Filed electronically with the Securities and Exchange
Commission on November 26, 1999
File No. 33-18477
File No. 811-5385
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. 24 / X /
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 26
/ X /
KEMPER VALUE SERIES, INC.
-------------------------
(Formerly Known as Kemper Value Fund, Inc.)
(Exact Name of Registrant as Specified in Charter)
222 South Riverside Plaza, Chicago, IL 60606
--------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (312) 781-1121
Philip J. Collora, Vice President and Secretary
Kemper Value Series, Inc.
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):
/ / Immediately upon filing pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (1)
/ / 75 days after filing pursuant to paragraph (a) (2)
/ / On __________________ pursuant to paragraph (b)
/ X / On February 1, 2000 pursuant to paragraph (a) (1)
/ / On __________________ pursuant to paragraph (a) (2) of Rule 485
/ / On __________________ pursuant to paragraph (a) (3) of Rule 485.
If Appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
LONG-TERM
INVESTING
IN A
SHORT-TERM
WORLD(SM)
February 1, 2000
KEMPER EQUITY FUNDS/VALUE STYLE
Kemper Contrarian Fund
Kemper-Dreman Financial Services Fund
Kemper-Dreman High Return Equity Fund
Kemper Small Cap Relative Value Fund
As with all mutual funds, the Kemper Small Cap Value Fund
Securities and Exchange
Commission (SEC) does not
approve or disapprove these Kemper U.S. Growth and Income Fund
shares or determine whether the
information in this prospectus
is truthful or complete. It is a Kemper Value Fund
criminal offense for anyone to
inform you otherwise.
[LOGO] KEMPER FUNDS
<PAGE>
.
HOW THE INVESTING IN
FUNDS WORK THE FUNDS
4 Kemper Contrarian 38 Kemper U.S. Growth 54 Choosing A Share
Fund and Income Fund Class
11 Kemper-Dreman 44 Kemper Value Fund 59 How To Buy Shares
Financial Services Fund
18 Kemper-Dreman High 50 Other Policies And 60 How To Exchange Or
Return Equity Fund Risks Sell Shares
26 Kemper Small Cap 52 Financial Highlights 61 Policies You Should
Relative Value Fund Know About
32 Kemper Small Cap 67 Understanding
Value Fund Distributions And
Taxes
<PAGE>
How The Funds Work
These funds invest mainly in common stocks, as a way of seeking growth of your
investment.
The funds invest mainly in companies whose stock prices appear low in light of
other measures of worth, such as earnings, book value or cash flow. Each fund
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. Their share
prices will go up and down, so be aware that you could lose money.
<PAGE>
TICKER SYMBOLS CLASS: A) KDCAX B) KDCBX C KDCCX
Kemper
Contrarian Fund
- --------------------------------------------------------------------------------
FUND GOAL The fund seeks long-term capital appreciation, with current
income as a secondary objective.
4
<PAGE>
The Fund's Strategy
The fund normally invests primarily in common stocks and other equity securities
of large U.S. companies (those with a market value of $1 billion or more) that
the portfolio managers believe are undervalued. Although the fund can invest in
stocks of any economic sector, at times it may emphasize the financial services
sector or other sectors (in fact, it may invest more than 25% of total assets in
a single sector).
The portfolio managers begin by screening for stocks whose price-to-earnings
ratios are below the average for the S&P 500 Index. The managers then compare a
company's stock price to its book value, cash flow and yield, and analyze
individual companies to identify those that are financially sound and appear to
have strong potential for long-term growth.
The managers assemble the fund's portfolio from among the most attractive
stocks, drawing on analysis of economic outlooks for various sectors and
industries. The managers intend to diversify the fund's holdings among sectors
and industries, although, depending on their outlook, they may increase or
reduce the fund's exposure to a given sector or industry.
The fund normally will sell a stock when it reaches a target price, its
fundamental factors have changed or it has performed below the managers'
expectations for three to four years.
- --------------------------------------------------------------------------------
While they're 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.
5
<PAGE>
The Risks Of Investing In The Fund
There are several factors that could hurt fund 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 large company stock prices fall, you should expect the value of
your investment to fall as well. Large company stocks may be less risky than
shares of smaller companies, but at times may not perform as well. 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 concentrates in one or more sectors, any factors
affecting those sectors could affect fund performance. For example, financial
services companies could be hurt by such factors as changing government
regulations, increasing competition and interest rate movements.
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 value stocks could become unpopular
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
Investors seeking to diversify a growth-oriented portfolio or add a core holding
to a value-oriented portfolio may want to consider this fund.
6
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
include shareholder fees, which would reduce returns. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1989 18.27
1990 -6.08
1991 26.53
1992 11.32
1993 9.07
1994 -0.03
1995 44.57
1996 14.42
1997 28.73
1998 19.17
Best quarter: 18.90%, Q1 1991 YTD return as of 9/30/1999: 3.31%
Worst quarter: -20.59%, Q3 1990
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 9/11/95 Since 3/18/88
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- ------------------------------------------------------------------------------
Class A 12.32% 19.05% -- 15.11% 14.64%
- ------------------------------------------------------------------------------
Class B 15.08 -- 21.58 -- --
- ------------------------------------------------------------------------------
Class C 17.92 -- 21.86 -- --
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Stock Price Index, an unmanaged
capitalization-weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange and the American Stock Exchange, and traded on the
Nasdaq Stock Market, Inc.
- ------------------------------------------------------------------------------
38.71% 25.70% 30.68%* 20.57% 19.85%**
- ------------------------------------------------------------------------------
* Since 8/31/95
** Since 3/31/88
The table includes the effects of maximum shareholder fees. The bar chart does
not include any effects of shareholder fees; if it did, total returns would be
lower. In both the
7
<PAGE>
table and the chart, total returns for ____ through ____ would have been lower
if operating expenses hadn't been reduced.
8
<PAGE>
How Much Investors Pay
Depending on which share class you choose and how much you invest, you may be
charged shareholder fees. The fund also has annual operating expenses, and as a
shareholder you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 5.75% None None
- ------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge (Load)
(as % of redemption proceeds) None* 4.00% 1.00%
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- ------------------------------------------------------------------------------
Other Expenses** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Expense Reimbursement 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Net Annual Operating Expenses*** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
* Only on shares bought without sales charge and sold within a year. See
"Choosing A Share Class, Class A Shares."
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors.
*** By contract, total operating expenses are capped at 0.00% through
00/00/0000.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets under
management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
9
<PAGE>
Based on the figures below (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 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 $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Thomas F. Sassi Frederick L. Gaskin
Lead Portfolio Manager o Began investment career
o Began investment career in 1986
in 1971 o Joined the advisor in
o Joined the advisor in 1996
1996 o Joined the fund team in
o Joined the fund team in 1997
1997
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
10
<PAGE>
TICKER SYMBOLS CLASS: A) KDFAX B) KDFBX C) KDFCX
Kemper-Dreman
Financial Services Fund
- --------------------------------------------------------------------------------
FUND GOAL The fund seeks long-
term capital appreciation.
11
<PAGE>
The Fund's Strategy
The fund normally invests at least 65% of total assets in common stocks and
other equity securities of financial services companies. This may include
companies of any size that commit at least half of their assets to the financial
services sector, or derive at least half of their revenues or net income from
that sector. The major types of financial services companies are banks,
insurance companies, savings and loans, securities brokerage firms and
diversified financial companies.
The portfolio managers begin by screening for financial services stocks whose
price-to-earnings ratios are below the average for the S&P 500 Index. The
managers then compare a company's stock price to its book value, cash flow and
yield, and analyze individual companies to identify those that are financially
sound and appear to have strong potential for long-term growth.
The managers assemble the fund's portfolio from among the most attractive
stocks, drawing on analysis of economic outlooks for various financial
industries. The managers intend to divide the fund's holdings among the
industries in the financial sector, although, depending on their outlook, they
may increase or reduce the fund's exposure to a given industry.
The fund normally will sell a stock when it reaches a target price, its
fundamental factors have changed or it has performed below the managers'
expectations for three to four years.
- --------------------------------------------------------------------------------
While the fund invests mainly in U.S. stocks, it could invest up to 30% of total
assets in foreign securities, and up to 35% of total assets in investment-grade
debt securities. Also, while they're 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.
12
<PAGE>
The Risks Of Investing In The Fund
There are several factors that could hurt fund 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. When stock prices fall, you should expect the value of your
investment to fall as well. The fact that the fund concentrates in a single
sector increases this risk, because factors affecting that sector could affect
fund performance. For example, financial services companies could be hurt by
such factors as changing government regulations, increasing competition and
interest rate movements.
Similarly, because the fund isn't diversified and can invest a larger percentage
of assets in a given company than a diversified fund, factors affecting that
company could affect fund performance. 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.
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 value stocks could become unpopular
o foreign stocks may be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o the bond portion of the portfolio could be hurt by rising interest rates or
declines in credit quality
o derivatives could produce disproportionate losses
o at times, it could be 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 appropriate for long-term investors who want to gain exposure
to the financial services sector and can accept the above-average risks of a
sector-specific investment.
13
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
include shareholder fees, which would reduce returns. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1998 00.00
Best quarter: 0.00%, Q0 1990 YTD return as of 9/30/1999: -5.82%
Worst quarter: -0.00%, Q0 1900
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 3/9/98 Since 3/9/98
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- ------------------------------------------------------------------------------
Class A -- -- -- -- --
- ------------------------------------------------------------------------------
Class B -- -- -- -- --
- ------------------------------------------------------------------------------
Class C -- -- -- -- --
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Stock Price Index, an unmanaged
capitalization-weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange and the American Stock Exchange, and traded on the
Nasdaq Stock Market, Inc.
- ------------------------------------------------------------------------------
00.00% 00.00% 00.00% 00.00% 00.00%
- ------------------------------------------------------------------------------
The table includes the effects of maximum shareholder fees. The bar chart does
not include any effects of shareholder fees; if it did, total returns would be
lower. In both the table and the chart, total returns for ____ through ____
would have been lower if operating expenses hadn't been reduced.
14
<PAGE>
How Much Investors Pay
Depending on which share class you choose and how much you invest, you may be
charged shareholder fees. The fund also has annual operating expenses, and as a
shareholder, you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 5.75% None None
- ------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge (Load)
(as % of redemption proceeds) None 4.00% 1.00%
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- ------------------------------------------------------------------------------
Other Expenses** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Expense Reimbursement 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Net Annual Operating Expenses*** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
* Only on shares bought without sales charge and sold within a year. See
"Choosing A Share Class, Class A Shares."
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors.
*** By contract, total operating expenses are capped at 0.00% through
00/00/0000.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets under
management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
The fund's subadviser is Dreman Value Management, L.L.C., Red Bank, NJ. Dreman
Value Management was founded in 1977 and currently manages over $7 bil-
15
<PAGE>
lion in assets. The manager for this fund is David N. Dreman, founder and
chairman of Dreman Value Management. Widely regarded as a leading proponent of
value-style investment management, Mr. Dreman began his investment career in
1957 and has managed the fund since inception.
16
<PAGE>
Based on the figures below (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 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 $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
17
<PAGE>
TICKER SYMBOLS CLASS: A) KDHAX B) KDHBX C) KDHCX
Kemper-Dreman
High Return Equity Fund
FUND GOAL The fund seeks a high
rate of total return.
18
<PAGE>
The Fund's Strategy
The fund normally invests at least 65% of total assets in common stocks and
other equity securities. The fund focuses on stocks of large U.S. companies
(those with a market value of $1 billion or more) that the portfolio managers
believe are undervalued. Although the fund can invest in stocks of any economic
sector, at times it may emphasize the financial services sector or other sectors
(in fact, it may invest more than 25% of total assets in a single sector).
The portfolio managers begin by screening for stocks whose price-to-earnings
ratios are below the average for the S&P 500 Index. The managers then compare a
company's stock price to its book value, cash flow and yield, and analyze
individual companies to identify those that are financially sound and appear to
have strong potential for long-term growth.
The managers assemble the fund's portfolio from among the most attractive
stocks, drawing on analysis of economic outlooks for various sectors and
industries. The managers intend to diversify the fund's holdings among sectors
and industries, although, depending on their outlook, they may increase or
reduce the fund's exposure to a given sector or industry.
The fund normally will sell a stock when it reaches a target price, its
fundamental factors have changed or it has performed below the managers'
expectations for three to four years.
- --------------------------------------------------------------------------------
OTHER INVESTMENTS
The managers may use various types of derivatives (contracts whose value is
based on, for example, indices, currencies or securities), particularly
exchange-traded stock index futures, which offer the fund exposure to future
stock market movements without direct ownership of stocks. While the fund
invests mainly in U.S. stocks, it could invest up to 20% of total assets in
foreign securities.
19
<PAGE>
The Risks Of Investing In The Fund
There are several factors that could hurt fund 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 large company stock prices fall, you should expect the value of
your investment to fall as well. Large company stocks may be less risky than
shares of smaller companies, but at times may not perform as well. 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 concentrates in one or more sectors, any factors
affecting those sectors could affect fund performance. For example, financial
services companies could be hurt by such factors as changing government
regulations, increasing competition and interest rate movements.
Any investments in index futures or other derivatives that don't perform as
expected could produce disproportionate losses, potentially costing the fund
more than it paid for the derivatives themselves.
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 value stocks could become unpopular
o foreign stocks may be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o at times, it could be 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 serve investors with long-term goals who are interested in a
large-cap value fund that takes moderately higher risks.
20
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
include shareholder fees, which would reduce returns. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1989 18.48
1990 -8.63
1991 47.57
1992 19.80
1993 9.22
1994 -0.99
1995 46.86
1996 28.79
1997 31.93
1998 11.96
Best quarter: 33.22%, Q1 1991 YTD return as of 9/30/1999: -7.96%
Worst quarter: -22.84%, Q3 1990
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 9/11/95 Since 3/18/88
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- ------------------------------------------------------------------------------
Class A 5.52% 21.12% -- 18.48% 18.35%
- ------------------------------------------------------------------------------
Class B 8.01 -- 24.61 -- --
- ------------------------------------------------------------------------------
Class C 11.05 -- 25.04 -- --
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Stock Price Index, an unmanaged
capitalization-weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange and the American Stock Exchange, and traded on the
Nasdaq Stock Market, Inc.
- ------------------------------------------------------------------------------
38.71% 25.70% 30.68%* 20.57% 19.85%**
- ------------------------------------------------------------------------------
* Since 8/31/95
** Since 3/31/88
The table includes the effects of maximum shareholder fees. The bar chart does
not include any effects of shareholder fees; if it did, total returns would be
lower. In both the
21
<PAGE>
table and the chart, total returns for ____ through ____
would have been lower if operating expenses hadn't been reduced.
22
<PAGE>
How Much Investors Pay
Depending on which share class you choose and how much you invest, you may be
charged shareholder fees. The fund also has annual operating expenses, and as a
shareholder you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 5.75% None None
- ------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge (Load)
(as % of redemption proceeds) None* 4.00% 1.00%
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- ------------------------------------------------------------------------------
Other Expenses** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Expense Reimbursement 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Net Annual Operating Expenses*** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
* Only on shares bought without sales charge and sold within a year. See
"Choosing A Share Class, Class A Shares."
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors.
*** By contract, total operating expenses are capped at 0.00% through
00/00/0000.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets under
management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
The fund's subadviser is Dreman Value Management, L.L.C., Red Bank, NJ. Dreman
Value Management was founded in 1977 and currently manages over $7 bil-
23
<PAGE>
lion in assets. The manager for this fund is David N. Dreman, founder and
chairman of Dreman Value Management. Widely regarded as a leading proponent of
value-style investment management, Mr. Dreman began his investment career in
1957 and has managed the fund since inception.
24
<PAGE>
Based on the figures below (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 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 $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
25
<PAGE>
TICKER SYMBOLS CLASS: A) KSRAX B) KSRBX C) KSRCX
Kemper
Small Cap
Relative Value Fund
- --------------------------------------------------------------------------------
FUND GOAL The fund seeks long-
term capital appreciation.
26
<PAGE>
The Fund's Strategy
The fund normally invests at least 65% of total assets in undervalued common
stocks of small U.S. companies, which the fund defines as companies that are
similar in market value to those in the Russell 2000 Index ($1.35 billion or
less as of 5/31/99).
The portfolio managers begin by screening for small companies whose stock prices
appear low relative to other companies in the same sector (rather than on an
absolute basis). A quantitative stock valuation model compares each company's
stock price to the company's earnings, book value, sales and other measures of
performance potential. The managers also look for factors that may signal a
rebound for a company, whether through a recovery in its markets, a change in
business strategy or other factors.
The managers then assemble the fund's portfolio from among the qualifying
stocks, using portfolio optimization software that combines information about
the potential return and risks of each stock.
The managers diversify the fund's investments among many companies (typically
over 150), and expect to keep the fund's sector weightings similar to those of
the overall small-cap market.
The fund will normally sell a stock when it no longer qualifies as a small
company, when it is no longer considered undervalued or when the managers
believe other investments offer better opportunities.
- --------------------------------------------------------------------------------
OTHER INVESTMENTS
While they're 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.
27
<PAGE>
The Risks Of Investing In The Fund
There are several factors that could hurt fund 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 small company portion of the U.S. stock
market. When small company stock prices fall, you should expect the value of
your investment to fall as well. Small company stocks tend to be more volatile
than stocks of larger companies, in part because small companies tend to be less
established than larger companies and more vulnerable to competitive challenges
and bad economic news. 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, the emergence of
new technologies could hurt electronics or medical technology 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 value stocks could become unpopular
o derivatives could produce disproportionate losses
o at times, it could be 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 looking to diversify a large-cap portfolio or a
growth-oriented portfolio may want to consider this fund.
28
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
include shareholder fees, which would reduce returns. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
1989 00.00
1990 00.00
1991 00.00
1992 00.00
1993 00.00
1994 00.00
1995 00.00
1996 00.00
1997 00.00
1998 00.00
Best quarter: 0.00%, Q0 1990 YTD return as of 9/30/1999: -2.34%
Worst quarter: -0.00%, Q0 1900
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 5/6/98 Since 5/6/98
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- ------------------------------------------------------------------------------
Class A -- -- -- -- --
- ------------------------------------------------------------------------------
Class B -- -- -- -- --
- ------------------------------------------------------------------------------
Class C -- -- -- -- --
- ------------------------------------------------------------------------------
The Russell 2000 Index, a capitalization-weighted price only index which is
comprised of 2000 of the smallest stocks (on the basis of capitalization) in the
Russell 3000 Index.
- ------------------------------------------------------------------------------
00.00% 00.00% 00.00% 00.00% 00.00%
- ------------------------------------------------------------------------------
The table includes the effects of maximum shareholder fees. The bar chart does
not include any effects of shareholder fees; if it did, total returns would be
lower. In both the table and the chart, total returns for ____ through ____
would have been lower if operating expenses hadn't been reduced.
29
<PAGE>
How Much Investors Pay
Depending on which share class you choose and how much you invest, you may be
charged shareholder fees. The fund also has annual operating expenses, and as a
shareholder you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 5.75% None None
- ------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge (Load)
(as % of redemption proceeds) 1.00%* 4.00% 1.00%
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- ------------------------------------------------------------------------------
Other Expenses** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Expense Reimbursement 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Net Annual Operating Expenses*** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
* Only on shares bought without sales charge and sold within a year. See
"Choosing A Share Class, Class A Shares."
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors.
*** By contract, total operating expenses are capped at 0.00% through
00/00/0000.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets under
management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
30
<PAGE>
Based on the figures below (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 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 $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FUND MANAGERS
Below are the people who handle the fund's day-to-day
management:
James M. Eysenbach Calvin S. Young
Lead Portfolio Manager o Began investment career
o Began investment career in 1988
in 1984 o Joined the advisor in
o Joined the advisor in 1990
1986 o Joined the fund team in
o Joined the fund team in 1998
1998
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
31
<PAGE>
TICKER SYMBOLS CLASS: A) KDSAX B) KDSBX C) KDSCX
Kemper
Small Cap Value Fund
- --------------------------------------------------------------------------------
FUND GOAL The fund seeks long-term capital appreciation.
32
<PAGE>
The Fund's Strategy
The fund normally invests at least 65% of total assets in undervalued common
stocks of small U.S. companies, which the fund defines as companies that are
similar in market value to those in the Russell 2000 Index ($1.35 billion or
less as of 5/31/99).
The portfolio managers begin by screening for small companies whose stock prices
appear low relative to other companies in the same sector (rather than on an
absolute basis). A quantitative stock valuation model compares each company's
stock price to the company's earnings, book value, sales and other measures of
performance potential. The managers also look for factors that may signal a
rebound for a company, whether through a recovery in its markets, a change in
business strategy or other factors.
The managers then assemble the fund's portfolio from among the qualifying
stocks, using portfolio optimization software that combines information about
the potential return and risks of each stock.
The managers diversify the fund's investments among many companies (typically
over 150), and expect to keep the fund's sector weightings similar to those of
the overall small-cap market.
The fund will normally sell a stock when it no longer qualifies as a small
company, when it is no longer considered undervalued or when the managers
believe other investments offer better opportunities.
- --------------------------------------------------------------------------------
OTHER INVESTMENTS
While the fund invests mainly in U.S. stocks, it could invest up to 20% of total
assets in foreign securities. Also, while they're 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.
33
<PAGE>
The Risks Of Investing In The Fund
There are several factors that could hurt fund 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 small company portion of the U.S. stock
market. When small company stock prices fall, you should expect the value of
your investment to fall as well. Small company stocks tend to be more volatile
than stocks of larger companies, in part because small companies tend to be less
established than larger companies and more vulnerable to competitive challenges
and bad economic news. 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, the emergence of
new technologies could hurt electronics or medical technology 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 value stocks could become unpopular
o foreign stocks may be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it could be 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 make sense for investors who are interested in small-cap market
exposure with potentially lower risk than a growth-oriented small-cap fund.
34
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
include shareholder fees, which would reduce returns. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
1993 2.54
1994 0.15
1995 43.29
1996 29.60
1997 20.02
1998 12.82
Best quarter: 16.42%, Q2 1995 YTD return as of 9/30/1999: -2.86%
Worst quarter: -24.07%, Q3 1998
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 9/11/95 Since 5/12/92
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- ------------------------------------------------------------------------------
Class A -17.81% 12.89% -- 13.08% 00.00%
- ------------------------------------------------------------------------------
Class B -16.22 -- 7.40 -- --
- ------------------------------------------------------------------------------
Class C -13.60 -- 8.00 -- --
- ------------------------------------------------------------------------------
The Russell 2000 Index, a capitalization-weighted price only index which is
comprised of 2000 of the smallest stocks (on the basis of capitalization) in the
Russell 3000 Index.
- ------------------------------------------------------------------------------
38.71% 25.70% 30.68%* -- 21.06%**
- ------------------------------------------------------------------------------
* Since 8/31/95
** Since 5/31/92
The table includes the effects of maximum shareholder fees. The bar chart does
not include any effects of shareholder fees; if it did, total returns would be
lower. In both the table and the chart, total returns for ____ through ____
would have been lower if operating expenses hadn't been reduced.
35
<PAGE>
How Much Investors Pay
Depending on which share class you choose and how much you invest, you may be
charged shareholder fees. The fund also has annual operating expenses, and as a
shareholder you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your Investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 5.75% None None
- ------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge (Load)
(as % of redemption proceeds) None* 4.00% 1.00%
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- ------------------------------------------------------------------------------
Other Expenses** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Expense Reimbursement 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Net Annual Operating Expenses*** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
* Only on shares bought without sales charge and sold within a year. See
"Choosing A Share Class, Class A Shares."
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors.
*** By contract, total operating expenses are capped at 0.00% through
00/00/0000.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets under
management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
36
<PAGE>
Based on the figures below (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 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 $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FUND MANAGERS
Below are the people who handle the fund's day-to-day
management:
James M. Eysenbach Calvin S. Young
Lead Portfolio Manager o Began investment career
o Began investment career in 1988
in 1984 o Joined the advisor in
o Joined the advisor in 1990
1986 o Joined the fund team in
o Joined the fund team in 1999
1999
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
37
<PAGE>
TICKER SYMBOLS CLASS: A) KUGAX B) KUGBX C) KUGCX
Kemper
U.S. Growth and
Income Fund
- --------------------------------------------------------------------------------
FUND GOAL The fund seeks long-term growth of capital, current income and
growth of income.
38
<PAGE>
The Fund's Strategy
The fund normally invests at least 80% of total assets in common stocks and
other equities of U.S. companies. The fund invests primarily in companies that
are similar in size to the companies in the S&P 500 Index.
The portfolio managers begin by screening for stocks that pay above-average
dividends and that the managers believe offer the prospect of increasing
dividends in the future and appear undervalued. The managers then analyze
individual companies to identify those that are financially sound and appear to
be well managed, competitive and positioned for long-term growth.
The managers assemble the fund's portfolio from among the most attractive
stocks, drawing on analysis of economic outlooks for various sectors and
industries. The managers intend to diversify the fund's holdings among sectors
and industries, although, depending on their outlook, they may increase or
reduce the fund's exposure to a given sector or industry.
The fund normally will sell a stock when its yield is low compared to the S&P
500 or the stock's own historical level, if it appears unlikely to pay a
dividend or when the managers believe its price is unlikely to go much higher or
that other investments offer better opportunities.
- --------------------------------------------------------------------------------
OTHER INVESTMENTS
While they're 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.
39
<PAGE>
The Risks Of Investing In The Fund
There are several factors that could hurt fund 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 large company stock prices fall, you should expect the value of
your investment to fall as well. Large company stocks may be less risky than
shares of smaller companies, but at times may not perform as well. 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.
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 value stocks could become unpopular
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
For investors with long-term goals who are looking for an investment that has
potentially lower risks than other large-cap funds, this fund may be a logical
choice.
40
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
include shareholder fees, which would reduce returns. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1998 00.00
Best quarter: 0.00%, Q0 1990 YTD return as of 9/30/1999: 0.00%
Worst quarter: -0.00%, Q0 1900
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 1/30/98 Since 1/30/98
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- ------------------------------------------------------------------------------
Class A 00.00% 00.00% -- 00.00% 00.00%
- ------------------------------------------------------------------------------
Class B 00.00 00.00 00.00 -- --
- ------------------------------------------------------------------------------
Class C 00.00 00.00 00.00 -- --
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Stock Price Index, an unmanaged
capitalization-weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange and the American Stock Exchange, and traded on the
Nasdaq Stock Market, Inc.
- ------------------------------------------------------------------------------
00.00% 00.00% 00.00% 00.00% 00.00%
- ------------------------------------------------------------------------------
The table includes the effects of maximum shareholder fees. The bar chart does
not include any effects of shareholder fees; if it did, total returns would be
lower. In both the table and the chart, total returns for ____ through ____
would have been lower if operating expenses hadn't been reduced.
41
<PAGE>
How Much Investors Pay
Depending on which share class you choose and how much you invest, you may be
charged shareholder fees. The fund also has annual operating expenses, and as a
shareholder you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 5.75% None None
- ------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge (Load)
(as % of redemption proceeds) None* 4.00% 1.00%
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- ------------------------------------------------------------------------------
Other Expenses** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Expense Reimbursement 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Net Annual Operating Expenses*** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
* Only on shares bought without sales charge and sold within a year. See
"Choosing A Share Class, Class A Shares."
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors.
*** By contract, total operating expenses are capped at 0.00% through
00/00/0000.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets under
management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
42
<PAGE>
Based on the figures below (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 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 $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FUND MANAGERS
Kathleen T. Millard Benjamin W. Thorndike
Lead Portfolio Manager o Began investment career
o Began investment career in 1980
in 1984 o Joined the advisor in
o Joined the advisor in 1983
1991 o Joined the fund team in
o Joined the fund team in 1998
1999
Greg Adams
o Began investment career
in 19__
o Joined the advisor in 19__
o Joined the fund team in
1999
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
43
<PAGE>
TICKER SYMBOLS CLASS: A) KVLAX B) KVLBX C) KVLCX
Kemper
Value Fund
- --------------------------------------------------------------------------------
FUND GOAL The fund seeks long-term growth of capital through investment in
undervalued equity securities.
44
<PAGE>
The Fund's Strategy
The fund normally invests at least 80% of total assets in equity securities. The
fund invests primarily in common stocks of larger, established U.S. companies
with a market value of $1 billion or more.
The portfolio managers begin by ranking the stocks in the Russell 1000 Index,
using a proprietary computer model that compares a company's stock price to its
earnings, book value, cash flow and other quantitative measures. The managers
then analyze those companies that the model indicates are most undervalued,
seeking to identify those whose stock prices appear likely to rebound due to a
particular factor such as a merger, reorganization or business trend. The
managers also consider the impact on the fund of each stock's potential risk
factors and expected volatility.
The managers assemble the fund's portfolio from among the most attractive 60 to
90 stocks, drawing on analysis of economic outlooks for various sectors and
industries. The managers intend to diversify the fund's holdings among sectors
and industries, although, depending on their outlook, they may increase or
reduce the fund's exposure to a given sector or industry.
The fund normally will sell a stock when the managers believe it is fairly
valued, it may not benefit from the current market, its fundamental factors may
change or it has performed below expectations.
- --------------------------------------------------------------------------------
OTHER INVESTMENTS
While most of the fund's equities are common stocks, some may be other types of
equities such as convertible securities and preferred stocks. Also while they're
permitted to use various types of derivatives (contracts whose value is based
on, for example, indices or securities), the managers don't intend to use them
as principal investments.
45
<PAGE>
The 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 large company stock prices fall, you should expect the value of
your investment to fall as well. Large company stocks may be less risky than
shares of smaller companies, but at times may not perform as well. 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.
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 value stocks could become unpopular
o foreign stocks may be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
For investors with long-term goals who are looking for an investment that has
potentially lower risks than other large-cap funds, this fund may be a logical
choice.
46
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
include shareholder fees, which would reduce returns. The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- ------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A Shares
- ------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1993 11.60
1994 1.65
1995 30.17
1996 22.99
1997 35.35
1998 11.86
Best quarter: 17.09%, Q4 1998 YTD return as of 9/30/1999: -3.46%
Worst quarter: -15.34%, Q3 1998
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 4/16/98 Since 12/31/92
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- ------------------------------------------------------------------------------
Class A 5.44% 18.36% -- -- 17.20%
- ------------------------------------------------------------------------------
Class B -- -- -- -- --
- ------------------------------------------------------------------------------
Class C -- -- -- -- --
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Stock Price Index, an unmanaged
capitalization-weighted measure of 500 widely held common stocks listed on the
New York Stock Exchange and the American Stock Exchange, and traded on the
Nasdaq Stock Market, Inc.
- ------------------------------------------------------------------------------
38.71% 25.70% -- -- 21.58%
- ------------------------------------------------------------------------------
The table includes the effects of maximum shareholder fees. The bar chart does
not include any effects of shareholder fees; if it did, total returns would be
lower. In both the table and the chart, total returns for ____ through ____
would have been lower if operating expenses hadn't been reduced.
47
<PAGE>
How Much Investors Pay
Depending on which share class you choose and how much you invest, you may be
charged shareholder fees. The fund also has annual operating expenses, and as a
shareholder you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your
investment
- ------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 5.75% None None
- ------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge (Load)
(as % of redemption proceeds) None* 4.00% 1.00%
- ------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- ------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- ------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- ------------------------------------------------------------------------------
Other Expenses** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Expense Reimbursement 0.00 0.00 0.00
- ------------------------------------------------------------------------------
Net Annual Operating Expenses*** 0.00 0.00 0.00
- ------------------------------------------------------------------------------
* Only on shares bought without sales charge and sold within a year. See
"Choosing A Share Class, Class A Shares."
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors.
*** By contract, total operating expenses are capped at 0.00% through
00/00/0000.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets under
management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
48
<PAGE>
Based on the figures below (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 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 $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
Expenses, assuming you kept your shares
- ------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- ------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- ------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FUND MANAGERS
Lois R. Roman
Lead Portfolio Manager Kathleen T. Millard
o Began investment career o Began investment career
in 1986 in 1984
o Joined the advisor in o Joined the advisor in
1994 1991
o Joined the fund team in o Joined the fund team in
1999 1999
William J. Wallace
o Began investment career
in 1981
o Joined the advisor in
1987
o Joined the fund team in
1992
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
49
<PAGE>
Other Policies And Risks
While 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, any 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 Scudder Kemper establishes a security's credit quality when it buys the
security, using independent ratings or, for unrated securities, its own
credit ratings. When ratings don't agree, a fund may use the higher rating.
If a security's credit quality falls, the advisor will determine whether
selling it would be in the shareholders' best interests.
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
This prospectus doesn't tell you about every policy or risk of investing in a
fund. For more information, you may want to request a copy of the SAI (the back
cover has additional information on how to do this).
50
<PAGE>
Year 2000 and euro readiness
Like all mutual funds, these funds could be affected by the inability of some
computer systems to recognize the year 2000. Also, because they invest in
foreign securities, the funds could be affected by accounting differences,
changes in tax treatment or other issues related to the conversion of certain
European currencies into the euro, which is already underway. Scudder Kemper has
readiness programs designed to address these problems, and has researched the
readiness of suppliers and business partners as well as issuers of securities
the funds own. Still, there's some risk that one or both of these problems could
materially affect a fund's operations (such as its ability to calculate net
asset value and to handle purchases and redemptions), its investments or
securities markets in general.
51
<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 report, along with each fund's financial statements,
is included in that fund's annual report (see "Shareholder reports" on the back
cover).
52
<PAGE>
Investing In The Funds
The following pages tell you about many of the services, choices and benefits of
being a Kemper Funds 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 other investment provider, such as a workplace
retirement plan.
<PAGE>
Choosing A Share Class
In this prospectus, there are three share classes for each fund. The Kemper
Value Fund offers a fourth class of shares separately. Each class has its own
fees and expenses, offering you a choice of cost structures.
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%, o Some investors may be able to
charged when you buy shares reduce or eliminate their sales
o In most cases, no charges when you charges; see next page
sell shares o Annual expenses are lower than
o No marketing/distribution fee those for Class B or Class C
- ------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge rate
o Deferred sales charge of up to falls to zero after six years
4.00%, charged when you sell shares o Shares automatically convert to
you bought within the last six years Class A after six years, which
o 0.75% marketing and distribution fee means lower annual expenses going
forward
- ------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge rate is
o Deferred sales charge of 1.00%, lower, but your shares never
charged when you sell shares you convert to Class A, so annual
bought within the last year expenses remain higher
o 0.75% marketing and distribution fee
- ------------------------------------------------------------------------------
54
<PAGE>
Class A shares
Class A shares have a sales charge that varies with the amount you invest:
Sales charge Sales charge
as a % of as a % of your
Your investment offering price 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
-----------------------------------------------------------
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 Kemper shares you already own (including shares in certain
other Kemper 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 Kemper 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.
55
<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 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 can answer your questions and help you determine if
you're eligible.
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.
56
<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 they charge an annual marketing/
distribution fee of 0.75%. 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.
Class B shares have a contingent deferred sales charge (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 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 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'd prefer to
see all of their investment go to work right away, and can accept somewhat
higher annual expenses in exchange.
57
<PAGE>
Class C shares
Like Class B shares, Class C shares have no up-front sales charges and have a
12b-1 plan that allows the fund to charge an annual marketing/distribution fee
of 0.75%. 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).
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 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 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.
58
<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
- ------------------------------------------------------------------------------
Through a financial representative
o Contact your representative using o Contact your representative using
the method that's most convenient the 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 a Kemper
investment slip to us at the
o Send it to us at the appropriate 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
- ------------------------------------------------------------------------------
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 219415, Kansas City, MO 64121-9415
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)
59
<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
$100 or more for exchanges between ordered in writing with a signature
existing accounts guarantee; if you're in doubt, see
page 67
- ------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by the o Contact your representative by
method that's most convenient for the method that's most convenient
you 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:
o the fund, class and account number Write a letter that includes:
you're exchanging out of o the fund, class and account
o the dollar amount or number of number from which you want to
shares you want to exchange sell shares
o the name and class of the fund you o the dollar amount or number of
want to exchange into shares you want to sell
o your name(s), signature(s) and o your name(s), signature(s) and
address, as they appear on your address, as they appear on your
account 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
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
- ------------------------------------------------------------------------------
60
<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 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.
Policies about transactions
The funds are open for business on 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.
61
<PAGE>
EXPRESS-Transfer lets you set up a link between a Kemper 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.
When you call us to sell shares, we may record the call, ask you for certain
information or take other steps designed to prevent fraudulent orders. It's
important to understand that, with respect to certain pre-authorized privileges,
as long as we take reasonable steps to ensure that an order appears genuine, we
are not responsible for any losses that may occur.
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 among Kemper funds are an option for most shareholders. 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.
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.
62
<PAGE>
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 contingent deferred sales charge (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
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.
63
<PAGE>
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 can answer your questions and help you determine if you are eligible.
If you sell shares in a Kemper fund and then decide to invest with Kemper again
within six months, you can take of advantage of the "reinstatement feature."
With this feature, you can put your money back into the same class of a Kemper
fund at its current NAV and for purposes of sales charges it will be treated as
if it had never left Kemper. You'll also 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 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.
64
<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 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.
65
<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; in most cases, a fund won't make a
redemption in kind unless your requests over a 90-day period total more
than $250,000 or 1% of the fund's 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)
66
<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 have regular schedules for paying out any earnings to shareholders:
o long-term capital gains: December, or otherwise as needed
The funds may make additional distributions for tax purposes if necessary.
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.
67
<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 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
- -------------------------------------------------------
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.
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.
68
<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. To reduce costs, we mail one copy per
household. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about each
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, or if you're a shareholder
and have questions, please contact Kemper or the SEC (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.
SEC
450 Fifth Street, N.W.
Washington, DC 20549-6009
www.sec.gov
Tel (800) SEC-0330
Kemper Funds
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com
Tel (800) 621-1048
- --------------------------------------------------------------------------------
SEC File Numbers
Kemper Contrarian Fund 000-000
Kemper-Dreman Financial Services Fund 000-000
Kemper-Dreman High Return Equity Fund 000-000
Kemper Small Cap Relative Value Fund 000-000
Kemper Small Cap Value Fund 000-000
Kemper U.S. Growth and Income Fund 000-000
Kemper Value Fund 000-000
PRINCIPAL UNDERWRITER
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808 www.kemper.com E-mail
[email protected] Tel (800) 621-1048
[LOGO] KEMPER FUNDS
Long-term investing in a short-term world(SM)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
February 1, 2000
Kemper Contrarian Fund ("Contrarian Fund")
Kemper-Dreman Financial Services Fund ("Financial Services Fund")
Kemper-Dreman High Return Equity Fund ("High Return Equity Fund")
Kemper Small Cap Value Fund ("Small Cap Value Fund")
Kemper Small Cap Relative Value Fund ("Small Cap Relative Value Fund")
Kemper U.S. Growth and Income Fund ("U.S. Growth and Income Fund")
Kemper Value Fund ("Value Fund")
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS 2
INVESTMENT POLICIES AND TECHNIQUES 5
PORTFOLIO TRANSACTIONS 26
INVESTMENT MANAGER AND UNDERWRITER 29
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES 43
NET ASSET VALUE 55
DIVIDENDS AND TAXES 56
PERFORMANCE 61
OFFICERS AND BOARD MEMBERS 66
SHAREHOLDER RIGHTS 76
This Statement of Additional Information is not a prospectus. It is the
combined Statement of Additional Information for each of the funds (the "Funds")
listed above. It should be read in conjunction with the combined prospectus of
the Funds dated February 1, 2000. The prospectus may be obtained without charge
from the Funds by calling the number listed above or the firm from which the
prospectus was obtained and is also available along with other related materials
on the SEC's Internet web site (http://www.sec.gov). The Funds' Annual Reports,
August 3 for the Contrarian Fund, September 30 for the U.S. Growth and Income
Fund and November 30 for the Small Cap Relative Value Fund, Financial Services
Fund, High Return Equity Fund and Small Cap Value Fund are incorporated by
reference into and are hereby deemed to be a part of this Statement of
Additional Information.
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental investment restrictions which cannot
be changed without approval of a majority of its outstanding voting shares. As
defined in the Investment Company Act of 1940, as amended (the "1940 Act"), this
means the lesser of the vote of (a) 67% of the shares of the Fund present at a
meeting where more than 50% of the outstanding shares are present in person or
by proxy or (b) more than 50% of the outstanding shares of the Fund.
Each Fund other than the Financial Services Fund has elected to be classified as
a diversified series of an open-end investment company; the Financial Services
Fund has elected to be classified as a non-diversified series of an open-end
investment company.
Each Fund other than the Financial Services Fund may not, as a fundamental
policy:
1. Borrow money, except as permitted under the 1940 Act, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time.
2. Issue senior securities, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
3. Concentrate its investments in a particular industry, as that term is used
in the 1940 Act, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time.
4. Make loans except as permitted under the 1940 Act, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time.
5. Purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investment secured by
real estate or interests therein, except that the Fund reserves freedom of
action to hold and to sell real estate as acquired as a result of the
Fund's ownership of securities.
6. Purchase physical commodities or contracts relating to physical
commodities.
7. Engage in the business of underwriting securities issued by others, except
to the extent that a Fund may be deemed to be an underwriter in connection
with the disposition of portfolio securities.
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. Each Fund has
adopted the following non-fundamental restrictions, which may be changed by the
Board without shareholder approval.
Financial Services Fund may not, as a fundamental policy:
1. Borrow money, except as permitted under the 1940 Act, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time.
2. Issue senior securities, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
3. Concentrate its investments in a particular industry, as that term is used
in the 1940 Act, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time, except that the Fund will
concentrate its investments in the financial services industry.
4. Make loans except as permitted under the 1940 Act, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time.
5. Purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investment secured by
real estate or interests therein, except that the Fund reserves freedom of
action to hold and to sell real estate as acquired as a result of the
Fund's ownership of securities.
6. Purchase physical commodities or contracts relating to physical
commodities.
<PAGE>
7. Engage in the business of underwriting securities issued by others, exept
to the extent that the Fund may be deemed to be an underwriter in
connection with a disposition of portfolio securities.
With regard to Item 5 for Financial Services Fund, 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.
Engage in the business of underwriting securities issued by others, except to
the extent that a Fund may be deemed to be an underwriter in connection with the
disposition of portfolio securities.
The Contrarian Fund, High Return Equity Fund, and Small Cap Value Fund may not,
as a non-fundamental policy:
1. Invest for the purpose of exercising control over management of any
company.
2. Invest its assets in securities of any investment company, except by
open market purchases, including an ordinary broker's commission, or in
connection with a merger, acquisition of assets, consolidation or
reorganization, and any investments in the securities of other
investment companies will be in compliance with the 1940 Act.
3. Purchase securities on margin or make short sales of securities,
provided that the Funds may enter into futures contracts and related
options and make initial and variation margin deposits in connection
therewith.
4. Mortgage, pledge, or hypothecate any assets except in connection with
borrowings in amounts not in excess of the lesser of the amount
borrowed or 10% of the value of its total assets at the time of such
borrowing; provided that the Funds may enter into futures contracts and
related options. Optioned securities are not considered to be pledged
for purposes of this limitation.
5. Invest more than 10% of the value of its net assets in illiquid
securities, including restricted securities and repurchase agreements
with remaining maturities in excess of seven days, and other securities
for which market quotations are not readily available.
6. Invest in oil, gas or mineral exploration or development programs
7. 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.
8. 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.
The Financial Services Fund may not, as a non-fundamental policy:
1. Invest for the purpose of exercising control over management of any
company.
2. Invest its assets in securities of any investment company, except by
open market purchases, including an ordinary broker's commission, or in
connection with a merger, acquisition of assets, consolidation or
reorganization, and any investments in the securities of other
investment companies will be in compliance with the 1940 Act.
3. Invest more than 15% of the value of its net assets in illiquid
securities.
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.
<PAGE>
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.
The Small Cap Relative Value Fund may not, as a non-fundamental policy:
1. Invest for the purpose of exercising control over management of any
company.
2. Invest its assets in securities of any investment company, except by
open market purchases, including an ordinary broker's commission, or in
connection with a merger, acquisition of assets, consolidation or
reorganization, and any investments in the securities of other
investment companies will be in compliance with the 1940 Act.
3. Invest more than 15% of the value of its net assets in illiquid
securities.
4. Mortgage, pledge or hypothecate any assets except in connection with
borrowings or in connection with options and futures contracts.
5. Purchase securities on margin or make short sales of securities,
provided that the Funds may enter into futures contracts and related
options and make initial and variation margin deposits in connection
therewith.
6. 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.
7. 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.
The U.S. Growth and Income Fund and Value Fund may not, as a non-fundamental
policy:
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); and
<PAGE>
7. Lend portfolio securities in an amount greater than 30% of its total
assets.
8. 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.
9. 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.
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
<PAGE>
General.
While it is anticipated that under normal circumstances all Funds will be fully
invested, in order to conserve assets during temporary defensive periods when
the Advisor deems it appropriate, each of Contrarian Fund, High Return Equity
Fund, Small Cap Relative Value Fund and Small Cap Value Fund, may invest up to
50% of its assets, and each of Financial Services Fund, U.S. Growth and Income
Fund and Value Fund may invest up to 100% of its assets in cash or
defensive-type securities, such as high-grade debt securities, securities of the
U.S. Government or its agencies and high quality money market instruments,
including repurchase agreements. Investments in such interest-bearing securities
will be for temporary defensive purposes only.
Common Stocks. Each Fund may invest 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, a Fund participates in the success
or failure of any company in which it holds stock. The market values of common
stock can fluctuate significantly, reflecting the business performance of the
issuing company, investor perception and general economic or financial market
movements. Smaller companies are especially sensitive to these factors. An
investment in common stock entails greater risk of becoming valueless than does
an investment in fixed-income securities. Despite the risk of price volatility,
however, common stock also offers the greatest potential for long-term gain on
investment, compared to other classes of financial assets such as bonds or cash
equivalents.
Convertible Securities. Each Fund may invest in convertible securities which may
offer higher income than the common stocks into which they are convertible. The
convertible securities in which a Fund may invest include bonds, notes,
debentures and preferred stocks which may be converted or exchanged at a stated
or determinable exchange ratio into underlying shares of common stock. Prior to
their conversion, convertible securities may have characteristics similar to
both nonconvertible debt securities and equity securities. While convertible
securities generally offer lower yields than nonconvertible debt securities of
similar quality, their prices may reflect changes in the value of the underlying
common stock. Convertible securities generally entail less credit risk than the
issuer's common stock.
Repurchase Agreements. Each Fund may invest in repurchase agreements, under
which it acquires ownership of a security and the broker-dealer or bank agrees
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the Fund's holding period. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, a Fund might
have expenses in enforcing its rights, and could experience losses, including a
decline in the value of the underlying securities and loss of income. The
securities underlying a repurchase agreement will be marked-to-market every
business day so that the value of such securities is at least equal to the
investment value of the repurchase agreement, including any accrued interest
thereon. In addition, the Fund must take physical possession of the security or
receive written confirmation of the purchase and a custodial or safekeeping
receipt from a third party or be recorded as the owner of the security through
the Federal Reserve Book-Entry System. Repurchase agreements will be limited to
transactions with financial institutions believed by the Advisor to present
minimal credit risk (for the U.S. Growth and Income Fund, those determined by
the Advisor to be at least as high in credit quality as that of other
obligations the 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 Corporation ("S&P").
The Advisor will monitor on an on-going basis the creditworthiness of the
broker-dealers and banks with which the Funds may engage in repurchase
agreements. Repurchase agreements maturing in more than seven days will be
<PAGE>
considered as illiquid for purposes of each Fund's limitation on illiquid
securities.
Foreign Securities. High Return Equity Fund and Financial Services Fund
investsprimarily in securities that are publicly traded in the United States;
but, have discretion to invest a portion of its assets in foreign securities
that are traded principally in securities markets outside the United States.
Each Fund may invest up to 20% of its assets in securities of foreign companies
through the acquisition of American Depository Receipts ("ADRs"), which are
bought and sold in the United States as well as through the purchase of
securities of foreign companies that are publicly traded in the United States
and the purchase of securities of foreign companies that are traded principally
in securities markets outside the United States. In connection with its foreign
securities investments, each Fund may, to a limited extent, engage in foreign
currency exchange, options and futures transactions as a hedge and not for
speculation. Additional information concerning foreign securities and related
techniques is contained under "Additional Investment Information."
Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possible imposition of exchange controls.
The prices of such securities may be more volatile than those of domestic
securities and the markets for such securities may be less liquid. In addition,
there may be less publicly available information about foreign issuers than
about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks and listed companies abroad than in the United States.
With respect to certain foreign countries, there is a possibility of
expropriation or diplomatic developments that could affect investment in these
countries.
Emerging Markets. While a Fund's investments in foreign securities will be
principally in developed countries, a Fund may make investments in developing or
"emerging" countries, which involve exposure to economic structures that are
generally less diverse and mature than in the United States, and to political
systems that may be less stable. A developing or emerging market country can be
considered to be a country that is in the initial stages of its
industrialization cycle. Currently, emerging markets generally include every
country in the world other than the United States, Canada, Japan, Australia, New
Zealand, Hong Kong, Singapore and most Western European countries. Currently,
investing in many emerging markets may not be desirable or feasible because of
the lack of adequate custody arrangements for a Fund's assets, overly burdensome
repatriation and similar restrictions, the lack of organized and liquid
securities markets, unacceptable political risks or other reasons. As
opportunities to invest in securities in emerging markets develop, a Fund may
expand and further broaden the group of emerging markets in which it invests. In
the past, markets of developing or emerging market countries have been more
volatile than the markets of developed countries; however, such markets often
have provided higher rates of return to investors. The Advisor believes that
these characteristics can be expected to continue in the future.
Many of the risks described above relating to foreign securities generally will
be greater for emerging markets than for developed countries. For instance,
economies in individual developing markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely by economic conditions in the countries with which they
trade. Also, the securities markets of developing countries are substantially
smaller, less developed, less liquid and more volatile than the securities
markets of the United States and other more developed countries. Disclosure,
regulatory and accounting standards in many respects are less stringent than in
the United States and other
<PAGE>
developed markets. There also may be a lower level of monitoring and regulation
of developing markets and the activities of investors in such markets, and
enforcement of existing regulations has been extremely limited.
In addition, brokerage commissions, custodial services and other costs relating
to investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging markets. Such markets
have different settlement and clearance procedures. In certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Such settlement problems may cause emerging market securities to be illiquid.
The inability of a Fund to make intended securities purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security caused by settlement problems could
result either in losses to a Fund due to subsequent declines in value of the
portfolio security or, if a Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Certain emerging
markets may lack clearing facilities equivalent to those in developed countries.
Accordingly, settlements can pose additional risks in such markets and
ultimately can expose the Fund to the risk of losses resulting from a Fund's
inability to recover from a counterparty.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading securities may cease or may be
substantially curtailed and prices for a Fund's portfolio securities in such
markets may not be readily available. At such times a Fund's portfolio
securities in the affected markets will be valued at fair value determined in
good faith by or under the direction of the Board of Trustees.
Investment in certain emerging market securities is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in certain emerging market securities and increase the costs
and expenses of a Fund. Emerging markets may require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments, the market could impose temporary
restrictions on foreign capital remittances.
Privatized Enterprises. Investments in foreign securities may include securities
issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. A Fund's investments in the
securities of privatized enterprises may include privately negotiated
investments in a government- or state-owned or controlled company or enterprise
that has not yet conducted an initial equity offering, investments in the
initial offering of equity securities of a state enterprise or former state
enterprise and investments in the securities of a state enterprise following its
initial equity offering.
In certain jurisdictions, the ability of foreign entities, such as a Fund, to
participate in privatizations may be limited by local law, or the price or terms
on which the Fund may be able to participate may be less advantageous than for
local investors. Moreover, there can be no assurance that governments that have
embarked on privatization programs will continue to divest their ownership of
state enterprises, that proposed privatization will be successful or that
governments will not re-nationalize enterprises that have been privatized.
In the case of the enterprises in which a Fund may invest, large blocks of the
stock of those enterprises may be held by a small group of stockholders, even
after the initial equity offerings by those enterprises. The sale of some
portion or all of those blocks could have an adverse effect on the price of the
stock of any such enterprise.
Prior to making an initial equity offering, most state enterprises or former
state enterprises go through an internal reorganization of management. Such
reorganizations are made in an attempt to better enable these enterprises to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprise's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which a Fund may invest
enjoy the protection of and receive preferential treatment from the respective
sovereigns that own or control them. After making an initial equity offering
these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
effectively operate in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
Depository Receipts. Each Fund except for U.S. Growth and Income Fund and Value
Fund may invest up to 20% of its assets in securities of foreign companies
through the acquisition of American Depository Receipts ("ADRs") as well as
through the purchase of securities of foreign companies that are publicly traded
in the United States and the purchase of
<PAGE>
foreign companies that are traded principally in securities markets outside the
United States. ADRs are bought and sold in the United States and are issued by
domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in the domestic bank or a correspondent bank. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers, such as changes in foreign currency exchange rates. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Fund
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs.
Borrowing. Each Fund is authorized to borrow from banks in amounts not in excess
of 10% of their respective total assets (the Small Cap Relative Value Fund is
authorized to borrow from banks in amounts not in excess of one-third (1/3) of
its total assets and Financial Services Fund is not authorized to 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), although they do not presently
intend to do so. If, in the future, they do borrow from banks, they would not
purchase additional securities at any time when such borrowings exceed 5% of
their respective net assets.
Small Cap Securities. Investments in securities of companies with small market
capitalizations are generally considered to offer greater opportunity for
appreciation and to involve greater risks of depreciation than securities of
companies with larger market capitalizations. Since the securities of such
companies are not as broadly traded as those of companies with larger market
capitalizations, these securities are often subject to wider and more abrupt
fluctuations in market price.
Among the reasons for the greater price volatility of these securities are the
less certain growth prospects of smaller firms, a lower degree of liquidity in
the markets for such stocks compared to larger capitalization stocks, and the
greater sensitivity of small companies to changing economic conditions. In
addition to exhibiting greater volatility, small company stocks may, to a
degree, fluctuate independently of larger company stocks. Small company stocks
may decline in price as large company stock prices rise, or rise in price as
large company stock prices decline. Investors should therefore expect that the
share value of the Small Cap Value Fund and the Small Cap Relative Value Fund
may be more volatile than the shares of a fund that invests in larger
capitalization stocks.
Real Estate Investment Trusts. U.S. Growth and Income Fund may invest in REITs.
REITs are sometimes informally characterized as equity REITs, mortgage REITs and
hybrid REITs. Investment in REITs may subject the Fund to risks associated with
the direct ownership of real estate, such as decreases in real estate values,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Equity REITs generally experience these risks directly through fee or leasehold
interests, whereas mortgage REITs generally experience these risks indirectly
through mortgage interests, unless the mortgage REIT forecloses on the
underlying real estate. Changes in interest rates may also affect the value of
the Fund's investment in REITs. For instance, during periods of declining
interest rates, certain mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by
those REITs.
Certain REITs have relatively small market capitalization, 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 (the "Code"), and to maintain exemption from the registration
requirements of the 1940 Act. By investing in REITs indirectly through the Fund,
a shareholder will bear not only his or her proportionate share of the expenses
of the Fund, 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.
<PAGE>
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
Debt Securities. The Financial Services Fund may invest in debt securities with
varying degrees of credit quality. High quality bonds (rated AAA or AA by S&P or
Aaa or Aa by Moody's) characteristically have a strong capacity to pay interest
and repay principal. Medium investment-grade bonds (rated A or BBB by S&P or A
or Baa by Moody's) are defined as having adequate capacity to pay interest and
repay principal. In addition, certain medium investment-grade bonds are
considered to have speculative characteristics. The Financial Services Fund may
invest up to 5% of its assets in debt securities which are rated below
investment-grade (hereinafter referred to as "low-rated securities") or which
are unrated, but deemed equivalent to those rated below investment-grade by the
Advisor . The Value Fund may invest up to 20% of its assets in debt securities
rated below investment-grade but will invest no more than 10% of its assets in
securities rated B or
<PAGE>
lower by Moody's or by S&P and may not invest more than 5% of its assets in
securities which are rated C by Moody's or D by S&P or of equivalent quality as
determined by the Advisor.These are commonly referred to as "junk bonds." The
lower the ratings of such debt securities, the greater their risks render them
like equity securities. For a more complete description of the risks of such
high yield/high risk securities, please refer to "Other Considerations."
Illiquid Securities. Each Fund may occasionally 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," "not readily
marketable," or "illiquid" restricted securities, i.e., which cannot be sold to
the public without registration under the Securities Act of 1933 (the "1933
Act") or the availability of an exemption from registration (such as Rules 144
or 144A) or because they are subject to other legal or contractual delays in or
restrictions on resale. The Contrarian, High Return Equity and Small Cap Value
Funds will not invest more than 10%, and the Small Cap Relative Value Fund and
U.S Growth and Income Fund will not invest more than 15%, of the value of their
net assets in illiquid securities.
The absence of a trading market can make it difficult to ascertain a market
value for illiquid securities. Disposing of illiquid securities may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for a Fund to sell them promptly at an acceptable price. A Fund may
have to bear the extra expense of registering such securities for resale and the
risk of substantial delay in effecting such registration. Also market quotations
are less readily available. The judgment of the Advisor may at times play a
greater role in valuing these securities than in the case of illiquid
securities.
Generally speaking, restricted securities may be sold in the U.S. only to
qualified institutional buyers, or in a privately negotiated transaction to a
limited number of purchasers, or 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 in a public offering for which a registration
statement is in effect under the 1933 Act. 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 a Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer, or the
prospectus forming a part of it, is materially inaccurate or misleading.
Zero Coupon Securities. Value Fund and U.S. Growth and Income Fund may invest in
zero coupon securities which pay no cash income and are sold at substantial
discounts from their value at maturity. When held to maturity, their entire
income, which consists of accretion of discount, comes from the difference
between the issue price and their value at maturity. Zero coupon securities are
subject to greater market value fluctuations from changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest (cash). Zero coupon securities which are convertible into common stock
offer the opportunity for capital appreciation as increases (or decreases) in
the market value of such securities closely follow the movements in the market
value of the underlying common stock. Zero coupon convertible securities
generally are expected to be less volatile than the underlying common stocks, as
they usually are issued with maturities of 15 years or less and are issued with
options and/or redemption features exercisable by the holder of the obligation
entitling the holder to redeem the obligation and receive a defined cash
payment.
Zero coupon securities include securities issued directly by the U.S. Treasury,
and U.S. Treasury bonds or notes and their unmatured interest coupons and
receipts for their underlying principal ("coupons") which have been separated by
their holder, typically a custodian bank or investment brokerage firm. A holder
will separate the interest coupons from the underlying principal (the "corpus")
of the U.S. Treasury security. A number of securities firms and banks have
stripped the interest coupons and receipts and then resold them in custodial
receipt programs with a number of different names, including "Treasury Income
Growth Receipts" (TIGRS(TM)) and Certificate of Accrual on Treasuries
(CATS(TM)). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
<PAGE>
When U.S. Treasury obligations have been stripped of their unmatured interest
coupons by the holder, the principal or corpus is sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (cash)
payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself (see "TAXES").
Reverse Repurchase Agreements. In a reverse repurchase agreement, a Fund sells a
portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, a Fund will
maintain liquid assets in a segregated custodial account to cover its obligation
under the agreement. Each Fund will enter into reverse repurchase agreements
only with parties whose creditworthiness has been found satisfactory by the
Advisor. Such transactions may increase fluctuations in the market value of a
Fund's assets and may be viewed as a form of leverage.
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 Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter 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 Adviser's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use
<PAGE>
of futures and options transactions for hedging should tend to minimize the risk
of loss due to a decline in the value of the hedged position, at the same time
they tend to limit any potential gain which might result from an increase in
value of such position. Finally, the daily variation margin requirements for
futures contracts would create a greater ongoing potential financial risk than
would purchases of options, where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value, and possibly income, and such losses can be greater than
if the Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put 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
<PAGE>
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 Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Adviser. The staff of the
SEC currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 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
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
<PAGE>
purposes. Typically, maintaining a futures contract or selling an option thereon
requires the Fund to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potential subsequent variation
margin) for the resulting futures position just as it would for any position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
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 Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions 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.
<PAGE>
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Options on Securities. A Fund may write (sell) "covered" call options on
securities as long as it owns the underlying securities subject to the option or
an option to purchase the same underlying securities, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain for the term of the option a segregated account
consisting of cash or other liquid securities ("eligible securities") to the
extent required by applicable regulation in connection with the optioned
securities. A Fund (other than the Contrarian Fund) may write "covered" put
options provided that, as long as the Fund is obligated as a writer of a put
option, the Fund will own an option to sell the underlying securities subject to
the option, having an exercise price equal to or greater than the exercise price
of the "covered" option, or it will deposit and maintain in a segregated account
eligible securities having a value equal to or greater than the exercise price
of the option. A call option gives the purchaser the right to buy, and the
writer the obligation to sell, the underlying security at the exercise price
during or at the end of the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the exercise price during or at the end of the option period. The premium
received for writing an option will reflect, among other things, the current
market price of the underlying security, the relationship of the exercise price
to such market price, the price volatility of the underlying security, the
option period, supply and demand and interest rates. The Funds may write, and
the Small Cap Relative Value Fund may also purchase, spread options, which are
options for which the exercise price may be a fixed dollar spread or yield
spread between the security underlying the option and another security that is
used as a bench mark. The exercise price of an option may be below, equal to or
above the current market value of the underlying security at the time the option
is written. The buyer of a put who also owns the related security is protected
by ownership of a put option against any decline in that security's price below
the exercise price less the amount paid for the option. The ability to purchase
put options allows the Small Cap Relative Value Fund to protect capital gains in
an appreciated security it owns, without being required to actually sell that
security. At times the Small Cap Relative Value Fund would like to establish a
position in a security upon which call options are available. By purchasing a
call option, the Fund is able to fix the cost of acquiring the security, this
being the cost of the downturn in the market, because the Fund is only at risk
for the amount of the premium paid for the call option which it can, if it
chooses, permit to expire.
During the option period the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain in the amount of the premium received.
If the covered call option writer has to sell the underlying security because of
the exercise of a call option, it realizes a gain or loss from the sale of the
underlying security, with the proceeds being increased by the amount of the
premium.
If a secured put option expires unexercised, the writer realizes a gain from the
amount of the premium. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized
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loss to the extent that the current market value of the underlying security is
less than the exercise price of the put option. However, this would be offset in
whole or in part by gain from the premium received.
Financial Futures Contracts. The Funds may enter into financial futures
contracts for the future delivery of a financial instrument, such as a security
or the cash value of a securities index. This investment technique is designed
primarily to hedge (i.e., protect) against anticipated future changes in market
conditions which otherwise might affect adversely the value of securities or
other assets which the Fund holds or intends to purchase. A "sale" of a futures
contract means the undertaking of a contractual obligation to deliver the
securities or the cash value of an index called for by the contract at a
specified price during a specified delivery period. A "purchase" of a futures
contract means the undertaking of a contractual obligation to acquire the
securities or cash value of an index at a specified price during a specified
delivery period. In some cases, securities called for by a futures contract may
not have been issued at the time the contract was written.
Although some futures contracts by their terms call for the actual delivery or
acquisition of securities or other assets, in most cases a party will close out
the contractual commitment before delivery of the underlying assets by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same month. Such a
transaction, if effected through a member of an exchange, cancels the obligation
to make or take delivery of the underlying securities or other assets. All
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded. A
Fund will incur brokerage fees when it purchases or sells contracts, and will be
required to maintain margin deposits. At the time a Fund enters into a futures
contract, it is required to deposit with its custodian, on behalf of the broker,
a specified amount of cash or eligible securities, called "initial margin." The
initial margin required for a futures contract is set by the exchange on which
the contract is traded. Subsequent payments, called "variation margin," to and
from the broker are made on a daily basis as the market price of the futures
contract fluctuates. The costs incurred in connection with futures transactions
could reduce a Fund's return. Futures contracts entail risks. If the Advisor 's
judgment about the general direction of markets is wrong, the overall
performance may be poorer than if no such contracts had been entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio assets being hedged. In addition, the market prices of
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because, from the point of view of speculators, the
margin requirements in the futures markets are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities or other assets and
movements in the prices of futures contracts, a correct forecast of market
trends by the Advisor may still not result in a successful hedging transaction.
If any of these events should occur, the Fund could lose money on the financial
futures contracts and also on the value of its portfolio assets.
Options on Financial Futures Contracts. Each Fund may write call options on
financial futures contracts; each Fund other than the Contrarian Fund may write
put options on financial futures contracts; and the Small Cap Relative Value
Fund may purchase call and put options on financial futures contracts. An option
on a futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract at a specified exercise price
at any time during the period of the option. Upon exercise, the writer of the
option delivers the futures contract to the holder at the exercise price. A Fund
would be required to deposit with its custodian initial margin and maintenance
margin with respect to put and call options on futures contracts written by it.
A Fund will establish segregated accounts or will provide cover with respect to
written options on financial futures contracts in a manner similar to that
described under "Options on Securities." Options on futures contracts involve
risks similar to those risks relating to transactions in financial futures
contracts described above. Also, an option purchased by the Small Cap Relative
Value Fund may expire worthless, in which case the Fund would lose the premium
paid therefor.
Foreign Currency Options. The Kemper-Dreman High Return Equity Fund may engage
in foreign currency options transactions. A foreign currency option provides the
option buyer with the right to buy or sell a stated amount of foreign currency
at the exercise price at a specified date or during the option period. A call
option gives its owner the right, but not the obligation, to buy the currency,
while a put option gives its owner the right, but not the obligation, to sell
the currency.
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The option seller (writer) is obligated to fulfill the terms of the option sold
if it is exercised. However, either seller or buyer may close its position
during the option period in the secondary market for such options any time prior
to expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the Fund against an adverse movement in the
value of a foreign currency, it does not limit the gain which might result from
a favorable movement in the value of such currency. For example, if a Fund were
holding securities denominated in an appreciating foreign currency and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, it would not have to exercise its put. Similarly, if the Fund had
entered into a contract to purchase a security denominated in a foreign currency
and had purchased a foreign currency call to hedge against a rise in value of
the currency but instead the currency had depreciated in value between the date
of purchase and the settlement date, the Fund would not have to exercise its
call but could acquire in the spot market the amount of foreign currency needed
for settlement.
Foreign Currency Futures Transactions. As part of its financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Kemper-Dreman High Return Equity Fund may use
foreign currency futures contracts and options on such futures contracts.
Through the purchase or sale of such contracts, a Fund may be able to achieve
many of the same objectives as through forward foreign currency exchange
contracts more effectively and possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and are traded on boards of trade and commodities
exchanges. It is anticipated that such contracts may provide greater liquidity
and lower cost than forward foreign currency exchange contracts.
Forward Foreign Currency Exchange Contracts. The Kemper-Dreman High Return
Equity Fund may engage in forward foreign currency transactions. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days
("term") from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. These contracts are traded directly between
currency traders (usually large commercial banks) and their customers. The
Advisor believes that it is important to have the flexibility to enter into such
forward contracts when it determines that to do so is in the best interests of a
Fund. A Fund will not speculate in foreign currency exchange.
If a Fund retains the portfolio security and engages in an offsetting
transaction with respect to a forward contract, the Fund will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between a Fund's entering into a
forward contract for the sale of foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund would
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund would suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain that might result should the value of such currency increase. A
Fund may have to convert its holdings of foreign currencies into U.S. Dollars
from time to time in order to meet such needs as Fund expenses and redemption
requests. Although foreign exchange dealers do not charge a fee for conversion,
they do realize a profit based on the difference (the "spread") between the
prices at which they are buying and selling various currencies.
A Fund will not enter into forward contracts or maintain a net exposure in such
contracts when the Fund would be obligated to deliver an amount of foreign
currency in excess of the value of the Fund's securities or other assets
denominated in that currency. A Fund segregates eligible securities to the
extent required by applicable regulation in connection with forward foreign
currency exchange contracts entered into for the purchase of a foreign currency.
A Fund generally does not enter into a forward contract with a term longer than
one year.
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
<PAGE>
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 Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Currency Transactions. The Financial Services Fund may engage in currency
transactions with Counterparties in order to hedge the value of portfolio
holdings denominated in particular currencies against fluctuations in relative
value. Currency transactions include forward currency contracts, exchange listed
currency futures, exchange listed and OTC options on currencies, and currency
swaps. A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. A
currency swap is an agreement to exchange cash flows based on the notional
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or are
determined to be of equivalent credit quality by the Advisor .
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging or cross hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the 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
<PAGE>
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values. The Fund will usually enter into swaps on a net basis, i.e.,
the two payment streams are netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as the Fund will
segregate assets (or enter into offsetting positions) to cover its obligations
under swaps, the Adviser and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon 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.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
<PAGE>
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 the Fund's obligations or to segregate
cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of 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 sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of 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.
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.
<PAGE>
Lending Portfolio Securities. A Fund may lend its portfolio securities to
brokers, dealers and institutional investors who need to borrow securities in
order to complete certain transactions, such as covering short sales, avoiding
failures to deliver securities or completing arbitrage operations. By lending
its securities, a portfolio can increase its income by the receipt of interest
on the loan. Any gain or loss in the market value of the securities loaned that
might occur during the term of the loan would accrue to the Fund. Securities'
loans will be made on terms which require that (a) the borrower pledge and
maintain (on a daily basis) with the Fund collateral consisting of cash, a
letter of credit or United States Government securities having a value at all
times not less than 100% of the value of the securities loaned, (b) the loan can
be terminated by the Fund at any time, (c) the Fund receives reasonable interest
on the loan which may include the Fund's investing any cash collateral in
interest bearing short-term investments), and (d) any distributions on the
loaned securities must be paid to the Fund. the U.S. Growth and Income Fund will
lend its securities if, as a result, the aggregate of such loans exceeds 33% and
30%, respectively, of the value of each the Fund's total assets. Loan
arrangements made by a Fund will comply with all other applicable regulatory
requirements, including the rules of the New York Stock Exchange, which require
the borrower, after notice, to redeliver the securities within the normal
settlement time of five business days. All relevant facts and circumstances,
including the credit worthiness of the broker, dealer or institution, will be
considered in making decisions with respect to the lending of securities,
subject to review by the Fund's Board of Directors or Board of Trustees, as
applicable. While voting rights may pass with the loaned securities, if a
material event occurs affecting an investment on loan, the loan must be called
and the securities voted. Each Fund (except for the ??? Fund and the U.S. Growth
and Income Fund) does not intend to lend any of its securities if as a result
more than 5% of the net assets of the Fund would be on loan.
Warrants. Each Fund may invest in warrants up to 5% of the value of its
respective net 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.
<PAGE>
Other Considerations. As reflected previously, the Financial Services Fund and
the Value Fund may invest a portion of their assets in fixed income securities
that are in the lower rating categories of recognized rating agencies or are
non-rated, commonly referred to as "junk bonds." These lower rated or non-rated
fixed income securities are considered, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories.
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do those of higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower rated securities also tend to be more sensitive to economic conditions
than are higher rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, regarding lower rated bonds may
depress the prices for such securities. These and other factors adversely
affecting the market value of high yield securities will adversely affect a
Fund's net asset value. Although some risk is inherent in all securities
ownership, holders of fixed income securities have a claim on the assets of the
issuer prior to the holders of common stock. Therefore, an investment in fixed
income securities generally entails less risk than an investment in common stock
of the same issuer.
High yield securities frequently are issued by corporations in the growth stage
of their development. They may also be issued in connection with a corporate
reorganization or a corporate takeover. Companies that issue such high yielding
securities often are highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risk associated with acquiring
the securities of such issuers generally is greater than is the case with higher
rated securities. For example, during an economic downturn or recession, highly
leveraged issuers of high yield securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
or the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss from default by the
issuer is significantly greater for the holders of high yielding securities
because such securities are generally unsecured and are often subordinated to
other creditors of the issuer.
The Financial Services Fund may from time to time purchase securities on a
"when-issued" or "forward delivery" basis for payment and delivery at a later
date. The price of such securities, which may be expressed in yield terms, is
fixed at the time the commitment to purchase is made, but delivery and payment
for the when-issued or forward delivery securities takes place at a later date.
During the period between purchase and settlement, no payment is made by the
Fund to the issuer and no interest accrues to the Fund. To the extent that
assets of the Fund are held in cash pending the settlement of a purchase of
securities, the Fund would earn no income; however, it is the Fund's intention
to be fully invested to the extent practicable and subject to the policies
stated above. While when-issued or forward delivery securities may be sold prior
to the settlement date, the Fund intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a
security on a when-issued or forward delivery basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. At the time of settlement, the market value of the when-issued or forward
delivery securities may be more or less than the purchase price. The Fund does
not believe that its net asset value or income will be adversely affected by its
purchase of securities on a when-issued or forward delivery basis.
PORTFOLIO TRANSACTIONS
Brokerage Commissions.
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase and sale
of securities for a Fund is to obtain the most favorable net results, taking
into account such factors as price, commission where applicable, size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Adviser seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through the familiarity of Scudder Investor
Services, Inc. ("SIS") with commissions charged on comparable transactions, as
well as by comparing commissions paid by a Fund to reported commissions paid by
others. The Adviser routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
<PAGE>
A Fund's purchases and sales of fixed-income securities are generally placed by
the Adviser with primary market makers for these securities on a net basis,
without any brokerage commission being paid by a Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or a
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for a
Fund to pay a brokerage commission in excess of that which another broker might
charge for executing the same transaction on account of execution services and
the receipt of research services. The Adviser has negotiated arrangements, which
are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services
to the Adviser or a Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser may place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of a Fund. In effecting transactions in
over-the-counter securities, orders are placed with the principal market makers
for the security being traded unless, after exercising care, it appears that
more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through SIS, which is a corporation registered
as a broker-dealer and a subsidiary of the Adviser. SIS will place orders on
behalf of a Fund with issuers, underwriters or other brokers and dealers. SIS
will not receive any commission, fee or other remuneration from a Fund for this
service.
Although certain research, market and statistical information from
broker/dealers may be useful to a Fund and to the Adviser, it is the opinion of
the Adviser that such information only supplements the Adviser's own research
effort since the information must still be analyzed, weighed, and reviewed by
the Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than a Fund, and not all such information is used by
the Adviser in connection with a Fund. Conversely, such information provided to
the Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to a
Fund.
The Trustees or Directors review, from time to time, whether the recapture for
the benefit of a Fund of some portion of the brokerage commissions or similar
fees paid by a Fund on portfolio transactions is legally permissible and
advisable.
<PAGE>
Dreman Value Management, L.L.C.
Under the sub-advisory agreement between the Advisor and Dreman Value
Management, L.L.C. ("DVM"), DVM places all orders for purchases and sales of
Financial Service Fund's and High Return Equity Fund's securities. At times
investment decisions may be made to purchase or sell the same investment
securities of a Fund and for one or more of the other clients managed by DVM.
When two or more of such clients are simultaneously engaged in the purchase or
sale of the same security through the same trading facility, the transactions
are allocated as to amount and price in a manner considered equitable to each.
Position limits imposed by national securities exchanges may restrict the number
of options a 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 a Fund. On the
other hand, the ability of a Fund to participate in volume transactions may
produce better executions for a Fund in some cases. The Board members believes
that the benefits of DVM's organization outweigh any limitations that may arise
from simultaneous transactions or position limitations.
DVM, in effecting purchases and sale of portfolio securities for the account of
a Fund, will implement a Fund's policy of seeking best execution of orders. DVM
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 a
Fund and DVM. 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 DVM. In selecting among firms believed to meet
the criteria for handling a particular transaction, DVM may give consideration
to those firms that have sold or are selling shares of a 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 a Fund and DVM,
although DVM is not authorized to pay higher commissions to firms that provide
such services, except as described below.
DVM 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
<PAGE>
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 DVM in cash. Subject to Section 28(e) and procedures
adopted by the Board, a Fund could pay a firm that provides research services
commissions for effecting a securities transaction for a Fund in excess of the
amount other firms would have charged for the transaction if DVM 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 DVM's overall responsibilities to a
Fund and other clients. Not all of such research services may be useful or of
value in advising a Fund. Research benefits will be available for all clients of
DVM. The sub-advisory fee paid by the Advisor to DVM is not reduced because
these research services are received.
Brokerage Commissions
The table below shows total brokerage commissions paid by the Funds for the last
three fiscal years or periods, as applicable and for the most recent fiscal
year, the percentage thereof that was allocated to firms based upon research
information provided. The information for Small Cap Relative Value Fund,
Financial Services Fund and U.S. Growth and Income Fund is provided for the
periods since each Fund's commencement of operations, as noted below.
<TABLE>
<CAPTION>
Allocated to firms based
Fund Fiscal 1999 on Research in Fiscal 1999 Fiscal 1998 Fiscal 1997*
- ---- ----------- -------------------------- ----------- ------------
<S> <C> <C> <C> <C>
Contrarian Fund $ xx% $284,000 $243,000
Financial Services Fund $X,xxx,xxx Xx% $116,000** $X,xxx,xxx
High Return Equity Fund $ Xx% $2,979,000 $1,432,000
Small Cap Value Fund $ xx% $1,638,000 $1,339,000
Small Cap Relative Value Fund $ xx%** $2,000 N/A
U.S. Growth and Income Fund $x,xxx,xxx xx% $18,223*** $xxx,xxx
Value Fund
$x,xxx,xxx xx% $344,034 $354,337
</TABLE>
* January 1, 1997 - November 30, 1997.
*** From March 9, 1998 through November 30, 1998
*** From January 30, 1998 through September 30, 1998
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Scudder Kemper Investments, Inc., 345 Park Avenue, New York,
New York, is the investment manager of each Fund. The Advisor is approximately
70% owned by Zurich Financial Services, Inc., a newly formed global insurance
and financial services company. Pursuant to an investment management agreement,
Scudder Kemper Investments, Inc. acts as the investment adviser of each Fund,
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 Board
members or officers of the Funds if elected to such positions. The investment
management agreement provides that each Fund pays the charges and expenses of
its operations, including the fees and expenses of the directors (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
<PAGE>
related thereto, taxes and membership dues. Each Fund bears the expenses of
registration of its shares with the SEC, and effective January 1, 2000, pays the
cost of qualifying and maintaining the qualification of each Fund's shares for
sale under the securities laws of the various states ("Blue Sky expenses").
Prior to January 1, 2000, Kemper Distributors Inc., ("KDI") as principal
underwriter, paid the Blue Sky expenses.
Responsibility for overall management of each Fund rests with its Board members
and officers. Professional investment supervision is provided by the Adviser.
The investment management agreements provide that the Advisor shall act as each
Fund's investment adviser, manage its investments and provide it with various
services and facilities. 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 former
investment manager of the Funds, and Scudder changed it name to Scudder Kemper
Investments, Inc. As a result of the transaction, Zurich owned approximately 70%
of the Adviser, with the balance owned by the Adviser's officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in the Adviser) 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 shareholder initially owned approximately 57%
of Zurich Financial Services, Inc., with the balance initially owned by former
B.A.T shareholders.
Upon consummation of this transaction, the Funds' existing investment management
agreements with the Advisor was deemed to have been assigned and, therefore,
terminated. The Board has approved new investment management agreements (the
"Agreements") with the Adviser, which are substantially identical to the current
investment management agreements, except for the dates of execution and
termination. These Agreements became effective upon the termination of the then
current investment management agreements and were approved by shareholders at a
special meeting.
Each Agreement will continue in effect until September 30, 2000 and from year to
year thereafter only if their 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. Each
Agreements 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.
Pursuant to the investment management agreement, the Advisor acts as each Fund's
investment advisor, 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 directors or officers of the Fund if elected to such
positions.
<PAGE>
The Advisor maintains a large research department, which conducts ongoing
studies of the factors that affect the position of various industries, companies
and individual securities. In this work, the Advisor utilizes certain reports
and statistics from a wide variety of sources, including brokers and dealers who
may execute portfolio transactions for each Fund and for clients of the Advisor,
but conclusions are based primarily on investigations and critical analyses by
its own research specialists.
Certain investments may be appropriate for a Fund and also for other clients
advised by the Advisor. Investment decisions for a Fund and other clients are
made with a view toward 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 date. In
such event, such transactions will be allocated among the clients in a manner
believed by the Advisor 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 a Fund may be combined with
those of other clients of the Advisor in the interest of achieving the most
favorable net results to a Fund.
Under the Agreements, the Advisor provides each Fund with continuing investment
management for each Fund's portfolio consistent with each Fund's investment
objectives, policies and restrictions and determines what securities shall be
purchased for the portfolio of each Fund, what portfolio securities shall be
held or sold by each Fund and what portion of each 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 Code and to each Fund's investment objectives,
policies and restrictions and subject, further, to such policies and
instructions as the Trustees of the Trust may from time to time establish. The
Advisor also advises and assists the officers of the Trust 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 each Fund.
The Advisor also renders significant administrative services (not otherwise
provided by third parties) necessary for each Fund's operations as 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 each
Fund (such as a 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 a Fund's federal, state and
local tax returns; preparing and filing a 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 a Fund under applicable federal and state securities
laws; maintaining each Fund's books and records to the extent not otherwise
maintained by a third party; assisting in establishing accounting policies of
each Fund; assisting in the resolution of accounting and legal issues;
establishing and monitoring each Fund's operating budget; processing the payment
of each Fund's bills; assisting each Fund in, and otherwise arranging for, the
payment of distributions and dividends; and otherwise assisting each 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 the Trust affiliated with the Advisor and makes
available, without expense to the Trust, the services of such Trustees, officers
and employees of the Advisor as may duly be elected officers or Trustees of the
Trust, subject to their individual consent to serve and to any limitations
imposed by law, and provides the Trust's office space and facilities.
Under the Agreements each 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 expenses of and the fees for
registering or qualifying securities for sale; the fees and expenses of
Trustees, officers and employees of the Trust 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. Each Fund may
arrange to have third parties assume all or part of the expenses of sale,
underwriting and distribution of shares of each Fund. Each 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 Agreements expressly provide that the Advisor shall not be required to pay a
pricing agent of each Fund for portfolio pricing services, if any.
<PAGE>
In reviewing the terms of the Agreements and in discussions with the Advisor
concerning such Agreements, the Trustees of the Trust who are not "interested
persons" of the Trust have been represented by Vedder, Price, Kaufman &
Kammholz, as independent counsel at each Fund's expense.
The Agreements provide that the Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by a Fund in connection with
matters to which the Agreements 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 Agreements.
Officers and employees of the Advisor from time to time may have transactions
with various banks, including a 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 the Trust may have dealings with the Trust
as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Trust.
Employees of the Advisor and certain of its subsidiaries are permitted to make
personal securities transactions, subject to requirements and restrictions set
forth in the Advisor's Code of Ethics. The Code of Ethics contains 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 the Fund. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, 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 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 Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
The current investment management fee rates are payable monthly at the annual
rates shown below:
<TABLE>
<CAPTION>
Financial
Services High Return Small Cap
Average Daily Net Assets Contrarian Fund Fund Equity Fund Value Fund
------------------------ --------------- ---- ----------- ----------
<S> <C> <C> <C> <C>
$0 - $250 million 0.75% 0.75% 0.75% 0.75%
$250 million - $1 billion 0.72 0.72 0.72 0.72
$1 billion - $2.5 billion 0.70 0.70 0.70 0.70
$2.5 billion - $5 billion 0.68 0.68 0.68 0.68
$5 billion - $7.5 billion 0.65 0.65 0.65 0.65
$7.5 billion - $10 billion 0.64 0.64 0.64 0.64
$10 billion - $12.5 billion 0.63 0.63 0.63 0.63
Over $12.5 billion 0.62 0.62 0.62 0.62
</TABLE>
Small Cap
Relative U.S. Growth and
Average Daily Net Assets Value Fund Income Fund
------------------------ ---------- -----------
$0 - $250 million 0.75% 0.60%
$250 million - $1 billion 0.72 0.57
$1 billion - $2.5 billion 0.70 0.55
$2.5 billion - $5 billion 0.68 0.53
$5 billion - $7.5 billion 0.65 0.53
$7.5 billion - $10 billion 0.64 0.53
$10 billion - $12.5 billion 0.63 0.53
Over $12.5 billion 0.62 0.53
<PAGE>
The table below shows the total investment management fees paid by the Funds for
the last three fiscal years. The information for Small Cap Relative Value Fund,
Financial Services Fund and U.S. Growth and Income Fund is presented for the
periods since each Fund's commencement of operations, as noted below.
<TABLE>
<CAPTION>
Fund Fiscal 1999 Fiscal 1998 Fiscal 1997*
- ---- ----------- ----------- ------------
<S> <C> <C> <C>
Contrarian Fund $x,xxx,xxx $X,xxx,xxx $903,000
$x,xxx,xxx
Financial Services Fund** $721, 000 $xxx,xxx
High Return Equity Fund $xx,xxx,xxx $29,284,000 $12,084,000
Small Cap Value Fund $x,xxx,xxx $8,166,000 $5,160,000
Small Cap Relative Value Fund** $x,xxx $3,000 N/A
U.S. Growth and Income Fund
Value Fund
</TABLE>
*January 1, 1997 - November 30, 1997.
**March 9, 1998 - September 30, 1998
***May 6, 1998 - September 30, 1998
The Advisor has agreed to waive temporarily a portion of its management fee for
the Small Cap Relative Value Fund to the extent described in the prospectus.
FINANCIAL SERVICES FUND AND HIGH RETURN EQUITY FUND SUB-ADVISER. Dreman Value
Management, L.L.C. ("DVM"), Three Harding Road, Red Bank, New Jersey 07701, is
the sub-advisor for the Financial Services Fund and High Return Equity Fund. DVM
is controlled by David N. Dreman. DVM serves as sub-advisor pursuant to the
terms of Sub-Advisory Agreements between it and the Adviser. DVM was formed in
April 1997 and has served as sub-advisor for the High Return Equity Fund since
August 1997 and for Financial Services Fund since its inception in March, 1998.
Under the terms of the Sub-Advisory Agreements, DVM manages the investment and
reinvestment of the Financial Services Fund and High Return Equity Fund's
portfolios and will provide such investment advice, research and assistance as
the Advisor may, from time to time, reasonably request.
The Advisor pays DVM for its services a sub-advisory fee, payable monthly, at
the annual rate of 0.24% of the first $250 million of a Fund's average daily net
assets, 0.23% of the average daily net assets between $250 million and $1
billion, 0.224% of average daily net assets between $1 billion and $2.5 billion,
0.218% of average daily net assets between $2.5 billion and $5 billion, 0.208%
of average daily net assets between $5 billion and $7.5 billion, 0.205% of
average daily net assets between $7.5 billion and $10 billion, 0.202% of average
daily net assets between $10 billion and $12.5 billion and 0.198% of the Fund's
average daily net assets over $12 billion. In addition, for High Return Equity
Fund, The Advisor has guaranteed to pay a minimum of $8 million to DVM during
each of the calendar years 2000, 2001 and 2002 that DVM serves as sub-adviser.
The table below shows the total sub-advisory fees paid by the Funds for the last
three fiscal periods.
<TABLE>
<CAPTION>
Fund Fiscal 1999 Fiscal 1998 Fiscal 1997*
- ---- ----------- ----------- ------------
<PAGE>
<S> <C> <C> <C>
Financial Services Fund $xx,xxx $86,000**
High Return Equity $x,xxx,xxx $9,776,000 $2,557,000
</TABLE>
* For the period August 1997 (beginning of sub-advisory relationship) through
November 30, 1997.
** For the period March 9, 1998 (commencement of operations) to November
30, 1998
The Sub-Advisory Agreements provide that DVM 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 Agreements relate, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
DVM in the performance of its duties or from reckless disregard by DVM of its
obligations and duties under the Sub-Advisory Agreements.
The Sub-Advisory Agreement for High Return Equity Fund remains in effect until
December 31, 2002 unless sooner terminated or not annually approved as described
below. Notwithstanding the foregoing, the Sub-Advisory Agreement shall continue
in effect through December 31, 2002 and year to year thereafter, but only as
long as such continuance is specifically approved at least annually (a) by a
majority of the directors who are not parties to such agreement or interested
persons of any such party except in their capacity as directors of the Fund, and
(b) by the shareholders or the Board of the Fund. The Sub- Advisory Agreement
may be terminated at any time upon 60 days' notice by the Advisor or by the
Board 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. DVM may not terminate the Sub-Advisory
Agreement prior to July 30, 2000. Thereafter, DVM may terminate the Sub-Advisory
Agreement upon 90 days' notice to the Adviser.
The Sub-Advisory Agreement for Financial Services Fund remains in effect until
February 1, 2003 unless sooner terminated or not annually approved as described
below. Notwithstanding the foregoing, the Sub-Advisory Agreement shall continue
in effect through February 1, 2003 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 KET, and (b) by the
shareholders of the Fund or the Board of Trustees of KET. 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
not terminate the Sub-Advisory Agreement prior to February 1, 2003. Thereafter,
the Sub-Advisor may terminate the Sub-Advisory Agreement upon 90 days' notice to
the Adviser.
FUND ACCOUNTING AGENT. Scudder Fund Accounting Corp. ("SFAC"), (address to be
innserted ) a subsidiary of Scudder Kemper Investments, Inc., is responsible for
determining the daily net asset value per share of the Funds and maintaining all
accounting records related thereto. Currently, SFAC receives no fee for its
services to the Contrarian, High Return Equity and Small Cap Value Funds;
however, subject to Board approval, at some time in the future, SFAC may seek
payment for its services to those Funds under its agreement with such Funds. The
Financial Services Fund, Small Cap Relative Value Fund, U.S. Growth and Income
Fund and Value Fund each pay SFAC an annual fee equal to 0.025% of the first
$150 million of average daily net assets, 0.0075% of the next $850 million of
such assets and 0.0045% of such assets in excess of $1 billion, plus holding and
transaction charges for this service. For fiscal year 1999, the Financial
Services Fund paid $xxx,xxx in fees to Scudder Fund Accounting Corporation
pursuant to the fund accounting agreement, and for the period of March 9, 1998
(commencement of operations) to November 30, 1998, the Financial Services Fund
paid $88,000. For the fiscal year ended 1998, Small Cap Relative Value Fund did
not pay any fees to SFAC, and for the period January 30, 1998 to September 30,
1998, U.S. Growth and Income Fund paid no fees to SFAC after a waiver of
$25,000. For the period ending ______________, Small Cap Relative Value Fund and
U.S. Growth and Income Fund paid SFAC $xx,xxx ans $xx,xxx, respectively. For the
fiscal year ended September 30, 1999, Value Fund, consisting of multiple classes
of shares, incurred annual fees of $107,935, of which $12,046 was unpaid at
September 30, 1999. For the fiscal year ended September 30, 1998, Value Fund,
which consisted of multiple classes of shares during such period, incurred
annual fees of $50,128, of which $5,562 was unpaid at September 30, 1998.
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution
<PAGE>
agreement") with each Fund, Kemper Distributors, Inc. ("KDI"), 222 South
Riverside Plaza, Chicago, Illinois 60606, an affiliate of the Adviser, and a
wholly-owned subsidiary of the Adviser, is the principal underwriter and
distributor for the shares of each Fund and acts as agent of each Fund in the
continuous offering of its shares. KDI bears all its expenses of providing
services pursuant to the distribution 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. KDI may enter into
related selling group agreements with various broker-dealers, including
affiliates of KDI, that provide distribution services.
Class A Shares. KDI receives no compensation from the Funds as principal
underwriter for Class A shares and pays all expenses of distribution of each
Fund's Class A shares under the distribution agreement not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays or
allows concessions or discounts to firms for the sale of each Fund's shares. The
following information concerns the underwriting commissions paid in connection
with the distribution of each Fund's Class A shares for the periods noted.
<PAGE>
<TABLE>
<CAPTION>
Commissions Retained by Commissions Underwriter Commissions Paid to
Fund Fiscal Year Underwriter Paid to All Firms Affiliated Firms
- ---- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
Contrarian Fund 1999 $xx,xxx $xxx,xxx $x,xxx
1998 $52,000 $581,000 $5,000
1997* $90,000 $576,000 $--
Financial Services Fund 1999 $x,xxx,xxx $xxx,xxx $xxx,xxx
1998 $86,000 $3,035,000 $0
High Return Equity Fund 1999 $x,xxx,xxx $xx,xxx,xxx $xxx,xxx
1998 $2,099,000 $17,133,000 $228,000
1997* $3,113,000 $13,161,000 $221,000
Small Cap Value Fund 1999
1998 $233,000 $2,515,000 $57000
1997* $584,000 $4,828,000 $68,000
1996 $231,000 $1,734,000 $114,000
Small Cap Relative Value 1999
Fund**
1998 $1,000 $3,000 $0
U.S. Growth and Income 1999 $x,xxx $x,xxx $x
Fund
1998*** $5,000 $292,000 $0
Value Fund 1999 $x,xxx $x,xxx $x
1998 $1,446 $351,886 $0
</TABLE>
* Amounts paid from January 1, 1997 through November 30, 1997.
** For the period of May 6, 1998 (commencement of operations) to September 30,
1998.
*** For the period of January 30, 1998 to September 30, 1998.
Class B and C Shares. The Funds have adopted plans under Rule 12b-1 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 investment and may cost more than other types of
sales charges. The table below shows amounts paid in connection with the
Contrarian, High Return Equity and Small Cap Value Funds' Rule 12b-1 Plan during
the period January 1, 1997 through November 30, 1997.
For its services under the distribution agreement, KDI receives a fee from each
Fund pursuant to a Rule 12b-1 Plan, payable monthly, at the annual rate of 0.75%
of average daily net assets of such Fund attributable to Class B shares. This
fee is accrued daily as an 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 distribution agreement, KDI receives a fee from each
Fund pursuant to a Rule 12b-1 Plan, payable monthly, at the annual rate of 0.75%
of average daily net assets of such Fund attributable to 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 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 and the fee continues until terminated by KDI or a Fund.
KDI also receives any contingent deferred sales charges
<PAGE>
received on redemptions of Class C shares. See "Redemption or Repurchase of
Shares--Contingent Deferred Charge--Class C Shares."
Expenses of the Funds and of KDI in connection with the Rule 12b-1 Plans for the
Class B and Class C shares are set forth below. A portion of the marketing,
sales and operating expenses shown below could be considered overhead expense.
<PAGE>
<TABLE>
<CAPTION>
Contingent Total Distribution
Distribution Deferred Distribution Fees Fees Paid by
Fees Paid by Sales Charge Paid by Underwriter
Fund Class Fiscal Fund to to Underwriter to to Affiliated
B Shares Year Underwriter Underwriter Firms Firms
- -------- ---- ----------- ----------- ----- -----
<S> <C> <C> <C> <C> <C>
Contrarian Fund 1999 $xxx,xxx $xxx,xxx $xxx,xxx --
1998 $648,000 $117,000 $903,000 --
1997* $353,000 $62,000 $989,000 --
Financial 1999 $xxx,xxx $xxx,xxx $xxx,xxx
Services Fund
1998 $397,000 $122,000 $3,952,000 $33,000
High Return 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Equity Fund
1998 $13,773,000 2,717,000 $34,050,000 --
1997* $5,477,000 $817,000 $29,872,000 --
Small Cap 1999 $xxx,xxx $xxx,xxx $xxx,xxx --
Value Fund
1998 $3,293,000 $857,000 $4,888,000 --
1997* $1,716,000 $221,000 $9,907,000 --
Small Cap** 1999 $0$xxx,xxx $xxx,xxx --
Relative Value
Fund
1998 $0 $46,000 --
U.S. Growth and 1999 $xxx,xxx $xxx,xxx
Income Fund
1998 $12,000 2,000 $256,000
Value Fund 1999 $xxx,xxx $xxx,xxx
1998 $28,037 $9,480 $674,408 $0
</TABLE>
Other Distribution Expenses Paid by Underwriter
-----------------------------------------------
Marketing Misc.
Advertising Prospectus and Sales Operating Interest
and Literature Printing Expenses Expenses Expense
- -------------- -------- -------- -------- -------
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$119,000 $12,000 $231,000 $54,000 $286,000
$96,000 $7,000 $287,000 $7,000 $166,000
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$240,000 $28,000 $597,000 $82,000 $234,000
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$4,192,000 $425,000 $8,215,000 $1,224,000 $6,398,000
$2,812,000 $210,000 $7,887,000 $330,000 $2,538,000
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$969,000 $94,000 $1,736,000 $80,000 $1,730,000
$867,000 $65,000 $2,409,000 $78,000 $810,000
-- -- $xxx,xxx $xxx,xxx $xxx,xxx
-- -- $1,000 $1,000 $1,000
$xxx,xxx $xxx,xxx $xxx,xxx
$11,000 $1,000 $28,000 $9,000 $10,000
$xxx,xxx $xxx,xxx $xxx,xxx
$11,890 $1,657 $36,916 $12,606 $15,135
<PAGE>
<TABLE>
<CAPTION>
Contingent Total Distribution
Distribution Deferred Distribution Fees Fees Paid by
Fees Paid by Sales Charge Paid by Underwriter
Fund Class Fiscal Fund to to Underwriter to to Affiliated
C Shares Year Underwriter Underwriter Firms Firms
- -------- ---- ----------- ----------- ----- -----
<S> <C> <C> <C> <C> <C>
Contrarian Fund 1998 $70,000 $3,000 $73,000 --
1997* $29,000 $2,000 $38,000 --
1996 $2,000*** $2,000 $15,000 --
Financial 1999 $xxx,xxx $xxx,xxx $xxx,xxx
Services Fund
1998 $60,000 $7,000 $2,000 $2,000
High Return 1998 $2,588,000 $105,000 $2,886,000 --
Equity Fund
1997 $901,000 $31,000 $1,417,000 --
1996 $96,000*** $3,000 $281,000 --
Small Cap 1998 $803,000 $40,000 $984,000 --
Value Fund
1997* $392,000 $22,000 $677,000 --
1996 $48,000 $1,000 $130,000 --
Small Cap 1998 $0 -- -- --
Relative Value
Fund**
U.S. Growth and 1999 $xxx,xxx $xxx,xxx
Income Fund
1998 $12,000 2,000 $256,000
Value Fund 1999 $xxx,xxx $xxx,xxx
1998 $4,063 $127 $2,833 $0
</TABLE>
Other Distribution Expenses Paid by Underwriter
-----------------------------------------------
Marketing Misc.
Advertising Prospectus and Sales Operating Interest
and Literature Printing Expenses Expenses Expense
-------------- -------- -------- -------- -------
$22,000 $2,000 $44,000 $16,000 $17,000
$12,000 $1,000 $35,000 $9,000 $9,000
$20,000 $1,000 $41,000 $6,000 $3,000
$xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
$48,000 $6,000 $121,000 $17,000 $6,000
$956,000 $99,000 $1,915,000 $292,000 $428,000
$565,000 $42,000 $1,309,000 $32,000 $150,000
$202,000 $13,000 $237,000 $55,000 $22,000
$296,000 $29,000 $540,000 $99,000 $185,000
$248,000 $19,000 $537,000 $10,000 $69,000
$103,000 $7,000 $136,000 $35,000 $12,000
-- -- $1,000 -- --
$xxx,xxx $xxx,xxx $xxx,xxx
$11,000 $1,000 $28,000 $9,000 $10,000
$xxx,xxx $xxx,xxx $xxx,xxx
$1,880 $273 $5,906 $7,228 $161
(1) No contingent deferred sales charges have been imposed on Class C shares
purchased prior to April 1, 1996.
* Amounts paid from January 1, 1997 through November 30, 1997.
** Amounts paid from May 6, 1998 (commencement of operations) to September 30,
1998.
<PAGE>
*** Amounts shown are after expense waiver.
<PAGE>
Rule 12b-1 Plan. If the Rule 12b-1 Plan (the "Plan") is terminated in accordance
with its terms, the obligation of a Fund to make payments to KDI pursuant to the
Plan will cease and the Fund will not be required to make any payments past the
termination date. Thus, there is no legal obligation for the Fund to pay any
expenses incurred by KDI in excess of its fees under the Plan, if for any reason
the Plan is terminated in accordance with its terms. Future fees under the Plan
may or may not be sufficient to reimburse KDI for its expenses incurred. (See
"Principal Underwriter" for more information.)
Each distribution agreement and Rule 12b-1 Plan continues in effect from year to
year so long as such continuance is approved for each class at least annually by
a vote of the Board of the Fund, including the Board members who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the agreement. Each agreement automatically terminates in the event
of its assignment and may be terminated for a class at any time without penalty
by a Fund for that 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 or a majority
of the Board members 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 Rule 12b-1 Plan 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 a Fund and all material
amendments must in any event be approved by the Board in the manner described
above with respect to the continuation of the agreement.
ADMINISTRATIVE SERVICES. Administrative services are provided to each Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all its expenses of providing services pursuant to the administrative
agreement between KDI and each Fund, including the payment of service fees. Each
Fund pays KDI an administrative services fee, payable monthly, at an annual rate
of up to 0.25% of average daily net assets of the Class A, B and C shares of the
Fund.
KDI has entered into related arrangements with various broker-dealer firms and
other service or administrative firms ("firms"), that provide services and
facilities for their customers or clients who are investors in the Funds. 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 Funds,
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,
normally payable quarterly, at an annual rate of up to 0.25% of the net assets
in the Funds' 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 the Fund. Firms to which service fees
may be paid may include affiliates of KDI.
The following information concerns the administrative services fee paid by each
Fund for the fiscal years ended 1999, 1998 and 1997. The information for Small
Cap Relative Value Fund, Financial Services Fund and U.S. Growth and Income Fund
is presented for the periods since each Fund's commencement of operations, as
noted below.
<TABLE>
<CAPTION>
Administrative Service Fees Paid by Fund
---------------------------------------- Service Fees Paid by
Fiscal Year Service Fees Paid by Administrator to
Fund ----------- Class A Class B Class C Administrator to Firms Affiliated Firms
- ---- ------- ------- ------- ---------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Contrarian Fund 1999 $xxx,xxx $xxx,xxx $xx,xxx $xxx,xxx $x
1998 $263,000 $214,000 $23,000 $497,000 $0
1997* $146,000 $111,000 $10,000 $284,000 --
Financial Sercices Fund 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
<PAGE>
1998 $123,000 $132,000 $20,000 $344,000 $0
High Return Equity Fund 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
1998 $4,407,000 $4,610,000 $872,000 $10,206,000 $21,000
1997* $1,732,000 $1,818,000 $299,000 $4,879,000 $15,000
Small Cap Value Fund 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
1998 $1,384,000 $1,099,000 $266,00 $2,586,000 $5,000
1997* $936,000 $577,000 $130,000 $2,042,000 $5,000
Small Cap Relative 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $0
Value Fund
1998** $0 $0*** $0*** $2,000 $0
U.S. Growth and Income 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
Fund
1998 $12,000 $6,000 $0 $256,000 $0
Value Fund 1999 $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx $xxx,xxx
1998 $11,901 $9,334 $1,346 $22,581 $0
</TABLE>
* Amounts paid from January 1, 1997 through November 30, 1997
** Amounts paid from May 6, 1998 (commencement of operations) to September 30,
1998.
*** Amounts shown are after expense waiver.
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 Funds. Currently, the
administrative services fee payable to KDI is payable at the annual rate of
0.25% based upon Fund assets in accounts for which a firm provides
administrative serviceseffective January 1, 2000, a the annual reat of 0.15%
based upon fund assets. . 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.
Certain Board members or officers of the Funds are also directors or officers of
the Advisor or KDI as indicated under "Officers and Board Members."
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 Funds. State Street
attends to the collection of principal and income, and payment for and
collection of proceeds of securities bought and sold by the Funds. Investors
Fiduciary Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri
64105 is also the transfer agent and dividend-paying agent for the Contrarian,
High Return Equity and Small Cap Value Funds. Pursuant to a services agreement
with IFTC, Kemper Service Company ("KSVC"), an affiliate of the Adviser, serves
as "Shareholder Service Agent" of the Contrarian, High Return Equity and Small
Cap Value Funds, and as such, performs all of IFTC's duties as transfer agent
and dividend paying agent. KSVC also serves as the transfer agent and
dividend-paying agent, as well as the Shareholder Service Agent, of the Small
Cap Relative Value Fund. IFTC receives as transfer agent for the Contrarian,
High Return Equity and Small Cap Value Funds, and pays to KSVC as follows: prior
to January 1, 1999, annual account fees at a maximum rate of $6 per account plus
account set up, transaction and maintenance charges, annual fees associated with
the contingent deferred sales charge (Class B shares only) and out-of-pocket
expense reimbursement and effective January 1, 1999, annual account fees of
$10.00 ($18.00 for retirement accounts) plus set up
<PAGE>
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.
IFTC's fee is reduced by certain earnings credits in favor of the Contrarian,
High Return Equity and Small Cap Value Funds and State Street's custodial fee is
reduced by certain earnings credits in favor of the Small Cap Relative Value
Fund. KSVC receives as transfer agent for the Small Cap Relative Value Fund
prior to January 1, 1999, annual account fees at a maximum rate of $6 per
account plus account set up, transaction and maintenance charges, annual fees
associated with the contingent deferred sales charge (Class B shares only) and
out-of-pocket expense reimbursement and effective January 1, 1999, annual
account fees of $10.00 ($18.00 for retirement accounts) plus set up charges,
annual fees associated with the contingent deferred sales charges (Class B
only), an asset-based fee of 0.08% and out-of-pocket reimbursement. The
following shows for each Fund, the shareholder service fees IFTC remitted to
KSVC for fiscal year 1999.
Fund Fees Paid to KSvC
- ---- -----------------
Contrarian Fund $xxx,xxx
Financial Services Fund $xxx,xxx
High Return Equity Fund $xxx,xxx
Small Cap Value Fund $xxx,xxx
Small Cap Relative Value Fund $xxx,xxx
U.S. Growth and Income Fund $xxx,xxx
Value Fund $xxx,xxx
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Funds' independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Funds' annual financial statements, review certain
regulatory reports and the Funds' federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Funds. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
LEGAL COUNSEL. Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street,
Chicago, Illinois 60601, serves as legal counsel to the Contrarian, High Return
Equity and Small Cap Value Funds. Dechert Price & Rhoads, Ten Post Office Square
South, Boston, Massachusetts serves as counsel to the Small Cap Relative Value
Fund, Financial Services Fund, U.S. Growth and Income Fund and Value Fund.
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
Alternative Purchase Arrangements. Class A shares of each Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of each Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. See,
also, "Summary of Expenses." Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class that
best suits their circumstances and objectives.
<TABLE>
<CAPTION>
Annual
12b-1 Fees
(as a % of
average daily
Sales Charge net assets) Other Information
------------ ----------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales None Initial sales charge waived
charge of 5.75% of the or reduced for certain
public offering price purchases
Class B Maximum contingent deferred 0.75% Shares convert to Class A
sales charge of 4% of shares six years after
redemption proceeds; issuance
<PAGE>
declines to zero after
six years
Class C Contingent deferred sales 0.75% No conversion feature
charge of 1% of redemption
proceeds for redemptions
made during first year after
purchase
</TABLE>
The minimum initial investment for each Fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $250 and the minimum subsequent investment is $50. Under
an automatic investment plan, such as Bank Direct Deposit, Payroll Direct
Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
Initial Sales Charge Alternative--Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
Allowed
to Dealers
as a
Percentage
As a As a Percentage of
Percentage of of Net Offering
Amount of Purchase Offering Price Asset Value* Price
------------------ -------------- ------------ -----
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over 0.00** 0.00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent
deferred sales charge as discussed below.
*** Commission is payable by KDI as discussed below.
Each Fund receives the entire net asset value of all its Class A shares sold.
KDI, the Funds' principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow 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 a Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in such Fund or other Kemper Mutual
Funds listed under "Special Features--Class A Shares--Combined Purchases" totals
at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features"; or (b) a participant-directed qualified
retirement plan described in Code Section 401(a) or a participant-directed
non-qualified deferred compensation plan described in Code Section 457 or a
<PAGE>
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 200 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of shares purchased under
the Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of a Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, .50% on the next $45 million and .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 under the foregoing schedules, KDI will
consider the cumulative amount invested by the purchaser in a Fund and other
Kemper Mutual Funds listed under "Special Features--Class A Shares--Combined
Purchases," including purchases pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features referred to above. The privilege of
purchasing Class A shares of a Fund at net asset value under the Large Order NAV
Purchase Privilege is not available if another net asset value purchase
privilege also applies.
Class A shares of a Fund or any other Kemper Mutual Fund listed under "Special
Features--Class A Shares--Combined Purchases" may be purchased at net asset
value in any amount by members of the plaintiff class in the proceeding known as
Howard and Audrey Tabankin, et al. v. Kemper Short-Term Global Income Fund, et.
al., Case No. 93 C 5231 (N.D.IL). This privilege is generally non-transferable
and continues for the lifetime of individual class members and for a ten year
period for non-individual class members. To make a purchase at net asset value
under this privilege, the investor must, at the time of purchase, submit a
written request that the purchase be processed at net asset value pursuant to
this privilege specifically identifying the purchaser as a member of the
"Tabankin Class." Shares purchased under this privilege will be maintained in a
separate account that includes only shares purchased under this privilege. For
more details concerning this privilege, class members should refer to the Notice
of (1) Proposed Settlement with Defendants; and (2) Hearing to Determine
Fairness of Proposed Settlement dated August 31, 1995, issued in connection with
the aforementioned court proceeding. For sales of Fund shares at net asset value
pursuant to this privilege, KDI may in its discretion pay investment dealers and
other financial services firms a concession, payable quarterly, at an annual
rate of up to .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
a Fund, its Advisor , 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; (c)
officers, directors, and employees of service agents of the Funds; (d)
shareholders who owned shares of Kemper Value Series, Inc. ("KVS") on September
8, 1995, and have continuously owned shares of KVS (or a Kemper Fund acquired by
exchange of KVS shares) since that date, for themselves or members of their
families; and (e) any trust, pension, profit-sharing or other benefit plan for
only such persons. Class A shares may be sold at net asset value in any amount
to selected employees (including their spouses and dependent children) of banks
and other financial services firms that provide administrative services related
to order placement and payment to facilitate transactions in shares of the Funds
for their clients pursuant to an agreement with KDI or one of its affiliates.
Only those employees of such banks and other firms who as part of their usual
duties provide services related to transactions in Fund shares may purchase a
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 a Fund's Class A
shares at net asset value through reinvestment programs described in the
prospectuses of such trusts that have such programs. Class A shares of a Fund
may be sold at net asset value through certain investment advisers registered
under the Investment Advisers 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 Funds. The Funds may also
issue Class A shares at
<PAGE>
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 a Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of a Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of 0.50% of
the amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative--Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Funds for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter." Class B shares of
a Fund will automatically convert to Class A shares of the same Fund six years
after issuance on the basis of the relative net asset value per share. The
purpose of the conversion feature is to relieve holders of Class B shares from
the distribution services fee when they have been outstanding long enough for
KDI to have been compensated for distribution related expenses. For purposes of
conversion to Class A shares, shares purchased through the reinvestment of
dividends and other distributions paid with respect to Class B shares in a
shareholder's Fund account will be converted to Class A shares on a pro rata
basis.
Purchase of Class C Shares. The public offering price of the Class C shares of a
Fund is the next determined net asset value. No initial sales charge is imposed.
Since Class C shares are sold without an initial sales charge, the full amount
of the investor's purchase payment will be invested in Class C shares for his or
her account. A contingent deferred sales charge may be imposed upon redemption
of Class C shares 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."
Shares of a Fund are sold at their public offering price, which is the net asset
value per share of the Fund next determined after an order is received in proper
form plus, with respect to Class A shares, an initial sales charge. The minimum
initial investment is $1,000 and the minimum subsequent investment is $100 but
such minimum amounts may be changed at any time. An order for the purchase of
shares that is accompanied by a check drawn on a foreign bank (other than a
check drawn on a Canadian bank in U.S. Dollars) will not be considered in proper
form and will not be processed unless and until the Fund determines that it has
received payment of the proceeds of the check. The time required for such a
determination will vary and cannot be determined in advance.
<PAGE>
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by the Fund at the applicable net asset value
per share of such Fund.
Each 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 a Fund's behalf. Orders for
purchase or redemption will be deemed to have been received by a Fund when such
brokers or their authorized designees accept the orders. Subject to the terms of
the contract between a Fund and the broker, ordinarily orders will be priced at
a Fund's net asset value next computed after acceptance by such brokers or their
authorized designees. Further, if purchases or redemptions of a 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
a 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 a Fund at any time for any reason.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B shares or Class C shares by certain classes of persons or
through certain types of transactions are provided because of anticipated
economies in sales and sales related efforts.
A Fund may suspend the right of redemption or delay payment more than seven days
(a) during any period when the New York Stock Exchange (the "Exchange") is
closed other than customary weekend and holiday closings or during any period in
which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of a Fund's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the value of a its net assets, or (c) for such other periods
as the SEC may by order permit for the protection of a Fund's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel or 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 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.
REDEMPTION OR REPURCHASE OF SHARES
General. Any shareholder may require a Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Funds' transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. When certificates for shares have been
issued, they must be mailed to or deposited with the Shareholder Service Agent,
along with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
The redemption price for shares of a Fund will be the net asset value per share
of that Fund next determined following receipt by the Shareholder Service Agent
of a properly executed request with any required documents as described above.
Payment for shares redeemed will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request
accompanied by any outstanding share certificates in proper form for transfer.
When a Fund is asked to redeem shares for which it may not have yet received
good payment (i.e., purchases by check, EXPRESS-Transfer or Bank Direct
Deposit), it may delay transmittal of redemption proceeds until it has
determined that collected funds have been received for the purchase of such
shares, which may be up to 10 days from receipt by a Fund of the purchase
amount. The redemption within two years of Class A shares purchased at net asset
value under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"), the redemption of Class B shares within six years
may be subject to a contingent deferred
<PAGE>
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 Funds may assess a
quarterly fee of $9 on an account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount record keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. A Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges, unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephone instructions are genuine.
The shareholder will bear the risk of loss, including loss resulting from
fraudulent or unauthorized transactions, so 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 and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Funds reserve the right to terminate or modify
this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which each Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the 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 a Fund can be redeemed and proceeds sent by federal wire
transfer to a single previously designated account. Requests received by the
Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value of the Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by a Fund for up to seven days if
the Advisor deems it appropriate under then current market conditions. Once
authorization is on file, the Shareholder Service Agent will honor requests by
telephone
<PAGE>
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 a Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the commission applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge--Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
Contingent
Deferred
Sales
Year of Redemption After Purchase Charge
--------------------------------- ------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below), (d) for redemptions made pursuant
to any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts). The contingent deferred sales charge will
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent: (a) redemptions
to satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the contingent deferred sales charge and the
conversion privilege), (b) redemptions in connection with retirement
<PAGE>
distributions (limited at any one time to 10% of the total value of plan assets
invested in a Fund), (c) redemptions in connection with distributions qualifying
under the hardship provisions of the 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 a 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 a Fund's Class B shares and that 16 months
later the value of the shares has grown by $1,000 through reinvested dividends
and by an additional $1,000 of share appreciation to a total of $12,000. If the
investor were then to redeem the entire $12,000 in share value, the contingent
deferred sales charge would be payable only with respect to $10,000 because
neither the $1,000 of reinvested dividends nor the $1,000 of share appreciation
is subject to the charge. The charge would be at the rate of 3% ($300) because
it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge 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. For example, an
investment made in May, 1999 will be eligible for the 3% charge if redeemed on
or after May 1, 2000. In the event no specific order is requested, the
redemption will be made first from shares representing reinvested dividends and
then from the earliest purchase of shares. KDI receives any contingent deferred
sales charge directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of a Fund
or any Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
a Fund or of the other listed Kemper Mutual Funds. A shareholder of a Fund or a
Kemper Mutual Fund who redeems Class A shares purchased under the Large Order
NAV Purchase Privilege (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"), 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, Class B or Class C
shares, as the case may be, of a Fund or of other Kemper Mutual Funds. The
amount of any contingent deferred sales charge also will be reinvested. These
reinvested shares will retain their original cost and purchase date for purposes
of the contingent deferred sales charge. Also, a holder of Class B shares who
has redeemed shares may reinvest up to the full amount redeemed, less any
applicable contingent deferred sales charge that may have been imposed upon the
redemption of such shares, at net asset value in Class A shares of a Fund or of
the Kemper Mutual Funds listed under "Special Features--Class A Shares--Combined
Purchases." Purchases through the reinvestment privilege are subject to the
minimum investment requirements applicable to the shares being purchased and may
only be made for Kemper Mutual Funds available for sale in the shareholder's
state of residence as listed under "Special Features--Exchange Privilege." The
reinvestment privilege can be used only once as to any specific shares and
reinvestment must be effected within six months of the redemption. If a loss is
realized on the redemption of shares of a Fund, the reinvestment in the same
Fund may be
<PAGE>
subject to the "wash sale" rules if made within 30 days of the redemption,
resulting in a postponement of the recognition of such loss for federal income
tax purposes. The reinvestment privilege may be terminated or modified at any
time.
Redemption in Kind. Although it is each Fund's present policy to redeem in cash,
if the Board determines that a material adverse effect would be experienced by
the remaining shareholders if payment were made wholly in cash, the Fund will
satisfy the redemption request in whole or in part by a distribution of
portfolio securities in lieu of cash, in conformity with the applicable rules of
the SEC, taking such securities at the same value used to determine net asset
value, and selecting the securities in such manner as the Board may deem fair
and equitable. If such a distribution occurred, shareholders receiving
securities and selling them could receive less than the redemption value of such
securities and in addition would incur certain transaction costs. Such a
redemption would not be as liquid as a redemption entirely in cash.
SPECIAL FEATURES
Class A Shares--Combined Purchases. Each Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following funds: Kemper Funds Trust, Kemper Income Trust, Kemper Technology
Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper Small Capitalization
Equity Fund, Kemper Income and Capital Preservation Fund, Kemper Municipal Bond
Fund, Kemper Diversified Income Fund, Kemper High Yield Series, Kemper U.S.
Government Securities Fund, Kemper International Fund, Kemper State Tax-Free
Income Series, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper Target
Equity Fund (series are subject to a limited offering period), Kemper
Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund (available only upon
exchange or conversion from Class A shares of another Kemper Mutual Fund),
Kemper U.S. Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper
Value Series, Inc., Kemper Value Plus Growth Fund, Kemper Horizon Fund, Kemper
Europe Fund, Kemper Asian Growth Fund, Kemper Aggressive Growth Fund, Kemper
Global/International Series, Inc., Kemper Securities Trust and Kemper Equity
Trust ("Kemper Mutual Funds"). Except as noted below, there is no combined
purchase credit for direct purchases of shares of Zurich Money Funds, Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"),
which are not considered "Kemper Mutual Funds" for purposes hereof. For purposes
of the Combined Purchases feature described above as well as for the Letter of
Intent and Cumulative Discount features described below, employer sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent may include: (a) Money Market Funds as
"Kemper Mutual Funds", (b) all classes of shares of any Kemper Mutual Fund and
(c) the value of any other plan investment, such as guaranteed investment
contracts and employer stock, maintained on such subaccount record keeping
system.
Class A Shares--Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation credit" toward the completion of the Letter, but
no price adjustment will be made on such shares. Only investments in Class A
shares are included in this privilege.
Class A Shares--Cumulative Discount. Class A shares of a Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a Fund being purchased, the value of all Class A shares of
the above mentioned Kemper Mutual Funds (computed at the maximum offering price
at the time of the purchase for which the discount is applicable) already owned
by the investor.
Class A Shares--Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a
<PAGE>
purchase. Upon such notification, the investor will receive the lowest
applicable sales charge. Quantity discounts described above may be modified or
terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of Kemper Mutual
Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and 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 a 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 a 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 a contingent deferred sales charge being imposed at the
time of exchange. For purposes of the contingent deferred sales charge that may
be imposed upon the redemption of the shares received on exchange, amounts
exchanged retain their original cost and purchase date.
Class C Shares. Class C shares of a Fund and Class C shares of any 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 purposes of determining 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.
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 for exchanges of $1,000,000 or less
if, in the investment manager's judgement, the exchange activity may have an
adverse effect n the Fund. In particular, a pattern of exchanges that coincides
with a "market timing" strategy may be disruptive to the Fund and therefor 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
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 "Redemption or Repurchase of Shares--General." Any share certificates must
be deposited prior to any exchange of such shares. During periods when it is
difficult to contact the Shareholder Service Agent by telephone, it may be
difficult to use the telephone exchange privilege. The exchange privilege is not
a right and may be suspended, terminated or modified at any time. Exchanges may
only be made for Kemper Funds that are eligible for sale in the shareholder's
state of residence. Currently, Tax-Exempt California Money Market Fund is
<PAGE>
available for sale only in California and the portfolios of Investors Municipal
Cash Fund are available for sale only in certain states. Except as otherwise
permitted by applicable regulations, 60 days' prior written notice of any
termination or material change will be provided.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a 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 a Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares--General." Once enrolled in
EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048 Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to KSVC, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination will become effective as soon as the Shareholder Service
Agent has had a reasonable time to act upon the request. EXPRESS-Transfer cannot
be used with passbook savings accounts or for tax-deferred plans such as
Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of a Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan ("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. A Fund may immediately terminate a shareholder's Plan in
the event that any item is unpaid by the shareholder's financial institution.
The Funds may terminate or modify this privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in a Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in a Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) A Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
Systematic Withdrawal Plan. The owner of $5,000 or more of a class of a Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount 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 (and Class A shares purchased under the Large Order NAV Purchase
Privilege and Class C shares in the 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.
<PAGE>
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, a Fund will not knowingly permit additional investments of less
than $2,000 if the investor is at the same time making systematic withdrawals.
KDI will waive the contingent deferred sales charge on redemptions of Class A
shares purchased under the Large Order NAV Purchase Privilege, Class B shares
and Class C shares made pursuant to a systematic withdrawal plan. The right is
reserved to amend the systematic withdrawal plan on 30 days' notice. The plan
may be terminated at any time by the investor or the Funds.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Traditional, Roth and Education Individual Retirement Accounts ("IRAs")
with IFTC as custodian. This includes Savings Incentive Match Plan for Employees
of Small Employers ("SIMPLE") IRA accounts and Simplified Employee Pension Plan
("SEP") IRA accounts and prototype documents.
o 403(b)(7) Custodial Accounts with IFTC as custodian. This type of plan is
available to employees of most non-profit organizations.
o Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of 25%
of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. The brochures for plans with IFTC as custodian describe the current
fees payable to IFTC for its services as custodian. Investors should consult
with their own tax 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 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 a 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
KSVC, (iii) the registered representative placing the trade is a member of
ProStar, a group of persons designated by KDI in acknowledgment of their
dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Funds. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Funds, or other funds underwritten by
KDI.
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day ("trade
date"). 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" in the Statement of Additional Information.
<PAGE>
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 prospectus 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 prospectus and to reject purchase orders. Also, from time to time, each
Fund may temporarily suspend the offering of shares of any Fund or class of a
Fund 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 Fund or 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
this prospectus.
NET ASSET VALUE
The net asset value per share of each Fund is the value of one share and is
determined separately for each class by dividing the value of the Fund's net
assets attributable to that class by the number of shares of that class
outstanding. The per share net asset value of the Class B and Class C shares of
the Fund will generally be lower than that of the Class A shares of the Fund
because of the higher expenses borne by the Class B and Class C shares. The net
asset value of shares of the Fund is computed as of the close of regular trading
on the New York Stock Exchange (the "Exchange") on each day the Exchange is open
for trading. The Exchange is scheduled to be closed on the following holidays:
New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by the Fund's pricing agent(s)
which reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market 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 Advisor 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.
<PAGE>
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, 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 the fair market value of the property on the valuation date.
DIVIDENDS AND TAXES
DIVIDENDS. The Contrarian Fund High Return Equity Fund and U.S. Growth and
Income Fund normally distribute quarterly dividends of net investment income,
The Financial Services Fund normally distributes semi-annual dividends of net
investment income and the Small Cap Value Fund, Small Cap Relative Value Fund
and Value Fund normally distribute annual dividends of net investment income.
Each Fund distributes any net realized short-term and long-term capital gains at
least annually to prevent application of a federal excise tax. Additional
distributions, including distributions of net short-term capital gains in excess
of net long-term capital losses, may be made, if necessary.
Each Fund may at any time vary the foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and
long-term capital gains as the Board of the Fund determines appropriate under
the then current circumstances. In particular, and without limiting the
foregoing, a Fund may make additional distributions of net investment income or
capital gain net income in order to satisfy the minimum distribution
requirements contained in the Internal Revenue Code (the "Code"). Dividends will
be reinvested in shares of the Fund paying such dividends unless shareholders
indicate in writing that they wish to receive them in cash or in shares of
Kemper Funds.
The U.S. Growth and Income 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.")
Income and capital gains dividends, if any, of the U.S. Growth and Income Fund
will be credited to shareholder accounts in full and fractional Fund shares of
the same class at net asset value except that, upon written request to the
Shareholder Service Agent, a shareholder may select one of the following
options:
(1) To receive income and short-term capital gains dividends in cash and
long-term capital gain dividends in shares of the same class at net asset value;
or
(2) To receive income and capital gain dividends in cash.
Any dividends of the U.S. Growth and Income Fund that are reinvested normally
will be reinvested in Fund shares of the same class. However, upon written
request to the Shareholder Service Agent, a shareholder may elect to have
dividends of the Fund invested without sales charge in shares of the same class
of another Kemper Fund at the net asset value of such class of such other fund.
See "Special Features--Class A Shares--Combined Purchases" for a list of such
other Kemper Funds. To use this privilege of investing dividends of the Fund in
shares of another Kemper Fund, sharehold ers must maintain a minimum account
balance of $1,000 in the Fund distributing the dividends. The Fund will reinvest
dividend checks (and future dividends) in shares of that same class of the Fund
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 Fund unless the shareholder requests that such policy not be applied to the
shareholder's account.
<PAGE>
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.
TAXES. The Funds intend to continue 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, a 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).
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 a Fund.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income. If any net realized long-term capital gains in excess of net
realized short-term capital losses are retained by a Fund for reinvestment,
requiring federal income taxes to be paid thereon by a Fund, the Funds intend 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 a
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 gains reported and the individual tax credit.
A Fund's options and futures transactions are subject to special tax provisions
that may accelerate or defer recognition of certain gains or losses, change the
character of certain gains or losses, or alter the holding periods of certain of
a Fund's securities.
The mark-to-market rules of the Code may require a Fund to recognize unrealized
gains and losses on certain options, futures and forward contracts held by the
Fund at the end of the fiscal year. Under these provisions, 60% of any capital
gain net income or loss recognized will generally be treated as long-term and
40% as short-term. In addition, the straddle rules of the Code would require
deferral of certain losses realized on positions of a straddle to the extent
that such Fund had unrealized gains in offsetting positions at year end.
Certain foreign currency-related gains and losses earned by a Fund may be
treated as ordinary income or loss.
The current position of the Internal Revenue Service is to treat a fund, such as
the Small Cap Relative Value Fund, as owning its proportionate share of the
income and assets of any partnership in which it is a partner, in applying the
various regulated investment company qualification tests. These requirements may
limit the extent to which the Small Cap Relative Value Fund may invest in
partnerships, especially in the case of partnerships that do not invest
primarily in a diversified portfolio of stocks and securities.
A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. The required
distribution is the sum of 98% of a Fund's net investment income for the
calendar year plus 98% of its net capital gain for the one-year period ending
October 31, plus any undistributed net investment income from the prior calendar
year, plus any undistributed net capital gain from the one year period ended
October 31 of the prior calendar year, minus any overdistribution in the prior
calendar year. Each Fund intends to declare or distribute dividends during the
appropriate periods of an amount sufficient to prevent imposition of the 4%
excise tax.
A shareholder who redeems shares of a Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the adjusted cost basis of the shares. Any loss
recognized on the redemption of shares held six months or less will be treated
as long-term capital loss to the extent that the shareholder has received any
long-term capital gain dividends on such shares. An exchange of a Fund's shares
for shares of another fund is treated as a redemption and reinvestment for
federal income tax purposes upon which gain or loss may be recognized. A
shareholder who has redeemed shares of a Fund or other Kemper Mutual Fund listed
in the prospectus under "Special
<PAGE>
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 a Fund or in shares of a Kemper Mutual Fund within six months of
the redemption as described in the prospectus under "Redemption or Repurchase of
Shares -- Reinvestment Privilege." If redeemed shares were held less than 91
days, then the lesser of (a) the sales charge waived on the reinvested shares,
or (b) the sales charge incurred on the redeemed shares, is included in the
basis of the reinvested shares and is not included in the basis of the redeemed
shares. If a shareholder realized a loss on the redemption or exchange of 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. If a shareholder of Class A shares redeems or otherwise
disposes of such Class A shares less than ninety-one days after they are
acquired and subsequently acquires shares of the Fund or of a Kemper Mutual Fund
without payment of any sales charge (or for a reduced sales charge) pursuant to
a reinvestment privilege acquired in connection with the Class A shares disposed
of, then the sales charge on the Class A shares disposed of (to the extent of
the reduction in the sales charge on the shares subsequently acquired) shall not
be taken into account in determining gain or loss on the Class A shares disposed
of, but shall be treated as incurred on the acquisition of the shares
subsequently acquired.
Investment income derived from certain American Depository Receipts may be
subject to foreign income taxes withheld at the source. Because the amount of a
Fund's investments in various countries will change from time to time, it is not
possible to determine the effective rate of such taxes in advance.
Shareholders who are non-resident aliens are subject to U.S. withholding tax on
ordinary income dividends (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by any applicable tax treaty.
For U.S. Growth and Income Fund 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.
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. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
If shares are held in a tax-deferred account, such as a retirement plan, income
and gain will not be taxable each year. Instead, the taxable portion of amounts
held in a tax-deferred account generally will be subject to tax as ordinary
income only when distributed from that account.
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
<PAGE>
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.
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.
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, recent tax law changes may require the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if the Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
If the Fund holds zero coupon securities or other securities which are issued at
a discount a portion of the difference between the issue price and the face
value of such securities ("original issue discount") will be treated as income
to the Fund each year, even though the Fund will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the investment company taxable income of the Fund which
must be distributed to shareholders in order to maintain the qualification of
the Fund as a regulated investment company and to avoid federal income tax at
the Fund level. If the Fund acquires a debt instrument at a market discount, a
portion of the gain recognized (if any) on disposition of such instrument may be
treated as ordinary income.
<PAGE>
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 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 sale or exchange of shares is a taxable event that may result in gain or loss
that will be a capital gain or loss held by the shareholder as a capital asset,
and may be long-term or short-term depending upon the shareholder's holding
period for the shares. A shareholder who has redeemed shares of the Fund or any
other Kemper Mutual Fund listed herein 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 herein 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.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving reinvestment of dividends and periodic
investment and redemption programs. Information for income tax purposes will be
provided after the end of the calendar year. Shareholders are encouraged to
retain copies of their account confirmation statements or year-end statements
for tax reporting purposes. However, those who have incomplete records may
obtain historical account transaction information at a reasonable fee.
When more than one shareholder resides at the same address, certain reports and
communications to be delivered to such shareholders may be combined in the same
mailing package, and certain duplicate reports and communications may be
eliminated. Similarly, account statements to be sent to such shareholders may be
combined in the same mailing package or consolidated into a single statement.
However, a shareholder may request that the foregoing policies not be applied to
the shareholder's account.. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
The Fund is organized as a Massachusetts business trust and is not subject to
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 of the Fund may be subject to state, local and foreign taxes on
Fund distributions and dispositions of Fund shares.
Shareholders should consult their tax advisors about the application of the
provisions of tax law in light of their particular tax situations.
Retirement Plans
<PAGE>
Shares of the U.S. Growth and Income Fund may be purchased as an investment in a
number of kinds of retirement plans, including qualified pension, profit
sharing, money purchase pension, and 401(k) plans, Code Section 403(b) custodial
accounts, and individual retirement accounts.
One of the tax-deferred retirement plan accounts that may hold Fund shares is an
individual retirement account ("IRA"). There are three kinds of IRAs that an
individual may establish: traditional IRAs, Roth IRAs and education IRAs. With a
traditional IRA, an individual may be able to make a deductible contribution of
up to $2,000 or, if less, the amount of the individual's earned income for any
taxable year prior to the year the individual reaches 70 1/2 if neither the
individual nor his or her spouse is an active participant in an employer's
retirement plan. An individual who is (or who has a spouse who is) an active
participant in an employer retirement plan also may be eligible to make
deductible IRA contributions; the amount, if any, of IRA contributions that are
deductible by such an individual is determined by the individual's (and
spouse's, if applicable) adjusted gross income for the year. Even if an
individual is not permitted to make a deductible contribution to an IRA for a
taxable year, however, the individual nonetheless may make nondeductible
contributions up to $2,000, or 100% of earned income if less, for that year. One
spouse also may contribute up to $2,000 per year to the other spouse's own IRA,
even if the other spouse has earned income of less than $2,000, as long as the
spouses' joint earned income is at least $4,000. There are special rules for
determining how withdrawals are to be taxed if an IRA contains both deductible
and nondeductible amounts. In general, a proportionate amount of each withdrawal
will be deemed to be made from nondeductible contributions; amounts treated as a
return of nondeductible contributions will not be taxable. Lump sum
distributions from another qualified retirement plan, may be rolled over into a
traditional IRA also.
With a Roth IRA, an individual may make only non-deductible contributions;
contributions can be made of up to $2,000 or, if less, the amount of the
individual's earned income for any taxable year, but only if the individual's
(and spouse's, if applicable) adjusted gross income for the year is less than
$95,000 for single individuals or $150,000 for married individuals. The maximum
contribution amount phases out and falls to zero between $95,000 and $110,000
for single persons and between $150,000 and $160,000 for married persons.
Contributions to a Roth IRA may be made even after the individual attains age 70
1/2. Distributions from a Roth IRA that satisfy certain requirements will not be
taxable when taken; other distributions of earnings will be taxable. An
individual with adjusted gross income of $100,000 or less generally may elect to
roll over amounts from a traditional IRA to a Roth IRA. The full taxable amount
held in the traditional IRA that is rolled over to a Roth IRA will be taxable in
the year of the rollover, except rollovers made for 1998, which may be included
in taxable income over a four year period.
An education IRA provides a method for saving for the higher education expenses
of a child; it is not designed for retirement savings. Generally, amounts held
in an education IRA may be used to pay for qualified higher education expenses
at an eligible (postsecondary) educational institution. An individual may
contribute to an educational IRA for the benefit of a child under 18 years old
if the individual's income does not exceed certain limits. The maximum
contribution for the benefit of any one child is $500 per year. Contributions
are not deductible, but earnings accumulate tax-free until withdrawal, and
withdrawals used to pay qualified higher education expenses of the beneficiary
(or transferred to an education IRA of a qualified family member) will not be
taxable. Other withdrawals will be subject to tax.
In addition, there are special IRA programs available for employers under which
an employer may establish IRA accounts for its employees in lieu of establishing
more complicated retirement plans, such as qualified profit sharing or 401(k)
plans. Known as SEP-IRAs (Simplified Employee Pension-IRA) and SIMPLE IRAs, they
permit employers to maintain a retirement program for their employees without
being subject to a number of the recordkeeping and testing requirements
applicable to qualified plans.
Please call the Fund to obtain information regarding the establishment of IRAs
or other retirement plans. A retirement plan custodian may charge fees in
connection with establishing and maintaining the plan. An investor should
consult with a competent advisor for specific advice concerning his or her tax
status and the possible benefits of establishing one or more retirement plan
accounts. The description above is only very general; there are numerous other
rules applicable to these plans to be considered before establishing one.
PERFORMANCE
A 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 a Fund. A Fund with fees or expenses
<PAGE>
being waived or absorbed by Scudder Kemper may also advertise performance
information before and after the effect of the fee waiver or expense absorption.
Each Fund's historical performance or return for a class of shares may be shown
in the form of "average annual total return" and "total return" figures. These
various measures of performance are described below. Performance information
will be computed separately for each class.
Each Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the SEC. The average annual total
return for a Fund for a specific period is found by first taking a hypothetical
$1,000 investment ("initial investment") in the Fund's shares on the first day
of the period, adjusting to deduct the maximum sales charge (in the case of
Class A shares), and computing the "redeemable value" of that investment at the
end of the period. The redeemable value in the case of Class B and Class C
shares may or may not include the effect of the applicable contingent deferred
sales charge that may be imposed at the end of the period. The redeemable value
is then divided by the initial investment, and this quotient is taken to the Nth
root (N representing the number of years in the period) and 1 is subtracted from
the result, which is then expressed as a percentage. The calculation assumes
that all income and capital gains dividends paid by a Fund have been reinvested
at net asset value on the reinvestment dates during the period. Average annual
total return may also be calculated without adjusting to deduct the maximum
sales charge.
Calculation of a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the "Financial Highlights" table in the
Fund's financial statements and prospectus. Total return performance for a
specific period is calculated by first taking a hypothetical investment
("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 shares and Class C shares may or may not include the
effect of the applicable contingent deferred sales charge that may be imposed at
the end of the period. The calculation assumes that all income and capital gains
dividends paid by the Fund have been reinvested at net asset value on the
reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge for Class
A shares or the contingent deferred sales charge for Class B shares and Class C
shares would be reduced if such charge were included.
A Fund's performance figures are based upon historical results and are not
representative of future performance. A Fund's Class A shares are sold at net
asset value plus a maximum sales charge of 5.75% of the offering price. Class B
shares and Class C shares are sold at net asset value. Redemptions of Class B
shares may be subject to a contingent deferred sales charge that is 4% in the
first year following the purchase, declines by a specified percentage each year
thereafter and becomes zero after six years. Redemption of Class C shares may be
subject to a 1% contingent deferred sales charge in the first year following the
purchase. Returns and net asset value will fluctuate. Factors affecting each
Fund's performance include general market conditions, operating expenses and
investment management. Any additional fees charged by a dealer or other
financial services firm would reduce the returns described in this section.
Shares of each Fund are redeemable at the then current net asset value, which
may be more or less than original cost.
A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged equity indexes including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Standard &
Poor's/Barra Value Index, the Russell 1000 Value Index and the Russell 2000
Value Index. The performance of a Fund may also be compared to the combined
performance of two indexes. The performance of a Fund may also be compared to
the performance of other mutual funds or mutual fund indexes with similar
objectives and policies as reported by independent mutual fund reporting
services such as Lipper Analytical Services, Inc. ("Lipper"). Lipper performance
calculations are based upon changes in net asset value with all dividends
reinvested and do not include the effect of any sales charges.
Information may be quoted from publications such as Morningstar, Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit, money market funds and U.S. Treasury
obligations. Bank product performance may be based upon, among other things, the
BANK RATE MONITOR National Index(Infinity) or various certificate of deposit
indexes. Money market fund performance may be based upon, among other things,
the IBC Financial Data, Inc.'s Money Fund Report(R) or Money Market Insight(R),
reporting services on money market funds.
<PAGE>
Performance of U.S. Treasury obligations may be based upon, among other things,
various U.S. Treasury bill indexes. Certain of these alternative investments may
offer fixed rates of return and guaranteed principal and may be insured.
A Fund may depict the historical performance of the securities in which a 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. A Fund may also discuss the relative performance of
growth stocks versus value stocks.
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 the 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.
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 applicable Fund.
The figures below show performance information for various periods for each
Fund. Comparative information for certain indices is also included. Please note
the differences and similarities between the investments which a Fund may
purchase and the investments measured by the applicable indices. The net asset
values and returns of each class of shares of the Funds will also fluctuate. No
adjustment has been made for taxes payable on dividends. The periods indicated
were ones of fluctuating securities prices and interest rates.
CONTRARIAN FUND -- NOVEMBER 30, 1999
AVERAGE
ANNUAL TOTAL RETURN Fund Class Fund Class Fund Class
TABLE A Shares B Shares C Shares
- ----- -------- -------- --------
Life of Class (+) xx.xx% xx.xx% xx.xx%
Ten Years xx.xx% xx.xx% xx.xx%
Five Years xx.xx% xx.xx% xx.xx%
Three Years xx.xx% xx.xx% xx.xx%
One Year xx.xx% xx.xx% xx.xx%
(+) Since March 18, 1988 for Class A shares. Since September 11, 1995 for Class
B and Class C shares.
N/A -Not Available.
FINANCIAL SERVICES FUND -- NOVEMBER 30, 1999
AVERAGE
ANNUAL TOTAL RETURN Fund Class Fund Class Fund Class
TABLE A Shares B Shares C Shares
- ----- -------- -------- --------
Life of Class (+) xx.xx% xx.xx% xx.xx%
Ten Years xx.xx% xx.xx% xx.xx%
Five Years xx.xx% xx.xx% xx.xx%
Three Years xx.xx% xx.xx% xx.xx%
<PAGE>
One Year xx.xx% xx.xx% xx.xx%
HIGH RETURN EQUITY FUND -- NOVEMBER 30, 1999
AVERAGE ANNUAL TOTAL Fund Class Fund Class Fund Class
RETURN TABLE A Shares B Shares C Shares
- ------------ -------- -------- --------
Life of Class (+) xx.xx% xx.xx% xx.xx%
Ten Years xx.xx% xx.xx% xx.xx%
Five Years xx.xx% xx.xx% xx.xx%
Three Years xx.xx% xx.xx% xx.xx%
One Year xx.xx% xx.xx% xx.xx%
(+) Since March 18, 1988for class A shares. Since September 11, 1995 for Class B
and Class C shares.
N/A - Not Available.
SMALL CAP VALUE FUND -- NOVEMBER 30, 1999
AVERAGE ANNUAL TOTAL RETURN Fund Class Fund Class Fund Class
TABLE A Shares B Shares C Shares
- ----- -------- -------- --------
Life of Class (+) xx.xx% xx.xx% xx.xx%
Five Years xx.xx% xx.xx% xx.xx%
Three Years xx.xx% xx.xx% xx.xx%
One Year xx.xx% xx.xx% xx.xx%
(+) Since May 22, 1992 for Class A shares. Since
September 11, 1995 for Class B and Class C shares.
N/A - Not Available.
SMALL CAP RELATIVE VALUE FUND -- SEPTEMBER 30, 1999
AVERAGE ANNUAL TOTAL RETURN Fund Class Fund Class Fund Class
TABLE A Shares B Shares C Shares
- ----- -------- -------- --------
Life of Fund (+) xx.xx% xx.xx% xx.xx%
One Year xx.xx% xx.xx% xx.xx%
(+) Since May 6, 1998 for Class A, B, and C shares.
U.S. GROWTH AND INCOME FUND -- NOVEMBER 30, 1999
AVERAGE
ANNUAL TOTAL RETURN Fund Class Fund Class Fund Class
TABLE A Shares B Shares C Shares
- ----- -------- -------- --------
Life of Class (+) xx.xx% xx.xx% xx.xx%
Ten Years xx.xx% xx.xx% xx.xx%
Five Years xx.xx% xx.xx% xx.xx%
Three Years xx.xx% xx.xx% xx.xx%
One Year xx.xx% xx.xx% xx.xx%
<PAGE>
VALUE FUND -- NOVEMBER 30, 1999
AVERAGE
ANNUAL TOTAL RETURN Fund Class Fund Class Fund Class
TABLE A Shares B Shares C Shares
- ----- -------- -------- --------
Life of Class (+) 14.83% 15.81% 16.01%
Ten Years xx.xx% xx.xx% xx.xx%
Five Years 14.70% 15.83% 16.07%
Three Years xx.xx% xx.xx% xx.xx%
One Year -7.71% -5.02% -2.08%
FOOTNOTES FOR ALL FUNDS
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 and Class C 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.
Investors may want to compare the performance of a Fund to certificates of
deposit issued by banks and other depository institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of a Fund to that of U.S.
Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Information regarding the performance of Treasury obligations may be
based upon, among other things, the Towers Data Systems U.S. Treasury Bill
index, which is an unmanaged index based on the average monthly yield of
treasury bills maturing in six months. Due to their short maturities, Treasury
bills generally experience very low market value volatility.
Investors may want to compare the performance of a Fund to that of money market
funds. Money market funds seek to maintain a stable net asset value and yield
fluctuates. Information regarding the performance of money market funds may be
based upon, among other things, IBC's Money Fund Report Averages(R) (All
Taxable). As reported by IBC Financial Data, Inc., all investment results
represent total return (annualized results for the period net of management fees
and expenses) and one year investment results are effective annual yields
assuming reinvestment of dividends.
<PAGE>
OFFICERS AND BOARD MEMBERS
The officers and Board members of the Funds, their birthdates, their principal
occupations and their affiliations, if any, with the Adviser and Kemper
Distributors, Inc. ("KDI"), or their affiliates are listed below. All persons
named as Board members also serve in similar capacities for other funds advised
by Scudder Kemper Investments, Inc.
<TABLE>
<CAPTION>
All Funds except Value Fund:
- ----------------------------
Position with
Underwriter,
Name, Age and Address Position Principal Scudder Investor
- --------------------- with Trust Occupation** Services, Inc.
---------- ------------ --------------
<S> <C> <C> <C>
JAMES E. AKINS (10/15/26), Trustee Consultant on International, ----
2904 Garfield Terrace N.W. Political and Economic Affairs;
Washington, D.C.; formerly, a career United States
Foreign Service
Officer; Energy
Adviser for the
White House; United
States Ambassador
to Saudi Arabia,
1973-1976.
JAMES R. EDGAR (07/22/46), Trustee Distinguished Fellow, Institute ----
1927County Road, 150E, of Government and Public
Seymour, Illinois; Affairs, University of Illinois;
Director, Kemper Insurance
Companies; formerly, Governor of
the State of Illinois, 1991-1999.
<PAGE>
All Funds except Value Fund:
- ----------------------------
Position with
Underwriter,
Name, Age and Address Position Principal Scudder Investor
- --------------------- with Trust Occupation** Services, Inc.
---------- ------------ --------------
ARTHUR R. GOTTSCHALK (2/13/25) Trustee Retired; formerly, President, ----
10642 Brookridge Drive, Illinois Manufacturers
Frankfort, Illinois; Association; Trustee, Illinois
Masonic Medical
Center; formerly,
Illinois State
Senator; formerly,
Vice President, The
Reuben H. Donnelley
Corp.; formerly,
attorney.
FREDERICK T. KELSEY (4/25/27) Trustee Retired; formerly, consultant to --
4010 Arbor Lane, Unit 102, Goldman, Sachs & Co.; formerly,
Northfield, Illinois; President, Treasurer and Trustee
of Institutional Liquid Assets
and its affiliated mutual funds;
Trustee of Northern
Institutional; formerly, Trustee
of the Pilot Funds.
THOMAS W. LITTAUER (4/26/55)## Vice President ,* Managing Director, Scudder --
Kemper.
FRED B. RENWICK (2/1/30) Trustee ; Professor of Finance, New York --
3 Hanover Square, University, Stern School of
New York, New York Business; Director, TIFF
Industrial Program, Inc.;
Director, The Wartburg Home
Foundation; Chairman, Investment
Committee of Morehouse College
Board of Trustees; Chairman,
American Bible Society
Investment Committee; formerly,
member of the Investment
Committee of Atlanta University
Board of Trustees; formerly,
Director of Board of Pensions,
Evangelical Lutheran Church of
America.
JOHN G. WEITHERS (8/8/33), 311 Trustee Retired; formerly, Chairman of --
Spring Lake, the Board and Chief Executive
Hinsdale, Illinois; Officer, Chicago Stock Exchange;
Director, Federal Life Insurance
Company; President of the
Members of the Corporation and
Trustee, DePaul University.
<PAGE>
All Funds except Value Fund:
- ----------------------------
Position with
Underwriter,
Name, Age and Address Position Principal Scudder Investor
- --------------------- with Trust Occupation** Services, Inc.
---------- ------------ --------------
MARK S. CASADY (9/21/60), + President ,* Managing Director, Scudder
Kemper.
PHILIP J. COLLORA (11/15/45)## Vice President, Senior Vice President, Scudder
Treasurer and Kemper
Secretary ,
ANN M. McCREARY (11/6/56), ++ Vice President , Managing Director, Scudder
Kemper.
KATHRYN L. QUIRK (12/3/52),++ Vice President ,* Managing Director, Scudder
Kemper.
Trustee for Kemper
Equity Trust and
Kemper Securities
Trust
LINDA J. WONDRACK (9/12/64), + Vice President , Senior Vice President, Scudder
Kemper.
JOHN R. HEBBLE (6/27/58), + Treasurer , Senior Vice President, Scudder --
Kemper.
MAUREEN E. KANE Assistant Secretary Vice President, Scudder Kemper. --
(2/14/62), + ,
BRENDA LYONS, (2/21/63) + Assistant Treasurer Senior Vice President, Scudder --
, Kemper.
CAROLINE PEARSON (4/1/62),+ Assistant Secretary Senior Vice President, Adviser; --
, formerly, Associate, Dechert
Price & Rhoads (law firm) 1989
to 1997
CORNELIA M. SMALL (7/28/44), ++ Vice President , Managing Director, Scudder --
Kemper Investments, Inc.
Managing Director, Scudder --
THOMAS F. SASSI (11/7/42), ++ Vice President , Kemper; formerly, consultant
Kemper Value with an unaffiliated investment
Series, Inc. only: consulting firm and an officer
of an unaffiliated investment
banking firm from 1993 to 1996
<PAGE>
All Funds except Value Fund:
- ----------------------------
Position with
Underwriter,
Name, Age and Address Position Principal Scudder Investor
- --------------------- with Trust Occupation** Services, Inc.
---------- ------------ --------------
Senior Vice President, Adviser. --
JAMES M. EYSENBACH (4/1/62)@ Vice President ,
Kemper Securities
Trust only:
Senior Vice President, Scudder --
LORI J. ENSINGER (12/12/61), ++ Vice President , Kemper.
Kemper Securities
Trust only:
Value Fund only:
- ----------------
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Trust Occupation** Services, Inc.
- --------------------- ---------- ------------ --------------
Lynn S. Birdsong (52)*#++ President and Managing Director of Scudder Senior Vice President
Trustee Kemper Investments, Inc.
Paul Bancroft III (68) Trustee Venture Capitalist and --
79 Pine Lane Consultant; Retired President,
Box 6639 Chief Executive Officer and
Snowmass Village, CO 81615 Director, Bessemer Securities
Corporation
Sheryle J. Bolton (52) Trustee Chief Executive Officer and --
Scientific Learning Corporation Director, Scientific Learning
1995 University Ave Corporation, Former President
Suite 400 and Chief Operating Officer,
San Francisco, CA 94704 Physicians Online, Inc.
(electronic transmission of
clinical information for
physicians (1994-1995); Member,
Senior Management Team,
Rockefeller & Co. (1990-1993)
William T. Burgin (55) Trustee General Partner, Bessemer --
83 Walnut Street Venture Partners; General
Wellesley, MA 02481-2101 Partner, Deer & Company;
Director, James River Corp.;
Director Galile Corp., Director
of various privately held
companies
<PAGE>
Value Fund only:
- ----------------
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Trust Occupation** Services, Inc.
- --------------------- ---------- ------------ --------------
Keith R. Fox (44) Trustee Private Equity Investor, Exeter --
Exeter Capital Management Corporation Capital Management Corporation
10 East 53rd Street
New York, NY 10022
William H. Luers (69) Trustee President, The Metropolitan
The Metropolitan Museum of Art Museum of Art (1986 to present)
1000 Fifth Avenue
New York, NY 10028
Kathryn L. Quirk (45)*#++ Trustee, Vice Managing Director of Scudder Senior Vice President,
President and Kemper Investments, Inc. Chief Legal Officer and
Assistant Secretary Assistant Clerk
Joan E. Spero (54) Trustee President, The Doris Duke __
Doris Duke Charitable Foundation Charitable Foundation (1997 to
650 Fifth Avenue - 19th Floor present), Undersecretary of
New York, NY 10019 State for Economic, Business and
Agricultural Affairs, (1993-1997)
Thomas J. Devine (71) Honorary Trustee Consultant __
450 Park Avenue
New York, NY 10022
Wilson Nolen (71) Honorary Trustee Consultant, June 1989 to
1120 Fifth Avenue present, Corporate Vice
New York, NY 10128-0144 President of Becton, Dickinson &
Company (manufacturer of medical
and scientific products),
from 1973 to June 1989
Robert G. Stone, Jr. (75) Honorary Trustee Chairman Emeritus and Director, --
405 Lexington Avenue Kirby Corporation (inland and
39th Floor offshore marine transportation
New York, NY 10174 and diesel repairs)
Donald E. Hall (46)@ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Ann M. McCreary( 48)++ Vice President Managing Director of Scudder __
Kemper Investments, Inc.
Kathleen T. Millard (37)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
<PAGE>
Value Fund only:
- ----------------
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Trust Occupation** Services, Inc.
- --------------------- ---------- ------------ --------------
John Millette (37) Vice President and Assistant Vice President of
Secretary Scudder Kemper Investments, Inc.
since September 1994; previously
employed by the law firm Kaye,
Scholer, Fierman, Hays & Handler
John R. Hebble (40)+ Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
Caroline Pearson (36)+ Assistant Secretary Senior Vice President of Scudder --
Kemper Investments, Inc.;
Associate, Dechert Price &
Rhoades (law firm) 1989-1997
</TABLE>
* Mr. Birdsong and Ms. Quirk are considered by the Trust and its counsel to
be persons who are "interested persons" of the Adviser or of the Trust
(within the meaning of the 1940 Act).
** Unless otherwise stated, all the Trustees and officers have been associated
with their respective companies for more than five years, but not
necessarily in the same capacity.
# Mr. Birdsong and Ms. Quirk are members of the Executive Committee, which
may exercise all of the powers of the Trustees when they are not in
session.
## Address: 222 South Riverside Plaza, Chicago, Illinois.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
@ Address: 333 South Hope Street, Los Angeles, California
* "Interested persons" as defined in the 1940 Act.
The Board members and officers who are "interested persons" as designated above
receive no compensation from the Funds. The table below shows amounts from
Kemper Value Series, Inc. ("KVS") paid or accrued to those directors who are not
designated "interested persons" during the fiscal period January 1, 1999 through
November 30, 1999. The table below also shows amounts from Kemper Securities
Trust (the "Trust"), including amounts from Small Cap Relative Value Fund and
U.S.Growth and Income Fund, paid or accrued to such trustees for the fiscal
period ended September 30, 1999. The total compensation from the Kemper Fund
complex is for the 1999 calendar year.
As of October 31, 1999, all Trustees and officers of the Trust as a
group owned beneficially (as that term is defined in Section 13(d) under the
Securities and Exchange Act of 1934) __________ shares, or ____% of the shares
of Large Company Value Fund.
As of October 31, 1999, all Trustees and officers of the Trust as a
group owned beneficially (as that term is defined in Section 13(d) under the
Securities and Exchange Act of 1934) _____ shares, or ___% of the shares of the
Scudder Shares of Value Fund.
As of October 31, 1999, ________ shares in the aggregate, _____% of the
outstanding shares of Scudder Value Fund were held in the name of Charles,
Schwab & Co., 101 Montgomery Street, San Francisco, CA 94104, who may be deemed
to be the beneficial owner of certain of these shares, but disclaims any
beneficial ownership therein.
To the best of the Trust's knowledge, as of October 31, 1999, no person
owned beneficially more than 5% of a Fund's or a Class' outstanding shares,
except as stated above.
<PAGE>
The Trustees and Officers of the Trust also serve in similar capacities with
respect to ot
<TABLE>
<CAPTION>
Aggregate Compensation Aggregate Compensation Total Compensation from Kemper Fund
Name of Board Members From KVS from the Trust Complex Paid to Board Members (2)
- --------------------- -------- -------------- ---------------------------------
<S> <C> <C> <C>
James E. Akins $xx,xxx $ xx,xxx $ xx,xxx
Arthur R. Gottschalk(1) xx,xxx xx,xxx xx,xxx
Frederick T. Kelsey xx,xxx xx,xxx xx,xxx
Fred B. Renwick xx,xxx xx,xxx xx,xxx
John G. Weithers xx,xxx xx,xxx xx,xxx
</TABLE>
(1) Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with certain Kemper funds. Deferred amounts accrue
interest monthly at a rate equal to the yield of Zurich Money Funds -
Zurich Money Market Fund. The total deferred amount and interest accrued
for the fiscal period ended September 30, 1999 for Small Cap Relative Value
is $xxx and for the fiscal period ended November 30, 1999 for KVS is
$xx,xxx for Mr. Gottschalk.
Includes compensation for service on the boards of 15 Kemper funds with 53 fund
portfolios. Each board member currently serves as a board member of 15 Kemper
Funds with 53 fund portfolios.
<TABLE>
<CAPTION>
Value Equity Trust* All Scudder Funds
------------------- -----------------
Paid by Paid by Paid by Paid by
Name the Trust the Adviser(1) the Funds The Adviser(1)
---- --------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Paul Bancroft III, $14,750 $850 $174,200 (23 $ 8,925 (23 funds)
Trustee funds)
Sheryle J. Bolton, $14,750 $0.00 $149,050 $0.00 (23 funds)
Trustee** (23 funds)
William T. Burgin, $14,750 $850 $150,950 $8,925 (23 funds)
Trustee (23 funds)
Thomas J. Devine, $16,650 $850 $178,000 $8,925 (24 funds)
Honorary Trustee+ (24 funds)
Keith R. Fox, Trustee $17,150 $850 $172,350 $8,925 (21 funds)
(21 funds)
William H. Luers, $13,250 $850 $157,050 $8,925 (24 funds)
Trustee** (24 funds)
Wilson Nolen, Honorary $14,750 $850 $189,075 $6,375 (24 funds)
Trustee+ (24 funds)
Joan E. Spero,*** Trustee $2,685 $0.00 $29,736 $0.00 (21 funds)
(21 funds)
Robert G. Stone, Jr. $0.00 $0.00 $8,000# $0.00 (1 fund)
Honorary Trustee (1 fund)
</TABLE>
(1) The Adviser paid the compensation to the Trustees for meetings associated
with the Adviser's alliance with Zurich Insurance Company. See "Investment
Adviser" for additional information.
* Value Equity Trust consists of two funds: Scudder Large Company Value Fund
and Value Fund.
** Elected as Trustee of the Trust in October 1997.
<PAGE>
*** Elected as Trustee of the Trust in September 1998.
+ Elected as an Honorary Trustee in December 1998, after serving as a
Trustee.
# Includes pension or retirement benefits received as Director of The Japan
Fund.
Members of the Board of Trustees who are employees of the Adviser or
its affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Fund.
Principal Holders of Securities
As of December 31, 1999 the officers and Board members as a group owned less
than 1% of each Fund, and the following owned of record more than 5% of the
outstanding stock of the funds, as set forth below.
Kemper Contrarian Fund
- ----------------------
Name and Address Class Percentage
- ---------------- ----- ----------
Kemper-Dreman Financial Services Fund
- -------------------------------------
Name and Address Class Percentage
- ---------------- ----- ----------
<PAGE>
Kemper-Dreman High Return Equity Fund
- -------------------------------------
Name and Address Class Percentage
- ---------------- ----- ----------
Kemper Small Cap Value Fund
- ---------------------------
Name and Address Class Percentage
- ---------------- ----- ----------
<PAGE>
Kemper Small Cap Relative Value Fund
- ------------------------------------
Name and Address Class Percentage
- ---------------- ----- ----------
<PAGE>
Kemper U.S. Growth and Income Fund
- ----------------------------------
Name and Address Class Percentage
- ---------------- ----- ----------
Kemper Value Fund
- -----------------
Name and Address Class Percentage
- ---------------- ----- ----------
SHAREHOLDER RIGHTS
The Contrarian, High Return Equity and Small Cap Value Funds are each a series
of Kemper Value Series, Inc. ("KVS"). KVS was organized as a Maryland
corporation in October, 1987 and has an authorized capitalization of
3,000,000,000 shares of $.01 par value common stock. In March, 1998, KVS changed
its name from Kemper Value Fund, Inc. to Kemper Value Series,
<PAGE>
Inc. and in July, 1997, KVS changed its name from Kemper-Dreman Fund, Inc. to
Kemper Value Fund, Inc. In September, 1995, KVS changed its name from Dreman
Mutual Group, Inc. to Kemper-Dreman Fund, Inc. The Small Cap Relative Value Fund
is a series of Kemper Securities Trust (the "Trust"). The Trust was organized as
a business trust under the laws of Massachusetts on October 2, 1997. The Trust
may issue an unlimited number of shares of beneficial interest in one or more
series, all having a par value of $.01, which may be divided by the Board into
classes of shares. Since KVS and the Trust may offer multiple funds, each is
known as a "series company." Currently, KVS offers four classes of shares of
each Fund. These are Class A, Class B and Class C shares, as well as Class I
shares, which have different expenses, that may affect performance, and are
available for purchase exclusively by the following investors: (a) tax-exempt
retirement plans of the Advisor and its affiliates; and (b) the following
investment advisory clients of the Advisor and its investment advisory
affiliates that invest at least $1 million in a Fund: (1) unaffiliated benefit
plans, such as qualified retirement plans (other than individual retirement
accounts and self-directed retirement plans); (2) unaffiliated banks and
insurance companies purchasing for their own accounts; and (3) endowment funds
of unaffiliated non-profit organizations. Currently, the Trust offers three
classes of shares of the Small Cap Relative Value Fund--Class A, Class B and
Class C shares. The Board may authorize the issuance of additional classes and
additional Funds if deemed desirable, each with its own investment objectives,
policies and restrictions. Shares of a Fund have equal noncumulative voting
rights except that Class B and Class C shares have separate and exclusive voting
rights with respect to the Rule 12b-1 Plan. Shares of each class also have equal
rights with respect to dividends, assets and liquidation of such Fund subject to
any preferences (such as resulting from different Rule 12b-1 distribution fees),
rights or privileges of any classes of shares of the Fund. Shares of each Fund
are fully paid and nonassessable when issued, are transferable without
restriction and have no preemptive or conversion rights. The Board of Directors
of KVS and the Board of Trustees of the Trust may, to the extent permitted by
applicable law, have the right at any time to redeem from any shareholder, or
from all shareholders, all or any part of any series or class, or of all series
or classes, of the shares of KVS and the Trust.
The Fund's activities are supervised by the Trust's Board of Trustees.
Any matter shall be deemed to have been effectively acted upon with respect to
the Fund if acted upon as provided in Rule 18f-2 under the 1940 Act, or any
successor rule, and in the Trust's Declaration of Trust. As used in the
Prospectus and in this Statement of Additional Information, the term "majority",
when referring to the approvals to be obtained from shareholders in connection
with general matters affecting the Fund and all additional portfolios (e.g.,
election of directors), means the vote of the lesser of (i) 67% of the Trust's
shares represented at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Trust's outstanding shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single portfolio (e.g., annual approval of investment
management contracts), means the vote of the lesser of (i) 67% of the shares of
the portfolio represented at a meeting if the holders of more than 50% of the
outstanding shares of the portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the portfolio.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) the 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 Small Cap Relative Value Fund and U.S. Growth and Income Fund are each a
series of Kemper Securities Trust (formerly Kemper Growth and Income Fund) (the
"Trust"), a Massachusetts business trust established under an Agreement and
Declaration of Trust of the Trust ("Declaration of Trust"), dated October 1,
1997.
<PAGE>
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of the
Small Cap Relative Value Fund. The Declaration of Trust, however, disclaims
shareholder liability for acts or obligations of the Small Cap Relative Value
Fund and requires that notice of such disclaimer be given in each agreement,
obligation, or instrument entered into or executed by the Small Cap Relative
Value 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 Small Cap Relative
Value 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 Advisor to be 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.
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 Funds are not required to hold annual shareholder meetings and do not intend
to do so. However, they will hold special meetings as required or deemed
desirable for such purposes as electing Board members, changing fundamental
policies or approving an investment management agreement. KVS will call a
meeting of shareholders, if requested to do so by the holders of at least 10% of
KVS's outstanding shares. In the case of a meeting called to consider removal of
a Board member or Board members, KVS or the Trust will assist in communications
with other shareholders as required by Section 16(c) of the 1940 Act. If shares
of more than one Fund are outstanding, shareholders will vote by Fund and not in
the aggregate or by class except when voting in the aggregate is required under
the 1940 Act, such as for the election of Board members, or when voting by class
is appropriate.
Master/Feeder Structure. The Board of Trustees of the Trust may determine,
without further shareholder approval, in the future that the objectives of the
Small Cap Relative Value 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 gains or
loss, or by contributing its assets to the master fund and avoiding transaction
costs and the realization of taxable gain or loss.
ADDITIONAL INFORMATION
Other Information
For Financial Services Fund:
The CUSIP number of the Class A shares of the Fund is 487917 10 6.
The CUSIP number of the Class B shares of the Fund is 487917 20 5.
The CUSIP number of the Class C shares of the Fund is 487917 30 4.
The Fund has a fiscal year ending November 30.
<PAGE>
Costs of $11,000 incurred by the Fund, in conjunction with its
organization, are amortized over the five-year period beginning March
2, 1998.
For Contrarian Fund:
The CUSIP number of the Class A shares of the Fund is .
The CUSIP number of the Class B shares of the Fund is
The CUSIP number of the Class C shares of the Fund is.
The Fund has a fiscal year ending November 30.
For High Return Equity Fund:
The CUSIP number of the Class A shares of the Fund is
The CUSIP number of the Class B shares of the Fund is
The CUSIP number of the Class C shares of the Fund is
The Fund has a fiscal year ending November 30.
Costs of $11,000 incurred by the Fund, in conjunction with its
organization, are amortized over the five-year period beginning March
2, 1998.
For Small Cap Value Fund:
The CUSIP number of the Class A shares of the Fund is
The CUSIP number of the Class B shares of the Fund is The CUSIP number
of the Class C shares of the Fund is The Fund has a fiscal year ending
September 30.
For Value Fund
The CUSIP number of the Class A, shares of the Fund
is 8114T-30-7;
The CUSIP number of the Class B, shares of the Fund
is 81114T-40-6;
The CUSIP number of the Class C, shares of the Fund is 8114T-50-5.
The Fund has a fiscal year ending September 30.
For U.S. Growth and Income Fund
The CUSIP number of the Class A, shares of the Fund
is
The CUSIP number of the Class B, shares of the Fund
is
The CUSIP number of the Class C, shares of the Fund
is
The Fund has a fiscal year ending September 30.
<PAGE>
General
Many of the investment changes in the Funds will be made at prices different
from those prevailing at the time they may be reflected in a regular report to
shareholders of the Funds. These transactions will reflect investment decisions
made by the Sub-Advisor in light of the Fund's investment objectives and
policies, its other portfolio holdings and tax considerations, and should not be
construed as recommendations for similar action by other investors.
Portfolio securities of the Funds are held separately pursuant to a custodian
agreement, by the Funds' custodian, State Street Bank and Trust Company.
The name "Kemper Equity Trust" is the designation of the Trust for the time
being under a Declaration of Trust dated January 6, 1998, as amended from time
to time, and all persons dealing with the Fund must look solely to the property
of the Fund for the enforcement of any claims against the Fund as neither the
Trustees, officers, agents, shareholders nor other series of the Trust assume
any personal liability for obligations entered into on behalf of the Fund. No
other series of the Trust assumes any liabilities for obligations entered into
on behalf of the Fund. Upon the initial purchase of shares, the shareholder
agrees to be bound by the Trust's Declaration of Trust, as amended from time to
time. The Declaration of Trust is on file at the Massachusetts Secretary of
State's Office in Boston, Massachusetts.
The name "Value Equity Trust" is the designation of the Trust for the time being
under a Declaration of Trust dated October 16, 1985, as amended from time to
time, and all persons dealing with the Fund must look solely to the property of
the Fund for the enforcement of any claims against the Fund as neither the
Trustees, officers, agents, shareholders nor other series of the Trust assume
any personal liability for obligations entered into on behalf of the Fund. No
other series of the Trust assumes any liabilities for obligations entered into
on behalf of the Fund. Upon the initial purchase of shares, the shareholder
agrees to be bound by the Trust's Declaration of Trust, as amended from time to
time. The Declaration of Trust is on file at the Massachusetts Secretary of
State's Office in Boston, Massachusetts.
The Fund's prospectus and this Statement of Additional Information omit certain
information contained in the Registration Statement and its amendments which the
Fund has filed with the SEC under the Securities Act of 1933 and reference is
hereby made to the Registration Statement for further information with respect
to the Fund and the securities offered hereby. The Registration Statement and
its amendments, are available for inspection by the public at the SEC in
Washington, D.C.
The Fund's Kemper Shares prospectus and this Statement of Additional Information
omit certain information contained in the Registration Statement and its
amendments which the Fund has filed with the SEC under the Securities Act of
1933 and reference is hereby made to the Registration Statement for further
information with respect to the Fund and the securities offered hereby. The
Registration Statement and its amendments, are available for inspection by the
public at the SEC in Washington, D.C.
<PAGE>
APPENDIX--RATINGS OF FIXED INCOME INVESTMENTS
Standard & Poor's Ratings Services Bond Ratings
AAA. Debt rated AAA has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Moody's Investors Service, Inc. Bond Ratings
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
<PAGE>
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
<PAGE>
KEMPER VALUE SERIES, INC.
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits.
-------- ---------
<S> <C> <C>
(a) (a)(1) Articles of Incorporation of Registrant is incorporated by reference to
Post-Effective Amendment No. 15 to the Registration Statement.
(a)(2) Articles Supplementary to Articles of Incorporation of Registrant
is incorporated by reference to Post-Effective Amendment No. 15 to the
Registration Statement.
(a)(3) Articles Supplementary to Articles of Incorporation of Registrant
is incorporated by reference to Post-Effective Amendment No. 15 to the
Registration Statement.
(a)(4) Articles Supplementary to Articles of Incorporation of Registrant
is incorporated by reference to Post-Effective Amendment No. 15 to the
Registration Statement.
(a)(5) Articles Supplementary to Articles of Incorporation of Registrant
is incorporated by reference to Post-Effective Amendment No. 15 to the
Registration Statement.
(a)(6) Articles Supplementary to Articles of Incorporation of Registrant
is incorporated by reference to Post-Effective Amendment No. 15 to the
Registration Statement.
(a)(7) Articles Supplementary to Articles of Incorporation of Registrant
is incorporated by reference to Post-Effective Amendment No. 15 to the
Registration Statement.
(a)(8) Articles of Amendment to Articles of Incorporation of Registrant
is incorporated by reference to Post-Effective Amendment No. 15 to the
Registration Statement.
(a)(9) Articles of Amendment to Articles of Incorporation of Registrant
is incorporated by reference to Post-Effective Amendment No. 21 to the
Registration Statement.
(a)(10) Articles Supplementary to Articles of Incorporation of Registrant
is incorporated by reference to Post-Effective Amendment No. 21 to the
Registration Statement.
(b) By-laws is incorporated by reference to Post-Effective Amendment No. 21 to
the Registration Statement.
(c) Inapplicable.
(d) (d)(1) Investment Management Agreement between the Registrant, on behalf of Kemper
Contrarian Fund and Scudder Kemper Investments, Inc. dated
1
<PAGE>
September 7, 1998 is incorporated by reference to Post-Effective Amendment
No. 23 to the Registration Statement.
(d)(2) Investment Management Agreement between the Registrant, on behalf of
Kemper-Dreman High Return Equity Fund and Scudder Kemper Investments, Inc.
dated September 7, 1998 is incorporated by reference to Post-Effective
Amendment No. 23 to the Registration Statement.
(d)(3) Investment Management Agreement between the Registrant, on behalf of Kemper
Small Cap Value Fund and Scudder Kemper Investments, Inc. dated September 7,
1998 is incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement.
(d)(4) Sub-Advisory Agreement between Scudder Kemper Investments, Inc. and Dreman
Value Management, L.L.C. dated September 7, 1998 (Kemper-Dreman High Return
Equity Fund) is incorporated by reference to Post-Effective Amendment No. 23
to the Registration Statement.
(e) (e)(1) Underwriting and Distribution Services Agreement between the Registrant and
Kemper Distributors, Inc. dated August 1, 1998 is incorporated by reference
to Post-Effective Amendment No. 23 to the Registration Statement.
(e)(2) Underwriting and Distribution Services Agreement between the Registrant and
Kemper Distributors, Inc. dated September 7, 1998 is incorporated by
reference to Post-Effective Amendment No. 23 to the Registration Statement.
(f) Selling Group Agreement is incorporated by reference to Post-Effective
Amendment No. 23 to the Registration Statement.
(g) Custodian Agreement between the Registrant, on behalf of Kemper Value Fund,
Inc., and Investors Fiduciary Trust Company is incorporated by reference to
Post-Effective Amendment No. 14 to the Registration Statement.
(h) (h)(1) Agency Agreement is incorporated by reference to Post-Effective Amendment
No. 14 to the Registration Statement.
(h)(2) Supplement to Agency Agreement between Registrant and Investors Fiduciary
Trust Company dated June 1, 1997 is incorporated by reference to
Post-Effective Amendment No. 21 to the Registration Statement.
(h)(3) Administrative Services Agreement between the Registrant and Kemper
Distributors, Inc. dated April 1, 1997 is incorporated by reference to
Post-Effective Amendment No. 21 to the Registration Statement.
(h)(4) Fund Accounting Agreement between Kemper Contrarian Fund and Scudder Fund
Accounting Corporation dated December 31, 1997 is incorporated by reference
to Post-Effective Amendment No. 21 to the Registration Statement.
(h)(5) Fund Accounting Agreement between Kemper-Dreman High Return Equity Fund and
Scudder Fund Accounting Corporation dated December 31, 1997 is incorporated
by reference to Post-Effective Amendment No. 21 to the Registration
Statement.
2
<PAGE>
(h)(6) Fund Accounting Agreement between Kemper Small Cap Value Fund and Scudder
Fund Accounting Corporation dated December 31, 1997 is incorporated by
reference to Post-Effective Amendment No. 21 to the Registration Statement.
(i) Legal Opinion and Consent of Counsel to be filed by subsequent amendment.
(j) Consent of Independent Auditors to be filed by subsequent amendment.
(k) Inapplicable.
(l) Inapplicable.
(m) (m)(1) Rule 12b-1 Plan between Kemper Contrarian Fund (Class B Shares) and Kemper
Distributors, Inc., dated September 7, 1998 is incorporated by reference to
Post-Effective Amendment No. 23 to the Registration Statement.
(m)(2) Rule 12b-1 Plan between Kemper Contrarian Fund (Class C Shares) and Kemper
Distributors, Inc., dated September 7, 1998 is incorporated by reference to
Post-Effective Amendment No. 23 to the Registration Statement.
(m)(3) Rule 12b-1 Plan between Kemper-Dreman High Return Equity Fund (Class B
Shares) and Kemper Distributors, Inc., dated September 7, 1998 is
incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement.
(m)(4) Rule 12b-1 Plan between Kemper-Dreman High Return Equity Fund (Class C
Shares) and Kemper Distributors, Inc., dated September 7, 1998 is
incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement.
(m)(5) Rule 12b-1 Plan between Kemper Small Cap Value Fund (Class B Shares) and
Kemper Distributors, Inc., dated September 7, 1998 is incorporated by
reference to Post-Effective Amendment No. 23 to the Registration Statement.
(m)(6) Rule 12b-1 Plan between Kemper Small Cap Value Fund (Class C Shares) and
Kemper Distributors, Inc., dated September 7, 1998 is incorporated by
reference to Post-Effective Amendment No. 23 to the Registration Statement.
(n) Inapplicable.
(o) Rule 18f-3 Plan is incorporated by reference to Post-Effective Amendment No.
21 to the Registration Statement.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Fund.
- -------- --------------------------------------------------------
None
Item 25. Indemnification.
- -------- ----------------
Article VIII of the Registrant's Agreement and Declaration of Trust
(Exhibit 23(a) hereto, which is incorporated herein by reference) provides in
effect that the Registrant will indemnify its officers and trustees under
certain circumstances. However, in accordance with Section 17(h) and 17(i) of
the Investment Company Act of 1940 and its own terms, said Article of the
Agreement and Declaration of Trust does not protect any person against any
3
<PAGE>
liability to the Registrant or its shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question as to 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.
On June 26, 1997, Zurich Insurance Company ("Zurich"), ZKI Holding
Corp. ("ZKIH"), Zurich Kemper Investments, Inc. ("ZKI"), Scudder, Stevens &
Clark, Inc. ("Scudder") and the representatives of the beneficial owners of the
capital stock of Scudder ("Scudder Representatives") entered into a transaction
agreement ("Transaction Agreement") pursuant to which Zurich became the majority
stockholder in Scudder with an approximately 70% interest, and ZKI was combined
with Scudder ("Transaction"). In connection with the trustees' evaluation of the
Transaction, Zurich agreed to indemnify the Registrant and the trustees who were
not interested persons of ZKI or Scudder (the "Independent Trustees") for and
against any liability and expenses based upon any action or omission by the
Independent Trustees in connection with their consideration of and action with
respect to the Transaction. In addition, Scudder has agreed to indemnify the
Registrant and the Independent Trustees for and against any liability and
expenses based upon any misstatements or omissions by Scudder to the Independent
Trustees in connection with their consideration of the Transaction.
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.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member, Group Executive Board, Zurich Financial Services, Inc.##
Chairman, Zurich-American Insurance Company o
4
<PAGE>
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO and Member, Group Executive Board, Zurich Financial Services, Inc.##
CEO/Branch Offices, Zurich Life Insurance Company##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
</TABLE>
* Two International Place, Boston, MA
X 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg,
R.C. Luxembourg B 34.564
*** Toronto, Ontario, Canada
5
<PAGE>
Oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
Xx 222 S. Riverside, Chicago, IL
O Zurich Towers, 1400 American Ln., Schaumburg, IL
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
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>
James L. Greenawalt President None
Thomas W. Littauer Director, Chief Executive Officer Trustee and Vice President
Kathryn L. Quirk Director, Secretary, Chief Legal Vice President
Officer and Vice President
James J. McGovern Chief Financial Officer and Vice None
President
Linda J. Wondrack Vice President and Chief Compliance Vice President
Officer
Paula Gaccione Vice President None
Michael E. Harrington Vice President None
Robert A. Rudell Vice President None
William M. Thomas Vice President None
Todd N. Gierke Assistant Treasurer None
Philip J. Collora Assistant Secretary Vice President and Secretary
Paul J. Elmlinger Assistant Secretary None
Diane E. Ratekin Assistant Secretary None
Mark S. Casady Director, Vice Chairman President
6
<PAGE>
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
Stephen R. Beckwith Director None
</TABLE>
(c) Not applicable
Item 28. Location of Accounts and Records
- -------- --------------------------------
Accounts, books and other documents are maintained at the offices of
the Registrant, the offices of Registrant's investment adviser, Scudder Kemper
Investments, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, at the
offices of the Registrant's principal underwriter, Kemper Distributors, Inc.,
222 South Riverside Plaza, Chicago, Illinois 60606 or, in the case of records
concerning custodial functions, at the offices of the custodian, Investors
Fiduciary Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri
64105 or, in the case of records concerning transfer agency functions, at the
offices of IFTC and of the shareholder service agent, Kemper Service Company,
811 Main Street, Kansas City, Missouri 64105.
Item 29. Management Services.
- -------- --------------------
Inapplicable.
Item 30. Undertakings.
- -------- -------------
Inapplicable.
7
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(a) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chicago and State of Illinois, on the 18th day
of November, 1999.
By: /s/Mark S. Casady
---------------------
Mark S. Casady, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 18th day of November, 1999
on behalf of the following persons in the capacities indicated.
SIGNATURE TITLE
- --------- -----
/s/ Thomas W. Littauer Chairman and Trustee
- --------------------------------------
Thomas W. Littauer*
/s/ James E. Akins Trustee
- --------------------------------------
James E. Akins*
/s/ James R. Edgar Trustee
- --------------------------------------
James R. Edgar*
/s/ Arthur R. Gottschalk Trustee
- --------------------------------------
Arthur R. Gottschalk*
/s/ Frederick T. Kelsey Trustee
- --------------------------------------
Frederick T. Kelsey*
/s/ Fred B. Renwick Trustee
- --------------------------------------
Fred B. Renwick*
/s/ John G. Weithers Trustee
- --------------------------------------
John G. Weithers*
/s/John R. Hebble Treasurer (Principal Financial
- -------------------------------------- and Accounting Officer)
John R. Hebble
*By: /s/Philip J. Collora
-----------------------
Philip J. Collora**
** Attorney-in-fact pursuant to powers of
attorney contained in the signature page of
Post-Effective Amendment No. 23 to the
Registration Statement, filed January 30, 1998
and filed herein.
<PAGE>
File No. 33-18477
File No. 811-5385
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 24
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 26
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
KEMPER VALUE SERIES, INC.
<PAGE>
KEMPER VALUE SERIES, INC.
EXHIBIT INDEX
