Kemper
Distributors, Inc., dated December 28, 1998, is incorporated by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement.
(4) 12b-1 Plan between Kemper Research Fund (Class C shares) and Kemper
Distributors, Inc., dated December 28, 1998, is incorporated by
reference to Pre-Effective Amendment No. 1 to the Registration
Statement.
(5) 12b-1 Plan between Kemper Small Cap Value+Growth Fund (Class B
shares) and Kemper Distributors, Inc., dated December 28, 1998, is
incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement.
Part C - Page 5
<PAGE>
(6) 12b-1 Plan between Kemper Small Cap Value+Growth Fund (Class C
shares) and Kemper Distributors, Inc., dated December 28, 1998, is
incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement.
(7) 12b-1 Plan between Kemper S&P 500 Index Fund (Class B shares) and
Kemper Distributors, Inc., dated March 31, 2000.
Filed herein.
(8) 12b-1 Plan between Kemper S&P 500 Index Fund (Class C shares) and
Kemper Distributors, Inc., dated March 31, 2000, is incorporated by
reference to Post-Effective Amendment No. 8 to the Registration
Statement.
(n) Multi-Distribution System Plan, dated December 28, 1998, is
incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement.
(p) Code of Ethics of Kemper Funds Trust is incorporated by reference
to Post-Effective Amendment No. 8 to the Registration Statement.
(p)(1) Code of Ethics for Scudder Kemper Investments, Inc. and certain of
its subsidiaries, including Kemper Distributors, Inc. and Scudder
Investor Services, Inc., is filed herein.
(p)(2) Code of Ethics for Bankers Trust Company is filed herein.
</TABLE>
Item 24. Persons Controlled or under Common Control with Fund.
-------- -----------------------------------------------------
None
Item 25. Indemnification
-------- ---------------
As permitted by Sections 17(h) and 17(i) of the Investment
Company Act of 1940, as amended (the "1940 Act"), pursuant to
Article IV of the Registrant's By-Laws (filed as Exhibit No. 2
to the Registration Statement), officers, directors, employees
and representatives of the Funds may be indemnified against
certain liabilities in connection with the Funds, and pursuant
to Section 12 of the Underwriting Agreement dated May 6, 1998
(filed as Exhibit No. 6(c) to the Registration Statement),
Scudder Investor Services, Inc. (formerly "Scudder Fund
Distributors, Inc."), as principal underwriter of the
Registrant, may be indemnified against certain liabilities
that it may incur. Said Article IV of the By-Laws and Section
12 of the Underwriting Agreement are hereby incorporated by
reference in their entirety.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be
permitted to directors, officers and controlling persons of
the Registrant and the principal underwriter pursuant to the
foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer, or
controlling person of the Registrant and the principal
underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant
by such director, officer or controlling person or the
principal underwriter in connection with the shares being
registered, the Registrant will, unless in
Part C - Page 6
<PAGE>
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Adviser
-------- ----------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
Part C - Page 7
<PAGE>
<TABLE>
<CAPTION>
Name Business and Other Connections of Board of Directors of Registrant's Adviser
---- ----------------------------------------------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer, Scudder Kemper Investments, Inc.**
Director, Kemper Service Company
Director, Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director and Treasurer, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Director and Chairman, Scudder Threadneedle International Ltd.
Director, Scudder Kemper Holdings (UK) Ltd. oo
Director and President, Scudder Realty Holdings Corporation *
Director, Scudder, Stevens & Clark Overseas Corporation o
Director and Treasurer, Zurich Investment Management, Inc. xx
Director and Treasurer, Zurich Kemper Investments, Inc.
Lynn S. Birdsong Director, Vice President and Chief Investment Officer, Scudder Kemper Investments, Inc. **
Director and Chairman, Scudder Investments (Luxembourg) S.A. #
Director, Scudder Investments (U.K.) Ltd. oo
Director and Chairman of the Board, Scudder Investments Asia, Ltd. ooo
Director and Chairman, Scudder Investments Japan, Inc. +
Senior Vice President, Scudder Investor Services, Inc.
Director and Chairman, Scudder Trust (Cayman) Ltd. @@@
Director, Scudder, Stevens & Clark Australia x
Director and Vice President, Zurich Investment Management, Inc. xx
Director and President, Scudder, Stevens & Clark Corporation **
Director and President, Scudder , Stevens & Clark Overseas Corporation o
Director, Scudder Threadneedle International Ltd.
Director, Korea Bond Fund Management Co., Ltd. @@
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company xxx
Nicholas Bratt Director and Vice President, Scudder Kemper Investments, Inc.**
Vice President, Scudder MAXXUM Company***
Vice President, Scudder, Stevens & Clark Corporation**
Vice President, Scudder, Stevens & Clark Overseas Corporation o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
8
<PAGE>
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, Chairman of the Board, Zurich Holding Company of America xxx
Director, ZKI Holding Corporation xx
Harold D. Kahn Chief Financial Officer, Scudder Kemper Investments, Inc.**
Kathryn L. Quirk Director and Secretary, Scudder, Stevens & Clark Overseas Corporation o
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President, Chief Legal Officer and Secretary, Scudder Financial Services,
Inc.*
Director, Korea Bond Fund Management Co., Ltd. @@
Director, Scudder Threadneedle International Ltd.
Director, Chairman of the Board and Secretary, Scudder Investments Canada, Ltd.
Director, Scudder Investments Japan, Inc. +
Director and Secretary, Scudder Kemper Holdings (UK) Ltd. oo
Director and Secretary, Zurich Investment Management, Inc. xx
Director, Secretary, Chief Legal Officer and Vice President, Kemper Distributors, Inc.
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc. ###
President and Director, Scudder, Stevens & Clark Overseas Corporation o
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc. @
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
Director, Scudder Threadneedle International Ltd. oo
Director, Scudder Investments Japan, Inc. +
Director, Scudder Kemper Holdings (UK) Ltd. oo
President and Director, Zurich Investment Management, Inc. xx
Director and Deputy Chairman, Scudder Investment Holdings, Ltd.
</TABLE>
* Two International Place, Boston, MA
@ 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449
Luxembourg, R.C. Luxembourg B 34.564
*** Toronto, Ontario, Canada
@@@ Grand Cayman, Cayman Islands, British West Indies
o 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
9
<PAGE>
xx 222 S. Riverside, Chicago, IL
xxx Zurich Towers, 1400 American Ln., Schaumburg, IL
@@ P.O. Box 309, Upland House, S. Church St., Grand
Cayman, British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
oo 1 South Place 5th floor, London EC2M 2ZS England
ooo One Exchange Square 29th Floor, Hong Kong
+ Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon,
Minato-ku, Tokyo 105-0001
x Level 3, 5 Blue Street North Sydney, NSW 2060
Item 27. Principal Underwriters.
-------- -----------------------
(a)
Kemper Distributors, Inc. acts as principal underwriter of the
Registrant's shares and acts as principal underwriter of the Kemper
Funds.
(b)
Information on the officers and directors of Kemper Distributors, Inc.,
principal underwriter for the Registrant is set forth below. The
principal business address is 222 South Riverside Plaza, Chicago,
Illinois 60606.
<TABLE>
<CAPTION>
(1) (2) (3)
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
<S> <C> <C> <C>
Thomas V. Bruns President None
Linda C. Coughlin Director and Vice Chairman None
Kathryn L. Quirk Director, Secretary, Chief Legal Vice President
Officer and Vice President
James J. McGovern Chief Financial Officer and Treasurer None
Linda J. Wondrack Vice President and Chief Compliance Officer Vice President
Paula Gaccione Vice President None
Michael E. Harrington Managing Director None
Todd N. Gierke Assistant Treasurer None
Philip J. Collora Assistant Secretary Vice President and Secretary
Diane E. Ratekin Assistant Secretary None
Mark S. Casady Director and Chairman President
10
<PAGE>
Terrence S. McBride Vice President None
Robert Froelich Managing Director None
C. Perry Moore Senior Vice President and Managing Director None
Lorie O'Malley Managing Director None
William F. Glavin Managing Director None
Gary N. Kocher Managing Director None
Susan K. Crenshaw Vice President None
Johnston A. Norris Managing Director and Senior Vice President None
John H. Robison, Jr. Managing Director and Senior Vice President None
Robert J. Guerin Vice President None
Kimberly S. Nassar Vice President None
Scott B. David Vice President None
Richard A. Bodem Vice President None
</TABLE>
(c) Not applicable
Item 28. Location of Accounts and Records
-------- --------------------------------
Accounts, books and other documents are maintained at the offices of the
Registrant, the offices of Registrant's investment adviser, Scudder Kemper
Investments, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, at the
offices of the Registrant's principal underwriter, Kemper Distributors, Inc.,
222 South Riverside Plaza, Chicago, Illinois 60606 or, in the case of records
concerning custodial functions, at the offices of the custodian, State Street
Bank and Trust Company, 225 Franklin Street, Boston, MA or, in the case of
records concerning transfer agency and shareholder service agent functions,
Kemper Service Company, 811 Main Street, Kansas City, Missouri 64105.
Item 29. Management Services
-------- -------------------
Not applicable.
Item 30. Undertakings
-------- ------------
Not applicable.
11
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Boston and the Commonwealth of
Massachusetts on the 18th day of December 2000.
KEMPER FUNDS TRUST
By /s/ Mark S. Casady
------------------
Mark S. Casady
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ James E. Akins
--------------------------------------
James E. Akins* Trustee December 18, 2000
/s/ Linda C. Coughlin
--------------------------------------
Linda C. Coughlin Trustee December 18, 2000
/s/ James R. Edgar
--------------------------------------
James R. Edgar* Trustee December 18, 2000
/s/ Arthur R. Gottschalk
--------------------------------------
Arthur R. Gottschalk* Trustee December 18, 2000
/s/ Frederick T. Kelsey
--------------------------------------
Frederick T. Kelsey* Trustee December 18, 2000
/s/ Thomas W. Littauer
--------------------------------------
Thomas W. Littauer* Chairman, Trustee and Vice President December 18, 2000
/s/ Kathryn L. Quirk
--------------------------------------
Kathryn L. Quirk* Trustee and Vice President December 18, 2000
/s/ Fred B. Renwick
--------------------------------------
Fred B. Renwick* Trustee December 18, 2000
/s/ John G. Weithers
--------------------------------------
John G. Weithers* Trustee December 18, 2000
<PAGE>
/s/ John R. Hebble
--------------------------------------
John R. Hebble Treasurer (Principal Financial and December 18, 2000
Accounting Officer)
</TABLE>
*By: /s/ Philip J. Collora
---------------------
Philip J. Collora**
** Attorney-in-fact pursuant to powers of attorney for
James E. Akins, Arthur R. Gottschalk, Frederick T. Kelsey,
Thomas W. Littauer, Kathryn L. Quirk, Fred B. Renwick, and
John G. Weithers, incorporated by reference to and contained in
Post-Effective Amendment No. 5 to the Registration Statement.
Attorney-in-fact pursuant to a power of attorney for James R. Edgar,
incorporated by reference to and contained in Post-Effective
Amendment No. 6 to the Registration Statement.
2
<PAGE>
File No. 333-65661
File No. 811-09057
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 10
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 11
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER INVESTORS TRUST
12
<PAGE>
SCUDDER INVESTORS TRUST
EXHIBIT INDEX
Exhibit (a)(1)
Exhibit (c)(1)(a)
Exhibit (c)(4)
Exhibit (c)(5)
Exhibit (c)(6)
Exhibit (i)
Exhibit (j)
Exhibit (p)(1)
Exhibit (p)(2)
13
