Filed electronically with the Securities and Exchange Commission on
November 30, 2000
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. 26 /_X_/
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /___/
Amendment No. 28 /_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, 2001 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>
KEMPER VALUE SERIES, INC.
Kemper Contrarian Fund
Kemper-Dreman High Return Equity Fund
Kemper Small Cap Value Fund
1
<PAGE>
LONG-TERM
INVESTING
IN A
SHORT-TERM
WORLD (SM)
February 1, 2001
Prospectus
KEMPER EQUITY FUNDS/VALUE STYLE
Kemper Contrarian Fund
Kemper-Dreman Financial Services Fund
Kemper-Dreman High Return Equity Fund
Kemper Small Cap Value Fund
Kemper U.S. Growth And Income Fund
Value Fund
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
[LOGO] KEMPER FUNDS
<PAGE>
HOW THE INVESTING IN
FUNDS WORK THE FUNDS
4 Kemper Contrarian 33 Kemper U.S. Growth 50 Choosing A Share Class
Fund And Income Fund
55 How To Buy Shares
11 Kemper-Dreman 40 Kemper Value Fund
Financial Services 56 How To Exchange Or
Fund 47 Other Policies And Sell Shares
Risks
19 Kemper-Dreman High 57 Policies You Should
Return Equity Fund 48 Financial Highlights Know About
26 Kemper Small Cap 63 Understanding
Value Fund Distributions And
Taxes
<PAGE>
How The Funds Work
These funds invest 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
pursues its own goal.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
<PAGE>
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 | Kemper Contrarian Fund
<PAGE>
--------------------------------------------------------------------------------
The Fund's Main Strategy
The fund normally invests at least 65% of total assets 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). As of December 31, 2000, companies in
which the fund invests had a median market capitalization of approximately $--
billion.
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 may favor securities from different sectors and
industries at different times while still maintaining variety in terms of the
sectors and industries represented.
The fund will normally sell a stock when it reaches a target price, its
fundamental factors have changed or it has performed below the managers'
expectations.
--ICON--------------------------------------------------------------------------
OTHER INVESTMENTS
Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies or
securities), the managers don't intend to use them as principal investments and
may not use them at all.
5 | Kemper Contrarian Fund
<PAGE>
--------------------------------------------------------------------------------
The Main Risks Of Investing In The Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the large company portion of the U.S. stock
market. When large company stock prices fall, you should expect the value of
your investment to fall as well. At times, large company stocks may not perform
as well as stocks of smaller or mid-size companies. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
To the extent that the fund focuses 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 may be out of favor for certain periods
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Investors seeking to diversify a growth-oriented portfolio or add a core holding
to a value-oriented portfolio may want to consider this fund.
--------------------------------------------------------------------------------
6 | Kemper Contrarian Fund
<PAGE>
--------------------------------------------------------------------------------
Performance
The bar chart shows how the 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 reflect
sales loads; if it did, returns would be lower. 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:
26.53 11.32 9.07 -0.03 44.57 14.42 28.73 19.17 -10.73
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
--------------------------------------------------------------------------------
Best quarter: ____%, Q_ 19__ YTD return as of [FISCAL YEAR END]: ___%
Worst quarter: ____%, Q_ 19__
--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/2000)
--------------------------------------------------------------------------------
Since Since
Since Since 9/11/95 Since 3/18/88
12/31/99 12/31/95 Life of 12/31/90 Life of
1 Year 5 Years Class B/C 10 Years Class A
------------------------------------------------------------------------------
Class A --% --% -- --% --%
------------------------------------------------------------------------------
Class B -- -- --% -- --
------------------------------------------------------------------------------
Class C -- --* -- -- --**
------------------------------------------------------------------------------
Index
------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index, an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
------------------------------------------------------------------------------
The table includes the effects of maximum sales loads. In both the table and the
chart, total returns for 1990 through 1996 would have been lower if operating
expenses hadn't been reduced.
* Since 9/30/95
** Since 3/31/88
7 | Kemper Contrarian Fund
<PAGE>
--------------------------------------------------------------------------------
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
------------------------------------------------------------------------------
Fee Table Class A Class B Class C
------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
------------------------------------------------------------------------------
Maximum Sales Charge (Load) 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 % % %
------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
------------------------------------------------------------------------------
Other Expenses**
------------------------------------------------------------------------------
Total Annual Operating Expenses
------------------------------------------------------------------------------
The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see "Policies You Should Know About -- Policies
about transactions") may be subject to a contingent deferred sales charge
of 1.00% if redeemed within one year of purchase and 0.50% if redeemed
during the second year following purchase.
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors. "Other
Expenses" are restated to reflect changes in certain administrative and
blue sky fees.
Based on the costs above, this example helps you compare each share class's
expenses to those of other mutual funds. The example assumes operating expenses
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
8 | Kemper Contrarian Fund
<PAGE>
------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------------
Class A shares $ $ $
------------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class A shares $ $ $
------------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------------
9 | Kemper Contrarian Fund
<PAGE>
--------------------------------------------------------------------------------
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 __% of its average daily net assets.
--ICON--------------------------------------------------------------------------
FUND MANAGERS
The following people 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
o Joined the fund team in 1997
in 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 | Kemper Contrarian Fund
<PAGE>
TICKER SYMBOLS CLASS: A) KDFAX B) KDFBX C) KDFCX
Kemper-Dreman
Financial Services Fund
FUND GOAL The fund seeks to provide long-term capital appreciation.
11 | Kemper-Dreman Financial Services Fund
<PAGE>
--------------------------------------------------------------------------------
The Fund's Main Strategy
The fund normally invests at least 65% of total assets in equity securities
(mainly common stocks) 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 manager begins by screening for financial services stocks whose
price-to-earnings ratios are below the average for the S&P 500 Index. The
manager then compares a company's stock price to its book value, cash flow and
yield, and analyzes individual companies to identify those that are financially
sound and appear to have strong potential for long-term growth.
The manager assembles the fund's portfolio from among the most attractive
stocks, drawing on analysis of economic outlooks for various financial
industries. The manager may favor securities from different industries in the
financial sector at different times, while still maintaining variety in terms of
industries and companies represented.
The fund will normally sell a stock when it reaches a target price, its
fundamental factors have changed or it has performed below the manager's
expectations.
--ICON--------------------------------------------------------------------------
OTHER INVESTMENTS
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 the fund is permitted to use various types of
derivatives (contracts whose value is based on, for example, indices, currencies
or securities), the manager doesn't intend to use them as principal investments
and may not use them at all.
12 | Kemper-Dreman Financial Services Fund
<PAGE>
--------------------------------------------------------------------------------
The Main Risks Of Investing In The Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform, in this case, financial services stocks. When prices of
financial services stocks 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 stock than a diversified fund, factors affecting that stock
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.
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 | Kemper-Dreman Financial Services Fund
<PAGE>
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, sectors,
economic trends or other matters
o value stocks may be out of favor for certain periods
o foreign securities 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, market conditions might make it hard to value some investments or
to get an attractive price for them
14 | Kemper-Dreman Financial Services Fund
<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
reflect sales loads; if it did, returns would be lower. 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:
-4.52
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1999 2000
--------------------------------------------------------------------------------
Best quarter: ____%, Q_ 19__ YTD return as of [FISCAL YEAR END]: ___%
Worst quarter: ____%, Q_ 19__
--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/2000)
--------------------------------------------------------------------------------
------------------------------------------------------------------------------
Since
Since 3/9/98
12/31/99 Life of
1 Year Classes
------------------------------------------------------------------------------
Class A --% --
------------------------------------------------------------------------------
Class B -- --%
------------------------------------------------------------------------------
Class C -- --
------------------------------------------------------------------------------
Index
------------------------------------------------------------------------------
Index: S&P Financial Index, a capitalization-weighted price-only index
representing 11 financial industries and 74 financial companies.
------------------------------------------------------------------------------
The table includes the effects of maximum sales loads. In both the table and the
chart, total returns would have been lower if operating expenses hadn't been
reduced.
* Since 3/31/98
15 | Kemper-Dreman Financial Services Fund
<PAGE>
--------------------------------------------------------------------------------
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
------------------------------------------------------------------------------
Fee Table Class A Class B Class C
------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
------------------------------------------------------------------------------
Maximum Sales Charge (Load) 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 % % %
------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
------------------------------------------------------------------------------
Other Expenses**
------------------------------------------------------------------------------
Total Annual Operating Expenses
------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see "Policies You Should Know About -- Policies
about transactions") may be subject to a contingent deferred sales charge
of 1.00% if redeemed within one year of purchase and 0.50% if redeemed
during the second year following purchase.
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors. "Other
Expenses" are restated to reflect changes in certain administrative and
blue sky fees.
Based on the costs above, this example helps you compare each share class's
expenses to those of other mutual funds. The example assumes operating expenses
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
16 | Kemper-Dreman Financial Services Fund
<PAGE>
------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------------
Class A shares $ $ $
------------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class A shares $ $ $
------------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------------
17 | Kemper-Dreman Financial Services Fund
<PAGE>
--------------------------------------------------------------------------------
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 __% 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 billion in
assets. The portfolio 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.
18 | Kemper-Dreman Financial Services Fund
<PAGE>
TICKER SYMBOLS CLASS: A) KDHAX B) KDHBX C) KDHCX
Kemper-Dreman
High Return Equity Fund
FUND GOAL The fund seeks to achieve a high rate of total return.
19 | Kemper-Dreman High Return Equity Fund
<PAGE>
--------------------------------------------------------------------------------
The Fund's Main Strategy
The fund normally invests at least 65% of total assets in equity securities
(mainly common stocks). The fund focuses on stocks of large U.S. companies
(those with a market value of $1 billion or more) that the portfolio manager
believes 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). As of
December 31, 2000, companies in which the fund invests had a median market
capitalization of approximately $-- and an average market capitalization of $--.
The portfolio manager begins by screening for stocks whose price-to-earnings
ratios are below the average for the S&P 500 Index. The manager then compares a
company's stock price to its book value, cash flow and yield, and analyzes
individual companies to identify those that are financially sound and appear to
have strong potential for long-term growth and income.
The manager assembles the fund's portfolio from among the most attractive
stocks, drawing on analysis of economic outlooks for various financial
industries. The manager may favor securities from different industries in the
financial sector at different times, while still maintaining variety in terms of
industries and companies represented.
The fund will normally sell a stock when it reaches a target price, its
fundamental factors have changed or it has performed below the managers'
expectations.
--ICON--------------------------------------------------------------------------
OTHER INVESTMENTS
The manager 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.
20 | Kemper-Dreman High Return Equity Fund
<PAGE>
--------------------------------------------------------------------------------
The Main Risks Of Investing In The Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the large company portion of the U.S. stock
market. When large company stock prices fall, you should expect the value of
your investment to fall as well. At times, large company stocks may not perform
as well as stocks of smaller or mid-size companies. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
To the extent that the fund 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 may be out of favor for certain periods
o derivatives could produce disproportionate losses
o foreign securities may be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This fund may serve investors with long-term goals who are interested in a
large-cap value fund that may focus on certain sectors of the economy.
--------------------------------------------------------------------------------
21 | Kemper-Dreman High Return Equity Fund
<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
reflect sales loads; if it did, returns would be lower. 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:
47.57 19.80 9.22 -0.99 46.86 28.79 31.92 11.96 -13.23
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
--------------------------------------------------------------------------------
Best quarter: ____%, Q_ 19__ YTD return as of [FISCAL YEAR END]: ___%
Worst quarter: ____%, Q_ 19__
--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/2000)
--------------------------------------------------------------------------------
Since Since
Since Since 9/11/95 Since 3/18/88
12/31/99 12/31/95 Life of 12/31/90 Life of
1 Year 5 Years Class B/C 10 Years Class A
------------------------------------------------------------------------------
Class A --% --% -- --% --%
------------------------------------------------------------------------------
Class B -- -- --% -- --
------------------------------------------------------------------------------
Class C -- -- -- -- --
------------------------------------------------------------------------------
Index
------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index, an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
------------------------------------------------------------------------------
The table includes the effects of maximum sales loads. In both the table and the
chart, total returns for 1990 through 1995 would have been lower if operating
expenses hadn't been reduced.
* Since 9/30/95
** Since 3/31/88
22 | Kemper-Dreman High Return Equity Fund
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
------------------------------------------------------------------------------
Fee Table Class A Class B Class C
------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
------------------------------------------------------------------------------
Maximum Sales Charge (Load) 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 % % %
------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
------------------------------------------------------------------------------
Other Expenses**
------------------------------------------------------------------------------
Total Annual Operating Expenses
------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see "Policies You Should Know About -- Policies
about transactions") may be subject to a contingent deferred sales charge
of 1.00% if redeemed within one year of purchase and 0.50% if redeemed
during the second year following purchase.
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors. "Other
Expenses" are restated to reflect changes in certain administrative and
blue sky fees.
Based on the costs above, this example helps you compare each share class's
expenses to those of other mutual funds. The example assumes operating expenses
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
23 | Kemper-Dreman High Return Equity Fund
<PAGE>
------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------------
Class A shares $ $ $ $
------------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class A shares $ $ $
------------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------------
24 | Kemper-Dreman High Return Equity Fund
<PAGE>
--------------------------------------------------------------------------------
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 to asset management. Scudder Kemper's team
is comprised of investment professionals, 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 __% of 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 $7 billion in
assets. The portfolio manager for this fund is David N. Dreman, founder and
chairman of Dreman Value Management. Widely regarded as a leading proponent of
value-style investment management, Mr. Dreman began his investment career in
1957 and has managed the fund since inception.
25 | Kemper-Dreman High Return Equity Fund
<PAGE>
TICKER SYMBOLS CLASS: A) KDSAX B) KDSBX C) KDSCX
Kemper
Small Cap Value Fund
FUND GOAL The fund seeks long-term capital appreciation.
26 | Kemper Small Cap Value Fund
<PAGE>
--------------------------------------------------------------------------------
The Fund's Main Strategy
The fund normally invests at least 65% of total assets in undervalued common
stocks of small U.S. companies, which the fund defines as companies that are
similar in market value to those in the Russell 2000 Index ($-- or less as of
12/31/00).
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 weighs 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.
--ICON--------------------------------------------------------------------------
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 the fund is permitted to use various
types of derivatives (contracts whose value is based on, for example, indices,
currencies or securities), the managers don't intend to use them as principal
investments and may not use them at all.
27 | Kemper Small Cap Value Fund
<PAGE>
--------------------------------------------------------------------------------
The Main Risks Of Investing In The Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the 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 sector, any factors affecting
that sector 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 may be out of favor for certain periods
o foreign securities 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, market conditions might make it hard to value some investments or
to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This fund may make sense for value-oriented investors who are interested in
small-cap market exposure with potentially lower risk than a growth-oriented
small-cap fund.
--------------------------------------------------------------------------------
28 | Kemper Small Cap Value Fund
<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
reflect sales loads; if it did, returns would be lower. 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:
2.54 0.15 43.29 29.60 20.02 -12.82 0.65
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999 2000
--------------------------------------------------------------------------------
Best quarter: ____%, Q_ 19__ YTD return as of [FISCAL YEAR END]: ___%
Worst quarter: ____%, Q_ 19__
--------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/2000)
--------------------------------------------------------------------------------
Since Since
Since Since 9/11/95 Since 3/18/88
12/31/99 12/31/95 Life of 12/31/90 Life of
1 Year 5 Years Class B/C 10 Years Class A
------------------------------------------------------------------------------
Class A --% --% -- --%
------------------------------------------------------------------------------
Class B -- -- --% --
------------------------------------------------------------------------------
Class C -- -- -- --
------------------------------------------------------------------------------
Index
------------------------------------------------------------------------------
Index: The Russell 2000 Value Index, which measures the performance of those
companies in the Russell 2000 Index with lower price-to-book ratios and lower
expected growth rates.
------------------------------------------------------------------------------
The table includes the effects of maximum sales loads. In both the table and the
chart, total returns for 1993 through 1996 would have been lower if operating
expenses hadn't been reduced.
* Since 9/30/95
** Since 5/31/92
29 | Kemper Small Cap Value Fund
<PAGE>
--------------------------------------------------------------------------------
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
---------------------------------------------------------------------------
Fee Table Class A Class B Class C
---------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
---------------------------------------------------------------------------
Maximum Sales Charge (Load) 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 % % %
---------------------------------------------------------------------------
Distribution (12b-1) Fee None
---------------------------------------------------------------------------
Other Expenses**
---------------------------------------------------------------------------
Total Annual Operating Expenses
---------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see "Policies You Should Know About -- Policies
about transactions") may be subject to a contingent deferred sales charge
of 1.00% if redeemed within one year of purchase and 0.50% if redeemed
during the second year following purchase.
** Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors. "Other
Expenses" are restated to reflect changes in certain administrative and
blue sky fees.
Based on the costs above, this example helps you compare each share class's
expenses to those of other mutual funds. The example assumes operating expenses
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
30 | Kemper Small Cap Value Fund
<PAGE>
------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------------
Class A shares $ $ $
------------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class A shares $ $ $
------------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------------
31 | Kemper Small Cap Value Fund
<PAGE>
--------------------------------------------------------------------------------
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 __% of its average daily net assets.
--ICON--------------------------------------------------------------------------
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
o Joined the fund team in 1999
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.
--------------------------------------------------------------------------------
32 | Kemper Small Cap Value Fund
<PAGE>
TICKER SYMBOLS CLASS: A) KUGAX B) KUGBX C) KUGCX
Kemper
U.S. Growth And
Income Fund
--------------------------------------------------------------------------------
FUND GOAL The fund seeks to provide long-term growth of capital, current
income and growth of income.
33 | Kemper U.S. Growth And Income Fund
<PAGE>
The Fund's Main Strategy
The fund normally invests at least 80% of total assets in equities (mainly
common stocks) 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 normally begin by screening for stocks that pay
above-average dividends, that the managers believe offer the prospect of
increasing dividends in the future and that 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 fund may invest in dividend-paying and non-dividend paying stocks.
The managers assembles the fund's portfolio from among the most attractive
stocks, drawing on analysis of economic outlooks for various financial
industries. The managers may favor securities from different industries in the
financial sector at different times, while still maintaining variety in terms of
industries and companies represented.
The fund normally will, but is not obligated to, 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 when the managers believe its price is unlikely to go
much higher or when other investments offer better opportunities.
[LOGO]
--------------------------------------------------------------------------------
OTHER INVESTMENTS
While the fund is permitted to use various types of derivatives (contracts whose
value is based on, for example, indices, currencies or securities), the managers
don't intend to use them as principal investments and may not use them at all.
34 | Kemper U.S. Growth And Income Fund
<PAGE>
The Main Risks Of Investing In The Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the large company portion of the U.S. stock
market. When large company stock prices fall, you should expect the value of
your investment to fall as well. At times, large company stocks may not perform
as well as stocks of smaller or mid-size companies. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
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 may be out of favor for certain periods
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
For investors with long-term goals who are looking for an investment that has
potentially lower risks than growth style large-cap funds, this fund may be a
logical choice.
35 | Kemper U.S. Growth And Income Fund
<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
reflect sales loads; if it did, returns would be lower. 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.
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1999 7.43
2000
Best quarter: ____%, Q_ 19__ YTD return as of [FISCAL YEAR END]: ___%
Worst quarter: ____%, Q_ 19__
Average Annual Total Returns (as of 12/31/2000)
------------------------------------------------------------------------------
Since
Since 1/30/98
12/31/99 Life of
1 Year Classes
------------------------------------------------------------------------------
Class A --% --
------------------------------------------------------------------------------
Class B -- --%
------------------------------------------------------------------------------
Class C -- --
------------------------------------------------------------------------------
Index
------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index, an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
------------------------------------------------------------------------------
The table includes the effects of maximum sales loads. In both the table and the
chart, total returns would have been lower if operating expenses hadn't been
reduced.
* Since 1/31/98.
36 | Kemper U.S. Growth And Income Fund
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
------------------------------------------------------------------------------
Fee Table Class A Class B Class C
------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
------------------------------------------------------------------------------
Maximum Sales Charge (Load) 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 % % %
------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
------------------------------------------------------------------------------
Other Expenses**
------------------------------------------------------------------------------
Total Annual Operating Expenses
------------------------------------------------------------------------------
Expense Reimbursements
------------------------------------------------------------------------------
Net Annual Operating Expenses***
------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large
Order NAV Purchase Privilege (see "Policies You Should Know About --
Policies about transactions") may be subject to a contingent deferred
sales charge of 1.00% if redeemed within one year of purchase and 0.50%
if redeemed during the second year following purchase.
** Includes costs of shareholder servicing, custody, accounting services
and similar expenses, which may vary with fund size and other factors.
"Other Expenses" are restated to reflect changes in certain
administrative and blue sky fees.
*** By contract, total operating expenses are capped at ___%, ___% and ___%
through _____ for Class A, B and C shares, respectively.
Based on the costs above (including one year of capped expenses in each period),
this example helps you compare each share class's expenses to those of other
mutual funds. The example assumes operating expenses remain the same. It also
assumes that you invested $10,000, earned 5% annual returns, reinvested all
dividends and distributions and sold your shares at the end of each period. This
is only an example; actual expenses will be different.
37 | Kemper U.S. Growth And Income Fund
<PAGE>
Example 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------------
Class A shares $ $ $
------------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class A shares $ $ $
------------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------------
38 | Kemper U.S. Growth And Income Fund
<PAGE>
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 __% of its average daily net assets.
[ICON]
--------------------------------------------------------------------------------
FUND MANAGERS
Kathleen T. Millard Greg Adams
Lead Portfolio Manager o Began investment career
o Began investment career in 1987
in 1984 o Joined the advisor in
o Joined the advisor in 1999
1991 o Joined the fund team
o Joined the fund team in 1999
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.
39 | Kemper U.S. Growth And Income Fund
<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.
* Kemper Value Fund is properly known as Value Fund.
40 | Kemper Value Fund
<PAGE>
The Fund's Main Strategy
The fund seeks long-term growth of capital through investment in undervalued
equity securities. The fund normally invests at least 80% of net assets in
equity securities, primarily common stocks of larger, established U.S. companies
(companies with a market value of $1 billion or more). As of December 31, 2000,
companies in which the fund invests had a median market capitalization of
approximately $--.
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 identify the 60 to 90 most attractive stocks, drawing on analysis
of economic outlooks for various sectors and industries. Based on these
outlooks, the managers may favor securities from different sectors and
industries at different times, while still maintaining variety in terms of the
sectors, industries and companies represented.
The fund will normally sell a stock when the managers believe it is fairly
valued, it may not benefit from the current market, its fundamental factors have
changed or it has performed below expectations.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
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 the
fund is permitted to use various types of derivatives (contracts whose value is
based on, for example, indices, currencies or securities), the managers don't
intend to use them as principal investments and might not use them at all.
41 | Kemper Value Fund
<PAGE>
The Main Risks Of Investing In The Fund
There are several risk factors that could hurt the fund's performance, cause you
to lose money or make the fund perform less well than other investments.
As with most stock funds, the most important factor with this fund is how stock
markets perform -- in this case, the large company portion of the U.S. stock
market. When large company stock prices fall, you should expect the value of
your investment to fall as well. Large company stocks at times may not perform
as well as stocks of smaller or mid-size companies. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
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 may be out of favor for certain periods
o derivatives could produce disproportionate losses
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them
42 | Kemper Value Fund
<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
reflect sales loads; if it did, returns would be lower. 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:
1999 4.07
2000
Best quarter: ____%, Q_ 19__ YTD return as of [FISCAL YEAR END]: ___%
Worst quarter: ____77%, Q_ 19__
Average Annual Total Returns (as of 12/31/2000)
------------------------------------------------------------------------------
Since
Since 4/16/98
12/31/99 Life of
1 Year Classes
------------------------------------------------------------------------------
Class A --% --
------------------------------------------------------------------------------
Class B -- --%
------------------------------------------------------------------------------
Class C -- --
------------------------------------------------------------------------------
Index
------------------------------------------------------------------------------
43 | Kemper Value Fund
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
------------------------------------------------------------------------------
Fee Table Class A Class B Class C
------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
------------------------------------------------------------------------------
Maximum Sales Charge (Load) 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 % % %
------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
------------------------------------------------------------------------------
Other Expenses**
------------------------------------------------------------------------------
Total Annual Operating Expenses
------------------------------------------------------------------------------
* The redemption of shares purchased at net asset value under the Large
Order NAV Purchase Privilege (see "Policies You Should Know About --
Policies about transactions") may be subject to a contingent deferred
sales charge of 1.00% if redeemed within one year of purchase and 0.50%
if redeemed during the second year following purchase.
** Includes costs of shareholder servicing, custody, accounting services
and similar expenses, which may vary with fund size and other factors.
"Other Expenses" are restated to reflect changes in certain
administrative and blue sky fees.
44 | Kemper Value Fund
<PAGE>
Based on the costs above, this example helps you compare each share class's
expenses to those of other mutual funds. The example assumes operating expenses
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. 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 $ $ $
------------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class A shares $ $ $
------------------------------------------------------------------------------
Class B shares
------------------------------------------------------------------------------
Class C shares
------------------------------------------------------------------------------
45 | Kemper Value Fund
<PAGE>
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 __% of its average daily net assets.
[ICON]
--------------------------------------------------------------------------------
FUND MANAGERS
Lois R. Roman Jonathan Lee
Lead Portfolio Manager o Began investment career
o Began investment career in 1990
in 1988 o Joined the advisor in
o Joined the advisor in 1999
1994 o Joined the fund team
o Joined the fund team in 1999
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.
46 | Kemper Value Fund
<PAGE>
Other Policies and Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, a fund's Board could
change that fund's investment goal without seeking shareholder
approval.
o As a temporary defensive measure, Kemper-Dreman Financial Services
Fund, Kemper U.S. Growth And Income Fund and Kemper Value Fund could
shift up to 100% of assets, and Kemper Contrarian Fund, Kemper-Dreman
High Return Equity Fund and Kemper Small Cap Value Fund could shift up
to 50% 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 These funds' equity investments are mainly common stocks, but may also
include other types of equities such as preferred or convertible
stocks.
o These funds may trade securities actively. This could raise transaction
costs (thus lowering performance) and could mean higher taxable
distributions.
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
Euro conversion
Funds which invest in foreign securities 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 is working to address euro-related issues as they occur and understands
that other key service providers are taking similar steps. Still, there's some
risk that this problem could materially affect a fund's operation (including its
ability to calculate net asset value and to handle purchases and redemptions),
its investments or securities markets in general.
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).
47
<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).
Fund Names
48
<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 a representative of your workplace retirement plan
or other investment provider.
<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%, charged o Some investors may be able to
when you buy shares reduce or eliminate their
sales charges; see next page
o In most cases, no charges when you sell
shares o Total annual operating
expenses are lower than those
o No distribution fee for Class B or Class C
------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge
rate falls to zero after six
o Deferred sales charge declining from years
4.00%, charged when you sell shares you
bought within the last six years o Shares automatically convert
to Class A after six years,
o 0.75% distribution fee which means lower annual
expenses going forward
------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge
rate is lower, but your
o Deferred sales charge of 1.00%, charged shares never convert to Class
when you sell shares you bought within A, so annual expenses remain
the last year higher
o 0.75% distribution fee
------------------------------------------------------------------------------
50
<PAGE>
Sales charge Sales charge
as a % of as a % of your
Your investment offering price net investment*
----------------------------------------------------------
Up to $50,000 5.75% 6.10%
----------------------------------------------------------
$50,000-$99,999 4.50 4.71
----------------------------------------------------------
$100,000-$249,999 3.50 3.63
----------------------------------------------------------
$250,000-$499,999 2.60 2.67
----------------------------------------------------------
$500,000-$999,999 2.00 2.04
----------------------------------------------------------
$1 million or more See below and next page
-----------------------------------------------------------
* Rounded to the nearest one-hundredth percent.
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $50,000 over the next 24 months ("letter of
intent")
o the amount of 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.
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.
51
<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 ("Large Order NAV Purchase
Privilege"). 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.
52
<PAGE>
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% is deducted
from fund assets each year. This means the annual expenses for Class B shares
are somewhat higher (and their performance correspondingly lower) compared to
Class A shares, which don't have a 12b-1 fee. After six years, Class B shares
automatically convert to Class A, which has the net effect of lowering the
annual expenses from the seventh year on.
Class B shares have a CDSC. This charge declines over the years you own shares,
and disappears completely after six years of ownership. But for any shares you
sell within those six years, you may be charged as follows:
Year after you bought shares CDSC on shares you sell
-----------------------------------------------------------------
First year 4.00%
-----------------------------------------------------------------
Second or third year 3.00
-----------------------------------------------------------------
Fourth or fifth year 2.00
-----------------------------------------------------------------
Sixth year 1.00
-----------------------------------------------------------------
Seventh year and later None (automatic conversion
to Class A)
-----------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper can answer your questions and
help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Class B shares can be a logical choice for long-term investors who would prefer
to see all of their investment go to work right away, and can accept somewhat
higher annual expenses in exchange.
53
<PAGE>
Class C shares
Like Class B shares, Class C shares have no up-front sales charges and have a
12b-1 plan under which a distribution fee of 0.75% is deducted from fund assets
each year. Because of this fee, the annual expenses for Class C shares are
similar to those of Class B shares, but higher than those for Class A shares
(and the performance of Class C shares is correspondingly lower than that of
Class A). However, unlike Class A shares, your entire investment goes to work
immediately.
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a CDSC, but only on shares you sell within one year of
buying them:
Year after you bought shares CDSC on shares you sell
-----------------------------------------------------------------
First year 1.00%
-----------------------------------------------------------------
Second year and later None
-----------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper can answer your questions and
help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.
54
<PAGE>
How To Buy Shares
Once you've chosen a share class, use these instructions to make investments.
Make out any checks to "Kemper Funds."
------------------------------------------------------------------------------
First investment Additional investments
------------------------------------------------------------------------------
$1,000 or more for regular accounts $100 or more for regular accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic Investment $50 or more with an Automatic
Plan Investment Plan, Payroll
Deduction or Direct Deposit
------------------------------------------------------------------------------
Through a financial representative
o Contact your representative using the o Contact your representative
method that's most convenient for you using the method that's most
convenient for you
------------------------------------------------------------------------------
By mail or express mail (see below)
o Fill out and sign an application o Send a check and 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 64121-9153
Express, registered, or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
55
<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
$100 or more for exchanges between be ordered in writing with a
existing accounts signature guarantee; if you're
in doubt, see page 59
------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by the o Contact your representative
method that's most convenient for you by the method that's most
convenient for you
------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for
instructions
------------------------------------------------------------------------------
By mail, express mail or fax (see previous
page)
Write a letter that includes: Write a letter that includes:
o the fund, class and account number o the fund, class and account
you're exchanging out of number from which you want to
sell shares
o the dollar amount or number of shares
you want to exchange o the dollar amount or number
of shares you want to sell
o the name and class of the fund you want
to exchange into o your name(s), signature(s)
and address, as they appear on
o your name(s), signature(s) and address, your account
as they appear on your account
o a daytime telephone number
o a daytime telephone number
------------------------------------------------------------------------------
With a systematic exchange plan With a systematic withdrawal plan
o To set up regular exchanges from a o To set up regular cash
Kemper fund account, call (800) 621-1048 payments from a Kemper fund
account, call (800) 621-1048
------------------------------------------------------------------------------
On the Internet
o Follow the instructions at o Follow the instructions at
www.kemper.com www.kemper.com
------------------------------------------------------------------------------
56
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder.
If you are investing through an investment provider, check the materials you
received from them. As a general rule, you should follow the information in
those materials wherever it contradicts the information given here. Please note
that an investment provider may charge its own fees.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 3 p.m. Central time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Kemper funds generally and on accounts held directly at Kemper. You can also use
it to make exchanges and sell shares.
57
<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 sell shares by phone or over the Internet, 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 transactions, 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 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.
58
<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 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. Such withdrawals
may be made at a maximum of 10% per year of the net asset value of the
account.
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.
59
<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 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 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 processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
60
<PAGE>
How the funds calculate share price
For each share class, the price at which you buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing A Share Class")
Class B and Class C shares-- net asset value per share, or NAV
To calculate NAV, each share class of each fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
-------------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For each fund and share class in this prospectus, the price at which you sell
shares is also the NAV, although for Class B and Class C investors a contingent
deferred sales charge may be taken out of the proceeds (see "Choosing A Share
Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
61
<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 you 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 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 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 pay you for shares you sell by "redeeming in kind," that is, by giving
you marketable securities (which typically will involve brokerage costs
for you to liquidate) rather than cash
o change, add or withdraw various services, fees and account policies
(for example, we may change or terminate the exchange privilege at any
time)
62
<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.
Each fund intends to pay dividends and distributions to its shareholders in
December, and if necessary may do so at times as needed.
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 tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
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.
63
<PAGE>
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 you
receive from a fund
-------------------------------------------------------------------
Generally taxed at capital gains rates
-------------------------------------------------------------------
o long-term capital gains from selling fund shares
-------------------------------------------------------------------
o long-term capital gains distributions you receive 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 a 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.
64
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. For more copies, call (800) 621-1048.
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 20549-0102
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 811-5385
Kemper-Dreman Financial Services Fund 811-08599
Kemper-Dreman High Return Equity Fund 811-5385
Kemper Small Cap Value Fund 811-5385
Kemper U.S. Growth And Income Fund 811-08393
Value Fund 811-1444
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>
Kemper Equity Funds/Value Style
Kemper Contrarian Fund
Kemper-Dreman High Return Equity Fund
Kemper Small Cap Value Fund
SUPPLEMENT TO PROSPECTUS
DATED FEBRUARY 1, 2001
CLASS I SHARES
--------------------------------------------------------------------------------
The above funds currently offer four classes of shares to provide investors with
different purchasing options. These are Class A, Class B and Class C shares,
which are described in the funds' prospectus, and Class I shares, which are
described in the prospectus as supplemented hereby. When placing purchase
orders, investors must specify for which class of shares they are ordering.
Class I shares are available for purchase exclusively by the following
categories of institutional investors: (1) tax-exempt retirement plans (Profit
Sharing, 401(k), Money Purchase Pension and Defined Benefit Plans) of Scudder
Kemper Investments, Inc. ("Scudder Kemper") and its affiliates and rollover
accounts from those plans; (2) the following investment advisory clients of
Scudder Kemper and its investment advisory affiliates that invest at least $1
million in a fund: unaffiliated benefit plans, such as qualified retirement
plans (other than individual retirement accounts and self-directed retirement
plans); unaffiliated banks and insurance companies purchasing for their own
accounts; and endowment funds of unaffiliated non-profit organizations; (3)
investment-only accounts for large qualified plans, with at least $50 million in
total plan assets or at least 1000 participants; (4) trust and fiduciary
accounts of trust companies and bank trust departments providing fee based
advisory services that invest at least $1 million in a fund on behalf of each
trust; and (5) policy holders under Zurich-American Insurance Group's collateral
investment program investing at least $200,000 in a fund; and (6) investment
companies managed by Scudder Kemper that invest primarily in other investment
companies. Class I shares currently are available for purchase only from Kemper
Distributors, Inc. ("KDI"), principal underwriter for the funds, and, in the
case of category 4 above, selected dealers authorized by KDI. Share certificates
are not available for Class I shares.
<PAGE>
The following information supplements the indicated sections of the prospectus.
Performance
The following table shows how the funds' Class I Shares' returns over different
periods average out. For context, the table has broad-based market indices
(which, unlike the funds, have no fees or expenses). All figures in this section
assume reinvestment of dividends and distributions. As always, past performance
is no guarantee of future results.
Average Annual Total Returns -- Class I shares
For periods ended December Life of Inception
31, 1999 One Year Five Years Class of Class
---------------------------------------------------------------------------
Kemper-Dreman High Return
Equity Fund --% --% --% 11/1/95
---------------------------------------------------------------------------
Index 1 --% --% --% 11/30/95
---------------------------------------------------------------------------
Kemper Small Cap Value Fund --% --% --% 10/31/95
---------------------------------------------------------------------------
Index 2 --% --% --% 10/31/95
---------------------------------------------------------------------------
Index 1: Standard & Poor's 500 Composite Stock Price Index, an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: The Russell 2000 Value Index, which measures the performance of those
companies in the Russell 2000 Index with lower price-to-book ratios and lower
expected growth rates.
2
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds.
Shareholder fees: Fees paid directly from your investment.
Maximum
Sales Maximum Maximum
Charge Deferred Sales
(Load) Sales Charge
Imposed on Charge (Load)
Purchases (Load) (as Imposed on
(as a % of a % of Reinvested
offering redemption Dividends/ Redemption Exchange
price) proceeds) Distributions Fee Fee
----------------------------------------------------------------------------
Kemper
Contrarian
Fund None None None None None
----------------------------------------------------------------------------
Kemper- Dreman
High Return
Equity Fund None None None None None
----------------------------------------------------------------------------
Kemper Small None None None None None
Cap Value Fund
----------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets.
Total
Annual
Fund
Management Distribution Other Operating
Fee (12b-1) Fees Expenses Expenses
----------------------------------------------------------------------------
Kemper Contrarian Fund --% None --%* --%*
----------------------------------------------------------------------------
Kemper-Dreman High Return
Equity Fund --% None --% --%
----------------------------------------------------------------------------
Kemper Small Cap
Value Fund --% None --% --%
----------------------------------------------------------------------------
* Estimated for Kemper Contrarian Fund since no Class I shares were issued as
of the fund's fiscal year end.
3
<PAGE>
Example
This example is to help you compare the cost of investing in a fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and returns vary from year to year, and
may be higher or lower than those shown.
Fees and expenses if you sold shares after:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------------
Kemper Contrarian Fund $-- $-- $-- $--
---------------------------------------------------------------------------
Kemper-Dreman High Return $-- $-- $-- $--
Equity Fund
---------------------------------------------------------------------------
Kemper Small Cap Value Fund $-- $-- $-- $--
---------------------------------------------------------------------------
4
<PAGE>
Financial Highlights
No financial information is presented for Class I shares of Kemper Contrarian
Fund since no Class I shares were issued as of the fiscal year end of the fund.
Kemper-Dreman High Return Equity Fund
5
<PAGE>
Kemper Small Cap Value Fund
Special Features
Shareholders of a fund's Class I shares may exchange their shares for (i) shares
of Zurich Money Funds -- Zurich Money Market Fund if the shareholders of Class I
shares have purchased shares because they are participants in tax-exempt
retirement plans of Scudder Kemper and its affiliates and (ii) Class I shares of
any other "Kemper Mutual Fund." Conversely, shareholders of Zurich Money Funds
-- Zurich Money Market Fund who have purchased shares because they are
participants in tax-exempt retirement plans of Scudder Kemper and its affiliates
may exchange their shares for Class I shares of "Kemper Mutual Funds" to the
extent that they are available through their plan. Exchanges will be made at the
relative net asset values of the shares. Exchanges are subject to the
limitations set forth in the prospectus.
As a result of the relatively lower expenses for Class I shares, the level of
income dividends per share (as a percentage of net asset value) and, therefore,
the overall investment return, typically will be higher for Class I shares than
for Class A, Class B and Class C shares.
February 1, 2001
<PAGE>
Kemper Equity Trust
-------------------
Kemper-Dreman Financial Services Fund ("Financial Services Fund")
Kemper Securities Trust
-----------------------
Kemper U.S. Growth and Income Fund ("U.S. Growth and Income Fund")
Kemper Value Series, Inc.
-------------------------
Kemper Contrarian Fund ("Contrarian Fund")
Kemper-Dreman High Return Equity Fund ("High Return Equity Fund")
Kemper Small Cap Value Fund ("Small Cap Value Fund")
Value Equity Trust
------------------
Value Fund - Kemper Shares ("Value Fund")
Class A, Class B and Class C
----------------------------
STATEMENT OF ADDITIONAL INFORMATION
February 1, 2001
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus for the Funds, as amended from time
to time, a copy of which may be obtained without charge by contacting Kemper
Distributors, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606,
1-800-621-1048, or from the firm from which this Statement of Additional
Information was obtained.
The Annual Report to Shareholders of each Fund, dated September 30,
2000 for the U.S. Growth and Income Fund and Kemper Value Fund, and November 30,
2000 for the Contrarian Fund, Financial Services Fund, High Return Equity Fund
and Small Cap Value Fund accompanies this Statement of Additional Information.
Each is incorporated by reference and is hereby deemed to be part of this
Statement of Additional Information.
This Statement of Additional Information is incorporated by reference
into the combined prospectus.
<PAGE>
TABLE OF CONTENTS
Page
----
INVESTMENT POLICIES AND TECHNIQUES.......................................1
ADDITIONAL INFORMATION ABOUT INVESTMENT TECHNIQUES.......................5
INVESTMENT RESTRICTIONS.................................................24
NET ASSET VALUE.........................................................25
Purchase of Shares...................................................27
Redemptions and Exchanges............................................32
SPECIAL FEATURES.....................................................36
ADDITIONAL TRANSACTION INFORMATION......................................40
PERFORMANCE INFORMATION.................................................42
FOOTNOTES FOR ALL FUNDS.................................................46
FUND ORGANIZATION.......................................................46
INVESTMENT MANAGER......................................................48
Code of Ethics.......................................................53
TRUSTEES AND OFFICERS...................................................55
Principal Holders of Securities......................................63
PORTFOLIO TRANSACTIONS..................................................75
Brokerage Commissions................................................75
Portfolio Turnover...................................................76
FINANCIAL STATEMENTS....................................................76
APPENDIX -- RATINGS OF INVESTMENTS......................................76
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INVESTMENT POLICIES AND TECHNIQUES
KEMPER-DREMAN FINANCIAL SERVICES FUND. The Fund seeks to provide long-term
capital appreciation. The Fund normally invests at least 65% of total assets in
equity securities (mainly common stocks) 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 manager begins by screening for financial services stocks whose
price-to-earnings ratios are below the average for the S&P 500 Index. The
manager then compares a company's stock price to its book value, cash flow and
yield, and analyzes individual companies to identify those that are financially
sound and appear to have strong potential for long-term growth. The manager
assembles the Fund's portfolio from among the most attractive stocks, drawing on
analysis of economic outlooks for various financial industries. The manager may
favor securities from different industries in the financial sector at different
times, while still maintaining variety in terms of industries and companies
represented. The Fund will normally sell a stock when it reaches a target price,
its fundamental factors have changed or it has performed below the manager's
expectations.
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. The Fund may invest up to 5% of its assets in debt securities
which are rated below investment-grade or which are unrated, but deemed
equivalent to those rated below investment-grade by the Investment Manager . The
Fund may also purchase securities on a "when-issued" or "forward delivery"
basis, invest in convertible securities, and zero coupon securities, enter into
repurchase agreements and reverse repurchase agreements, and may engage in
strategic transactions. The Fund will not invest more than 15%, of the value of
its net assets in illiquid securities .
While it is anticipated that under normal circumstances the Fund will be fully
invested, in order to conserve assets during temporary defensive periods when
the Investment Manager deems it appropriate, the Fund may invest up to 100% of
its assets in cash or defensive-type securities, such as high-grade debt
securities, 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.
KEMPER U.S. GROWTH AND INCOME FUND. The Fund seeks long-term growth of capital,
current income and growth of income. The Fund seeks this objective by investing
primarily in common stocks, preferred stocks, and securities convertible into
common stocks of U.S. companies that offer the prospect for growth of earnings
while paying current dividends. Overtime, continued growth of earnings tends to
lead to higher dividends and enhancement of capital value.
The Fund allocates its investments among different industries and companies, and
adjusts its portfolio securities for investment considerations and not for
trading purposes. The Fund may also purchase securities of real estate
investment trusts ("REITs"), as well as securities that do not pay current
dividends but that offer prospects for growth of capital and future income.
Convertible securities (which may be current coupon or zero coupon securities)
are bonds, notes, debentures, preferred stocks and other securities that may be
converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The Fund may also invest in nonconvertible
preferred stocks consistent with the Fund's objective.
From time to time, for temporary defensive purposes, when the Investment Manager
feels such a position is advisable in light of economic or market conditions,
the Fund may invest all or a portion of its assets in cash and cash equivalents,
including repurchase agreements. It is impossible to accurately predict for how
long such alternative strategies will be utilized.
The Fund may also enter into repurchase agreements and reverse repurchase
agreements, and invest in zero coupon securities, may loan securities and may
engage in strategic transactions. The Fund will not invest in foreign
securities. The Fund will not invest more than 15%, of the value of its net
assets in illiquid securities.
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The Fund's share price fluctuates with changes in interest rates and market
conditions. These fluctuations may cause the value of shares to be higher or
lower than when purchased. The Fund seeks to provide participation in the
long-term growth of the economy through the potential investment returns offered
by U.S. common stocks and other domestic equity securities. It maintains a
diversified portfolio consisting primarily of common stocks, preferred stocks
and convertible securities of companies with long-standing records of earnings
growth and higher-than-average dividend payouts. These companies, many of which
are mainstays of the U.S. economy, offer prospects for future growth of earnings
and dividends, and therefore may offer investors attractive long-term investment
opportunities.
The Fund's investment strategy, which emphasizes higher-yielding equity
securities issued by U.S. companies deemed to be underrated by the Investment
Manager, maybe more appropriate for the conservative portion of an investor's
equity portfolio. The Fund cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the Fund's shares will increase or decrease with
changes in the market prices of the Fund's investments and there is no assurance
that the Fund's objective will be achieved.
The Investment Manager applies a disciplined investment approach for selecting
holdings for the Fund. The first stage of this process involves analyzing a
selected pool of dividend-paying equity securities, to identify stocks that have
high yields relative to the yield of the Standard & Poor's 500 Composite Price
Index ("S&P500"), a commonly-accepted benchmark for the U.S. stock market. Also,
the Investment Manager screens for stocks that have yields at the upper end of
their historical yield range. In the Investment Manager's opinion, this subset
of higher-yielding stocks identified by applying these criteria offers the
potential for returns over time that are greater than or equal to the S&P 500,
at less risk than this market index. In the Investment Manager's opinion, these
favorable risk and return characteristics exist because the higher dividends
offered by these stocks may act as a "cushion" when markets are volatile and
because stocks with higher yields tend to sell at more attractive valuations
(e.g., lower price-to-earning ratios and lower price-to-book ratios).Once this
subset of higher-yielding stocks is identified, the Investment Manager conducts
a fundamental analysis of each company's financial strength, profitability,
projected earnings, sustainability of dividends, competitive outlook, and
ability of management. The Fund's portfolio may include stocks that are out of
favor in the market, but which, in the opinion of the Investment Manager, offer
compelling valuations and potential for long-term appreciation in price and
dividends. In order to diversify the Fund's portfolio among different industry
sectors, the Investment Manager evaluates how each sector reacts to broad
economic factors such as interest rates, inflation, Gross Domestic Product, and
consumer spending. The Fund's portfolio is constructed by attaining a proper
balance of stocks in these sectors based on the Investment Manager's economic
forecasts. The Investment Manager applies disciplined criteria for selling
stocks in the Fund's portfolio as well. When the Investment Manager determines
that the relative yield of a stock has declined excessively below the yield of
the S&P 500, or that the yield is at the lower end of the stock's historic
range, the stock generally is sold from the Fund's portfolio. Similarly, if the
Investment Manager's fundamental analysis determines that the payment of the
stock's dividend is at risk, or that market expectations for the stock are
unreasonably high, the stock is generally targeted for sale. In summary, the
Investment Manager applies disciplined buy and sell criteria, fundamental
company and industry analysis, and economic forecasts in managing the Fund to
pursue long-term price appreciation and income with a tendency for lower overall
volatility than the market, as measured by the S&P 500.
While it is anticipated that under normal circumstances the Fund will be fully
invested, in order to conserve assets during temporary defensive periods when
the Investment Manager deems it appropriate, the Fund may invest up to 100%of
its assets in cash or defensive-type securities, such as high-grade debt
securities, 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.
CONTRARIAN FUND. The Contrarian Fund's primary investment objective is to seek
long-term capital appreciation and its secondary objective is to seek current
income. The Fund will invest primarily in common stocks of larger, listed
companies with a record of earnings and dividends, low price-earnings ratios,
reasonable returns on equity, and sound finances which, in the opinion of
portfolio management, have intrinsic value.
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The Fund will invest principally in a diversified portfolio of equity securities
of companies that the investment manager believes to be undervalued. Securities
of a company may be undervalued as a result of overreaction by investors to
unfavorable news about a company, industry or the stock markets in general or as
a result of a market decline, poor economic conditions, tax-loss selling or
actual or anticipated unfavorable developments affecting the company.
The Fund may, from time to time, invest in stocks that pay no dividends. It is
anticipated that most stocks purchased will be listed on the New York Stock
Exchange, but the Fund may also purchase securities listed on other securities
exchanges and in the over-the-counter market. The Fund may invest in preferred
stocks, convertible securities and warrants, enter into repurchase agreements
and reverse repurchase agreements, and may engage in strategic transactions. The
Fund may also invest up to 20% of assets in foreign securities, including
emerging markets. The Fund will not invest more than 15%, of the value of its
net assets in illiquid securities.
While it is anticipated that under normal circumstances the Fund will be fully
invested, in order to conserve assets during temporary defensive periods when
the Investment Manager deems it appropriate, the Fund may invest up to 50% 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.
HIGH RETURN EQUITY FUND. The High Return Equity Fund's investment objective is
to achieve a high rate of total return. The Fund will invest primarily in common
stocks of larger, listed companies with a record of earnings and dividends, low
price-earnings ratios, reasonable returns on equity, and sound finances which,
in the opinion of portfolio management, have intrinsic value. The Fund generally
will invest in common stocks that pay relatively high dividends, i.e. comparable
to the dividend yield of Standard & Poor's 500 Composite Stock Index.
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities. Equity securities include common stocks, preferred
stocks, securities convertible into or exchangeable for common or preferred
stocks, equity investments in partnerships, joint ventures and other forms of
non-corporate investment and warrants and rights exercisable for equity
securities and equity equivalents. The Fund will invest principally in a
diversified portfolio of equity securities of companies that the investment
manager believes to be undervalued. Securities of a company may be undervalued
as a result of overreaction by investors to unfavorable news about a company,
industry or the stock markets in general or as a result of a market decline,
poor economic conditions, tax-loss selling or actual or anticipated unfavorable
developments affecting the company.
While most investments will be in dividend paying stocks, the Fund may also
acquire stocks that do not pay dividends in anticipation of market appreciation,
future dividends, and when the investment manager believes that it would be
advantageous to write options on such stocks. The Fund will be managed with a
view to achieving a high rate of total return on investors' capital primarily
through appreciation of its common stock holdings, options transactions and by
acquiring and selling stock index futures and options thereon and, to a lesser
extent, through dividend and interest income, all of which, in the investment
manager's judgment, are elements of "total return." The Fund may enter into
repurchase agreements and reverse repurchase agreements, and engage in strategic
transactions. The Fund may also invest up to 20% of assets in foreign
securities, including emerging markets. The Fund will not invest more than 15%,
of the value of its net assets in illiquid securities.
Although the Fund will not invest 25% or more of its total assets in any one
industry, it may, from time to time, invest a significant percentage of its
total assets in one or more market sectors, such as the financial services
sector.
While it is anticipated that under normal circumstances the Fund will be fully
invested, in order to conserve assets during temporary defensive periods when
the Investment Manager deems it appropriate, the Fund may invest up to 50% of
its assets in cash or defensive-type securities, such as high-grade debt
securities, securities
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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.
SMALL CAP VALUE FUND. The Small Cap Value Fund's investment objective is to seek
long-term capital appreciation. It will invest principally in a diversified
portfolio of equity securities of small companies with market capitalizations
ranging from $100 million to $1 billion that the investment manager believes to
be undervalued. Under normal market conditions, at least 65% of the total assets
of the Fund will be invested in securities of companies whose market
capitalizations are less than $1 billion.
The Fund will invest primarily in common stocks of companies with a record of
earnings, low price-earnings ratios, reasonable returns on equity and sound
finances which, in the opinion of the investment manager, have intrinsic value.
Such securities are generally traded on the New York Stock Exchange, the
American Stock Exchange and in the over-the-counter market. The Fund will invest
principally in a diversified portfolio of equity securities of companies that
the investment manager believes to be undervalued. Securities of a company may
be undervalued as a result of overreaction by investors to unfavorable news
about a company, industry or the stock markets in general or as a result of a
market decline, poor economic conditions, tax-loss selling or actual or
anticipated unfavorable developments affecting the company.
The Fund may invest in preferred stocks, convertible securities and warrants,
enter into repurchase agreements and reverse repurchase agreements, and engage
in strategic transactions. The Fund may also invest up to 20% of assets in
foreign securities, including emerging markets. The Fund will not invest more
than 15%, of the value of its net assets in illiquid securities.
While it is anticipated that under normal circumstances the Fund will be fully
invested, in order to conserve assets during temporary defensive periods when
the Investment Manager deems it appropriate, the Fund may invest up to 50% 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.
VALUE FUND - KEMPER SHARES seeks to provide long-term growth of capital through
investment in undervalued equity securities. This objective is not fundamental
and may be changed by the Trustees without a shareholder vote. Also, unless
otherwise stated, the policies of the Fund are not fundamental and may be
changed by the Trustees without a shareholder vote. If there is a change in
investment objective, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs. There can be no assurance that the Fund's objective will be met. The Fund
invests primarily in the stock of larger, established U.S. companies that the
Fund's portfolio management team believes are undervalued in the marketplace.
Stocks trade at a discount for many reasons. Typically, these companies, or
their industries, have fallen out of favor with investors because of such things
as earnings disappointments, negative industry or economic events, or investor
skepticism. As a result, their stock prices may not accurately reflect their
long-term business potential. Accordingly, the prices of these stocks may rise
as business fundamentals improve or as market conditions change. For example,
stock prices are often affected beneficially when a company's earnings exceed
general expectations or when investors begin to appreciate the full extent of a
company's business potential.
The Fund invests at least 80% of its net assets in equity securities consisting
of common stocks, preferred stocks, securities convertible into common stocks,
rights and warrants. The Fund changes its portfolio securities for long-term
investment considerations and not for trading purposes.
The Fund may be appropriate for investors who seek a core holding to establish
the foundation of a value-oriented portfolio or a value fund to diversify an
investor's existing growth-equity portfolio.
The Fund invests primarily in common stocks of larger, established domestic
companies with market capitalizations of at least $1 billion. The Adviser uses
in-depth fundamental and quantitative research to identify companies that are
currently undervalued in relation to future business prospects.
The Fund's portfolio management team uses a proprietary computer model to rank
the 1000 stocks that comprise the Russell 1000 Index -- a widely used large
stock universe -- based on their relative valuations. A company's valuation is
measured by comparing its stock price to its business fundamentals, such as
sales,
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earnings or book value. The Fund's portfolio management team focuses on the
stocks with the lowest valuations, which are further analyzed and rated using
fundamental research, such as an examination of a company's historical earnings
patterns, sales growth and profit margins in order to assess the likelihood of a
rebound in the stock price if a company's business fundamentals improve or
market conditions change.
In an effort to manage the risk exposure of the Fund, the portfolio management
team then assesses the expected volatility of the Fund and the potential impact
the most promising of the stocks may have on the Fund's risk level. Based on
this information, the Fund's portfolio management team selects approximately
60-90 stocks that the portfolio management team believes offer the greatest
potential for attractive long-term gains.
The Fund typically sells a stock when its price is no longer considered to be a
value, it is less likely to benefit from the current market or economic
environment, it experiences deteriorating fundamentals or its price performance
falls short of the portfolio management team's expectations.
The Fund may invest up to 20% of its assets in investment-grade debt
obligations, including zero coupon securities and commercial paper.
Investment-grade debt securities are those rated Aaa, Aa, A or Baa by Moody's
Investor Services, Inc. ("Moody's"), or AAA, AA, A or BBB by Standard and Poor's
Corporation ("S&P") or, if unrated, of equivalent quality as determined by the
Adviser.
The Fund may also purchase debt securities which are rated below
investment-grade (that is, rated below Baa by Moody's or below BBB by S&P) and
unrated securities of equivalent quality as determined by the Adviser, which
usually entail greater risk (including the possibility of default or bankruptcy
of the issues of such securities), generally involve greater volatility of price
and risk of principal and income, and may be less liquid and more difficult to
value than securities in the higher rating categories. The Fund may invest up to
20% of its assets in such securities ("high yield/high risk securities" commonly
referred to as "junk bonds") but will invest no more than 10% of its assets in
securities rated B or lower by Moody's or S&P or of equivalent quality as
determined by the Adviser and may not invest more than 5% of its net assets in
securities which are rated C by Moody's or D by S&P or of equivalent quality as
determined by the Adviser. Securities rated C or D may be in default with
respect to payment of principal or interest. Also, longer maturity bonds tend to
fluctuate more in price as interest rates change than do short-term bonds,
providing both opportunity and risk.
In addition, the Fund may enter into repurchase agreements and reverse
repurchase agreements, may engage in strategic transactions and derivatives and
invest in illiquid securities.
The Fund is limited to 5% of its net assets for initial margin and premium
amounts on futures positions considered speculative by the Commodity Futures
Trading Commission.
The Fund may borrow money for temporary, emergency or other purposes, including
investment leverage purposes, as determined by the Trustees.
It is the Fund's policy that illiquid securities (including repurchase
agreements of more than seven days duration, certain restricted securities, and
other securities which are not readily marketable) may not constitute, at the
time of purchase, more than 15% of the value of a Fund's net assets.
The Fund cannot guarantee a gain or eliminate the risk of loss. The net asset
value of a Fund's shares will increase or decrease with changes in the market
price of the Fund's investments, and there is no assurance that the Fund's
objective will be achieved.
ADDITIONAL INFORMATION ABOUT INVESTMENT TECHNIQUES
The following section includes disclosure about investment practices and
techniques which may be utilized by one or more funds described in this
Statement of Additional Information. The name of each fund authorized to utilize
the technique precedes its discussion. Specific limitations and policies
regarding the use of these techniques may be found in each fund's "Investment
Objective and Policies" section, as well as in "Investment Restrictions" below.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which a Fund may engage or a financial
instrument which a Fund may purchase are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. (the "Investment Manager"), in
its discretion, might, but is not required to, use in managing a Fund's
portfolio assets. The Investment Manager may, in its discretion, at any time
employ such practice, technique or instrument for one or
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more funds but not for all funds advised by it. Furthermore, it is possible that
certain types of financial instruments or investment techniques described herein
may not be available, permissible, economically feasible or effective for their
intended purposes in all markets. Certain practices, techniques, or instruments
may not be principal activities of a Fund but, to the extent employed, could
from time to time have a material impact on the Fund's performance.
Borrowing. The Fund will borrow only when the Investment Manager believes that
borrowing will benefit the Fund after taking into account considerations such as
the costs of the borrowing. Borrowing by the Fund will involve special risk
considerations. Although the principal of the Fund's borrowings will be fixed,
the Fund's assets may change in value during the time a borrowing is
outstanding, proportionately increasing exposure to capital risk.
Common Stocks. Common stock is issued by companies to raise cash for business
purposes and represents a proportionate interest in the issuing companies.
Therefore, the Fund participates in the success or failure of any company in
which it holds stock. The market values of common stock can fluctuate
significantly, reflecting the business performance of the issuing company,
investor perception and general economic and financial market movements. Despite
the risk of price volatility, however, common stocks have historically offered a
greater potential for long-term gain on investment, compared to other classes of
financial assets such as bonds or cash equivalents, although there can be no
assurance that this will be true in the future.
Convertible Securities. The Fund may invest in convertible securities, that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stock. Investments in convertible securities can provide
an opportunity for capital appreciation and/or income through interest and
dividend payments by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest are either fixed income
or zero coupon debt securities which may be converted or exchanged at a stated
or determinable exchange ratio into underlying shares of common stock. The
exchange ratio for any particular convertible security may be adjusted from time
to time due to stock splits, dividends, spin-offs, other corporate distributions
or scheduled changes in the exchange ratio. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Convertible securities
generally offer lower yields than non-convertible securities of similar quality
because of their conversion or exchange features.
Of course, like all debt securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities. Convertible securities may be issued as fixed income
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obligations that pay current income or as zero coupon notes and bonds, including
Liquid Yield Option Notes ("LYONs"(TM)).
Depositary Receipts. The Fund may invest in sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs"), International Depositary Receipts ("IDRs") and
other types of Depositary Receipts (which, together with ADRs, GDRs and IDRs are
hereinafter referred to as "Depositary Receipts"). Depositary receipts provide
indirect investment in securities of foreign issuers. Prices of unsponsored
Depositary Receipts may be more volatile than if they were sponsored by the
issuer of the underlying securities. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the stock of unsponsored
Depositary Receipts are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of the Depositary Receipts. ADRs are Depositary
Receipts which are bought and sold in the United States and are typically issued
by a U.S. bank or trust company which evidence ownership of underlying
securities by a foreign corporation. GDRs, IDRs and other types of Depositary
Receipts are typically issued by foreign banks or trust companies, although they
may also be issued by United States banks or trust companies, and evidence
ownership of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the United States securities markets and Depositary Receipts in bearer
form are designed for use in securities markets outside the United States. For
purposes of the Fund's investment policies, the Fund's investments in ADRs, GDRs
and other types of Depositary Receipts will be deemed to be investments in the
underlying securities. Depositary Receipts, including those denominated in U.S.
dollars will be subject to foreign currency exchange rate risk. However, by
investing in U.S. dollar-denominated 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.
However, certain Depositary Receipts may not be listed on an exchange and
therefore may be illiquid securities.
Investing in Emerging Markets. The Fund's investments in foreign securities may
be in developed countries or in countries considered by the Fund's Investment
Manager to have developing or "emerging" markets, which involves 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 the 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,
the 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 Investment
Manager believes that these characteristics may be expected to continue in the
future.
Most emerging securities markets have substantially less volume and are subject
to less governmental supervision than U.S. securities markets. Securities of
many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. In addition, there is less regulation
of securities exchanges, securities dealers, and listed and unlisted companies
in emerging markets than in the U.S.
Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
not kept pace with the volume of securities transactions. Delays in settlement
could result in temporary periods when a portion of the assets of the Fund is
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement
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problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Costs associated
with transactions in foreign securities are generally higher than costs
associated with transactions in U.S. securities. Such transactions also involve
additional costs for the purchase or sale of foreign currency.
Certain emerging markets require prior governmental approval of
investments by foreign persons, limit the amount of investment by foreign
persons in a particular company, limit the investment by foreign persons only to
a specific class of securities of a company that may have less advantageous
rights than the classes available for purchase by domiciliaries of the countries
and/or impose additional taxes on foreign investors. Certain emerging markets
may also restrict investment opportunities in issuers in industries deemed
important to national interest.
Certain 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 or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments.
In the course of investment in emerging markets, the Fund will be
exposed to the direct or indirect consequences of political, social and economic
changes in one or more emerging markets. While the Fund will manage its assets
in a manner that will seek to minimize the exposure to such risks, there can be
no assurance that adverse political, social or economic changes will not cause
the Fund to suffer a loss of value in respect of the securities in the Fund's
portfolio.
The risk also exists that an emergency situation may arise in one or
more emerging markets as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in such
markets may not be readily available. The Fund may suspend redemption of its
shares for any period during which an emergency exists, as determined by the
Securities and Exchange Commission. Accordingly if the Fund believes that
appropriate circumstances exist, it will promptly apply to the Securities and
Exchange Commission for a determination that an emergency is present. During the
period commencing from the Fund's identification of such condition until the
date of the Securities and Exchange Commission action, the Fund's securities in
the affected markets will be valued at fair value determined in good faith by or
under the direction of the Fund's Board.
Volume and liquidity in most foreign markets are less than in the U.S.,
and securities of many foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Fixed commissions on foreign securities
exchanges are generally higher than negotiated commissions on U.S. exchanges,
although the Fund endeavors to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of business and industry practices, securities exchanges, brokers,
dealers and listed companies than in the U.S. Mail service between the U.S. and
foreign countries may be slower or less reliable than within the U.S., thus
increasing the risk of delayed settlements of portfolio transactions or loss of
certificates for certificated portfolio securities. In addition, with respect to
certain emerging markets, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect the Fund's investments in those countries.
Moreover, individual emerging market economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
The Fund may have limited legal recourse in the event of a default with
respect to certain debt obligations it holds. If the issuer of a fixed-income
security owned by the Fund defaults, the Fund may incur
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additional expenses to seek recovery. Debt obligations issued by emerging market
country governments differ from debt obligations of private entities; remedies
from defaults on debt obligations issued by emerging market governments, unlike
those on private debt, must be pursued in the courts of the defaulting party
itself. The Fund's ability to enforce its rights against private issuers may be
limited. The ability to attach assets to enforce a judgment may be limited.
Legal recourse is therefore somewhat diminished. Bankruptcy, moratorium and
other similar laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political context,
expressed as an emerging market governmental issuer's willingness to meet the
terms of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank debt may
not contest payments to the holders of debt obligations in the event of default
under commercial bank loan agreements.
Income from securities held by the Fund could be reduced by a
withholding tax at the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. The Fund's net asset value
may also be affected by changes in the rates or methods of taxation applicable
to the Fund or to entities in which the Fund has invested. The Investment
Manager will consider the cost of any taxes in determining whether to acquire
any particular investments, but can provide no assurance that the taxes will not
be subject to change.
Many emerging markets have experienced substantial, and, in some
periods, extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many emerging market countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of the
largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in the
Fund's portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
The ability of emerging market country governmental issuers to make
timely payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
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To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a withdrawal
of external funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations. In addition,
the cost of servicing emerging market debt obligations can be affected by a
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
Foreign Securities. Investing in foreign securities involves certain special
considerations, including those set forth below, which are not typically
associated with investing in U.S. securities and which may favorably or
unfavorably affect the Fund's performance. As foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the U.S. and, at times, volatility of
price can be greater than in the U.S. Fixed commissions on some foreign
securities exchanges and bid to asked spreads in foreign bond markets are
generally higher than commissions or bid to asked spreads on U.S. markets,
although the Investment Manager will endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less governmental
supervision and regulation of securities exchanges, brokers and listed companies
in foreign countries than in the U.S. It may be more difficult for the Fund's
agents to keep currently informed about corporate actions in foreign countries
which may affect the prices of portfolio securities. Communications between the
U.S. and foreign countries may be less reliable than within the U.S., thus
increasing the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. Payment for securities without delivery
may be required in certain foreign markets. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect U.S. investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. The
management of the Fund seeks to mitigate the risks associated with the foregoing
considerations through continuous professional management.
Euro. The implementation of the Euro may result in uncertainties for European
securities and the operation of the Fund. The Euro was introduced on January 1,
1999 by eleven members countries of the European Economic and Monetary Union
(EMU). Implementation of the Euro requires the redenomination of European debt
and equity securities over a period of time, which may result in various
accounting differences and/or tax treatments which would not otherwise occur.
Additional questions are raised by the fact that certain other European
Community members, including the United Kingdom, did not officially implement
the Euro on January 1, 1999.
High Yield/High Risk Bonds. The Fund may also purchase debt securities which are
rated below investment-grade (commonly referred to as "junk bonds"), that is,
rated below Baa by Moody's or below BBB by S&P and unrated securities judged to
be of equivalent quality as determined by the Investment Manager. These
securities usually entail greater risk (including the possibility of default or
bankruptcy of the issuers of such securities), generally involve greater
volatility of price and risk to principal and income, and may be less liquid,
than securities in the higher rating categories. The lower the ratings of such
debt securities, the more their risks render them like equity securities.
Securities rated D may be in default with respect to payment of principal or
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interest. See the Appendix to this Statement of Additional Information for a
more complete description of the ratings assigned by ratings organizations and
their respective characteristics.
Issuers of 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 a sustained period of rising interest rates, 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 yield securities because
such securities are generally unsecured and are often subordinated to other
creditors of the issuer. Prices and yields of high yield securities will
fluctuate over time and, during periods of economic uncertainty, volatility of
high yield securities may adversely affect the Fund's net asset value. In
addition, investments in high yield zero coupon or pay-in-kind bonds, rather
than income-bearing high yield securities, may be more speculative and may be
subject to greater fluctuations in value due to changes in interest rates.
The Fund may have difficulty disposing of certain high yield (high risk)
securities because they may have a thin trading market. Because not all dealers
maintain markets in all high yield securities, the Fund anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. The lack of a liquid secondary market may have an adverse effect on
the market price and the Fund's ability to dispose of particular issues and may
also make it more difficult for the Fund to obtain accurate market quotations
for purposes of valuing the Fund's assets. Market quotations generally are
available on many high yield issues only from a limited number of dealers and
may not necessarily represent firm bids of such dealers or prices for actual
sales. Adverse publicity and investor perceptions may decrease the values and
liquidity of high yield securities. These securities may also involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
Credit quality in the high-yield securities market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
generally the policy of the Investment Manager not to rely exclusively on
ratings issued by established credit rating agencies, but to supplement such
ratings with its own independent and on-going review of credit quality. The
achievement of the Fund's investment objective by investment in such securities
may be more dependent on the Investment Manager's credit analysis than is the
case for higher quality bonds. Should the rating of a portfolio security be
downgraded, the Investment Manager will determine whether it is in the best
interests of the Fund to retain or dispose of such security.
Prices for below investment-grade securities may be affected by legislative and
regulatory developments. Also, Congress has from time to time considered
legislation which would restrict or eliminate the corporate tax deduction for
interest payments in these securities and regulate corporate restructurings.
Such legislation may significantly depress the prices of outstanding securities
of this type.
Illiquid Securities and Restricted Securities. The Fund may purchase securities
that are subject to legal or contractual restrictions on resale ("restricted
securities"). Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; (iii) in limited quantities after they have been
held for a specified period of time and other conditions are met pursuant to an
exemption from registration; or (iv) in a public offering for which a
registration statement is in effect under the Securities Act of 1933, as
amended. Issuers of restricted securities may not be subject to the disclosure
and other investor protection requirements that would be applicable if their
securities were publicly traded.
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Restricted securities are often illiquid, but they may also be liquid. For
example, restricted securities that are eligible for resale under Rule 144A are
often deemed to be liquid. ).
[The Fund's Board has approved guidelines for use by the Investment Manager in
determining whether a security is liquid or illiquid. Among the factors the
Investment Manager may consider in reaching liquidity decisions relating to Rule
144A securities are: (1) the frequency of trades and quotes for the security;
(2) the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to make a market
in the security; and (4) the nature of the security and the nature of the market
for the security (i.e., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of the transfer).]
Issuers of restricted securities may not be subject to the disclosure and other
investor protection requirement that would be applicable if their securities
were publicly traded. Where a registration statement is required for the resale
of restricted securities, the Fund may be required to bear all or part of the
registration expenses. The Fund may be deemed to be an "underwriter" for
purposes of the Securities Act of 1933, as amended when selling restricted
securities to the public and, in such event, the Fund may be liable to
purchasers of such securities if the registration statement prepared by the
issuer is materially inaccurate or misleading.
The Fund may also purchase securities that are not subject to legal or
contractual restrictions on resale, but that are deemed illiquid. Such
securities may be illiquid, for example, because there is a limited trading
market for them.
The Fund may be unable to sell a restricted or illiquid security. In addition,
it may be more difficult to determine a market value for restricted or illiquid
securities. Moreover, if adverse market conditions were to develop during the
period between the Fund's decision to sell a restricted or illiquid security and
the point at which the Fund is permitted or able to sell such security, the Fund
might obtain a price less favorable than the price that prevailed when it
decided to sell.
This investment practice, therefore, could have the effect of increasing the
level of illiquidity of the Fund.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the SEC which permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Manager. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating funds, including the following: (1) no fund may borrow money
through the program unless it receives a more favorable interest rate than a
rate approximating the lowest interest rate at which bank loans would be
available to any of the participating funds under a loan agreement; and (2) no
fund may lend money through the program unless it receives a more favorable
return than that available from an investment in repurchase agreements and, to
the extent applicable, money market cash sweep arrangements. In addition, a fund
may participate in the program only if and to the extent that such participation
is consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent the Fund is actually engaged in borrowing
through the interfund lending program, the Fund, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes (and not
for leveraging), except that the Fund may engage in reverse repurchase
agreements and dollar rolls for any purpose.
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.
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For example, the Fund may invest in a variety of investment companies which seek
to track the composition and performance of specific indexes or a specific
portion of an index. These index-based investments hold substantially all of
their assets in securities representing their specific index . Accordingly, the
main risk of investing in index-based investments is the same as investing in a
portfolio of equity securities comprising the index. The market prices of
index-based investments will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their NAVs). Index-based
investments may not replicate exactly the performance of their specified index
because of transaction costs and because of the temporary unavailability of
certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Investment-Grade Bonds. The Fund may purchase "investment-grade" bonds, which
are those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P or, if
unrated, judged to be of equivalent quality as determined by the Investment
Manager. Moody's considers bonds it rates Baa to have speculative elements as
well as investment-grade characteristics. To the extent that the Fund invests in
higher-grade securities, the Fund will not be able to avail itself of
opportunities for higher income which may be available at lower grades.
Investment of Uninvested Cash Balances. Each Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the SEC, each Fund may use
Uninvested Cash to purchase shares of affiliated funds including money market
funds, short-term bond funds and Scudder Cash Management Investment Trust, or
one
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or more future entities for which Scudder Kemper Investments acts as trustee or
investment advisor that operate as cash management investment vehicles and that
are excluded from the definition of investment company pursuant to section
3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (collectively, the
"Central Funds") in excess of the limitations of Section 12(d)(1) of the
Investment Company Act. Investment by each Fund in shares of the Central Funds
will be in accordance with the Fund's investment policies and restrictions as
set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance each Fund's ability to
manage Uninvested Cash.
Each Fund will invest Uninvested Cash in Central Funds only to the extent that
each Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers or other financial institutions, and are required to be secured
continuously by collateral in cash or liquid assets, maintained on a current
basis at an amount at least equal to the market value and accrued interest of
the securities loaned. The Fund has the right to call a loan and obtain the
securities loaned on five days' notice or, in connection with securities trading
on foreign markets, within such longer period of time which coincides with the
normal settlement period for purchases and sales of such securities in such
foreign markets. During the existence of a loan, the Fund continues to receive
the equivalent of any distributions paid by the issuer on the securities loaned
and also receives compensation based on investment of the collateral. The risks
in lending securities, as with other extensions of secured credit, consist of a
possible delay in recovery and a loss of rights in the collateral should the
borrower of the securities fail financially. Loans may be made only to firms
deemed by the Investment Manager to be of good standing and will not be made
unless, in the judgment of the Investment Manager, the consideration to be
earned from such loans would justify the risk.
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. The 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 the 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 privatizations will be successful or that
governments will not re-nationalize enterprises that have been privatized.
In the case of the enterprises in which the 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 or 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
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team that does not function as well as an 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 the 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
operate effectively in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
Real Estate Investment Trusts ("REITs"). REITs are sometimes informally
characterized as equity REITs, mortgage REITs and hybrid REITs. Investment in
REITs may subject the Fund to risks associated with the direct ownership of real
estate, such as decreases in real estate values, overbuilding, increased
competition and other risks related to local or general economic conditions,
increases in operating costs and property taxes, changes in zoning laws,
casualty or condemnation losses, possible environmental liabilities, regulatory
limitations on rent and fluctuations in rental income. Equity REITs generally
experience these risks directly through fee or leasehold interests, whereas
mortgage REITs generally experience these risks indirectly through mortgage
interests, unless the mortgage REIT forecloses on the underlying real estate.
Changes in interest rates may also affect the value of the Fund's investment in
REITs. For instance, during periods of declining interest rates, certain
mortgage REITs may hold mortgages that the mortgagors elect to prepay, which
prepayment may diminish the yield on securities issued by those REITs.
Certain REITs have relatively small market capitalizations, which may tend to
increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended, and to maintain exemption from the registration requirements of the
Investment Company Act of 1940, as amended. 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.
Repurchase Agreements. The Fund may invest in repurchase agreements pursuant to
its investment guidelines. In a repurchase agreement, the Fund acquires
ownership of a security and simultaneously commits to resell that security to
the seller, typically a bank or broker/dealer.
A repurchase agreement provides a means for the Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., the Fund) acquires a security ("Obligation") and the seller
agrees, at the time of sale, to repurchase the Obligation at a specified time
and price. Securities subject to a repurchase agreement are held in a segregated
account and, as described in more detail below, the value of such securities is
kept at least equal to the repurchase price on a daily basis. The repurchase
price may be higher than the purchase price, the difference being income to the
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to the Fund together with the repurchase price upon repurchase.
In either case, the income to the Fund is unrelated to the interest rate on the
Obligation itself. Obligations will be held by the custodian or in the Federal
Reserve Book Entry System.
[It is not clear whether a court would consider the Obligation
purchased by the Fund subject to a repurchase agreement as being owned by the
Fund or as being collateral for a loan by the Fund to the seller.] In the event
of the commencement of bankruptcy or insolvency proceedings with respect to the
seller of the Obligation before repurchase of the Obligation under a repurchase
agreement, the Fund may encounter delay
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and incur costs before being able to sell the security. Delays may involve loss
of interest or decline in price of the Obligation. [If the court characterizes
the transaction as a loan and the Fund has not perfected a security interest in
the Obligation, the Fund may be required to return the Obligation to the
seller's estate and be treated as an unsecured creditor of the seller. As an
unsecured creditor, the Fund would be at risk of losing some or all of the
principal and income involved in the transaction.] As with any unsecured debt
Obligation purchased for the Fund, the Investment Manager seeks to reduce the
risk of loss through repurchase agreements by analyzing the creditworthiness of
the obligor, in this case the seller of the Obligation. Apart from the risk of
bankruptcy or insolvency proceedings, there is also the risk that the seller may
fail to repurchase the Obligation, in which case the Fund may incur a loss if
the proceeds to the Fund of the sale to a third party are less than the
repurchase price. However, if the market value (including interest) of the
Obligation subject to the repurchase agreement becomes less than the repurchase
price (including interest), the Fund will direct the seller of the Obligation to
deliver additional securities so that the market value (including interest) of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase such securities at an agreed time and
price. The Fund maintains a segregated account in connection with outstanding
reverse repurchase agreements. The Fund will enter into reverse repurchase
agreements only when the Investment Manager believes that the interest income to
be earned from the investment of the proceeds of the transaction will be greater
than the interest expense of the transaction. Such transactions may increase
fluctuations in the market value of Fund assets and its yield.
Small Company Risk. The Investment Manager believes that many small companies
may have sales and earnings growth rates which exceed those of larger companies,
and that such growth rates may in turn be reflected in more rapid share price
appreciation over time. However, investing in smaller company stocks involves
greater risk than is customarily associated with investing in larger, more
established companies. For example, smaller companies can have limited product
lines, markets, or financial and managerial resources. Smaller companies may
also be dependent on one or a few key persons, and may be more susceptible to
losses and risks of bankruptcy. Also, the securities of smaller companies may be
thinly traded (and therefore have to be sold at a discount from current market
prices or sold in small lots over an extended period of time). Transaction costs
in smaller company stocks may be higher than those of larger companies.
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
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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 Manager's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions 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 Manager's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put 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
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and Eurodollar instruments are cash settled for the net amount, if any, by which
the option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Manager must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Manager. The staff of the
SEC currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing 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
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in the over-the-counter markets, and on securities indices, currencies and
futures contracts. All calls sold by the Fund must be "covered" (i.e., the Fund
must own the securities or futures contract subject to the call) or must meet
the asset segregation requirements described below as long as the call is
outstanding. Even though the Fund will receive the option premium to help
protect it against loss, a call sold by the Fund exposes the Fund during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security or instrument and may require the
Fund to hold a security or instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, foreign sovereign debt,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
Fund will not sell put options if, as a result, more than 50% of the Fund's
total assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio and return enhancement management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
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,
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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 Manager.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
The Fund generally will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund 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 Manager considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Manager believes
that the value of schillings will decline against the U.S. dollar, the Manager
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is
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engaging in proxy hedging. If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
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 Manager, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Manager's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, 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 Manager 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
Manager. If there is a default by the Counterparty, the
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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.
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
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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.
Warrants. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by the Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
When-Issued Securities. The Fund may from time to time purchase equity and debt
securities on a "when-issued", "delayed delivery" or "forward delivery" basis.
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
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. When the Fund purchases such securities, it immediately assumes the
risks of ownership, including the risk of price fluctuation. Failure to deliver
a security purchased on this basis may result in a loss or missed opportunity to
make an alternative investment.
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. While such securities
may be sold prior to the settlement date, the Fund intends to purchase them 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 this basis, it will record the transaction and reflect the value of
the security in determining its net asset value. The market value of the
securities may be more or less than the purchase price. The Fund will establish
a segregated account in which it will maintain cash and liquid securities equal
in value to commitments for such securities.
Zero Coupon Securities. The 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. The effect of owning instruments which do not make
current interest payments is that a fixed yield is earned not only on the
original investment but also, in effect, on all discount accretion during the
life of the obligation. This implicit reinvestment of earnings at the same rate
eliminates the risk of being unable to reinvest distributions at a rate as high
as the implicit yield on the zero coupon bond, but at the same time eliminates
any opportunity to reinvest earnings at higher rates. For this reason, zero
coupon bonds are subject to substantially
23
<PAGE>
greater price fluctuations during periods of changing market interest rates than
those of comparable securities that pay interest currently, which fluctuation is
greater as the period to maturity is longer. Zero coupon securities which are
convertible into common stock offer the opportunity for capital appreciation (or
depreciation) as increases (or decreases) in 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.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed with respect to a Fund without the
approval of a majority of the outstanding voting securities of such Fund which,
under the 1940 Act and the rules thereunder and as used in this Statement of
Additional Information, means the lesser of (i) 67% of the shares of such Fund
present at a meeting if the holders of more than 50% of the outstanding shares
of such Fund are present in person or by proxy, or (ii) more than 50% of the
outstanding shares of such 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.
In addition, as a matter of fundamental policy, each Fund will not:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(3) purchase physical commodities or contracts relating to
physical commodities;
(4) concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(5) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(6) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities; and
(7) make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
Each Fund has adopted the following non-fundamental restrictions, which may be
changed by the Board without shareholder approval. Each Fund may not:
(1) borrow money in an amount greater than 5% (10% for Kemper
Contrarian Fund, Kemper-Dreman High Return Equity Fund and
Kemper Small Cap Value Fund) of its total assets, except (i)
for temporary or emergency purposes and (ii) by engaging in
reverse repurchase
24
<PAGE>
agreements, dollar rolls, or other investments or transactions
described in the Fund's registration statement which may be
deemed to be borrowings;
(2) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value);
(7) lend portfolio securities in an amount greater than 5% (30%
for Kemper U.S. Growth and Income Fund)of its total assets;
and
(8) Invest more than 15% of net assets in illiquid securities
(except Value Fund, which limits investments in illiquid
securities according to the Investment Company Act of 1940)
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease beyond the specified limit resulting from a change in
values or net assets will not be considered a violation.
NET ASSET VALUE
The net asset value per share of a Fund is the value of one share and is
determined separately for each class by dividing the value of a Fund's net
assets attributable to the class by the number of shares of that class
outstanding. The per share net asset value of each of Class B and Class C shares
of the Fund will generally be lower than that of the Class A shares of a Fund
because of the higher expenses borne by the Class B and Class C shares. The net
asset value of shares of a Fund is computed as of the close of regular trading
on the New York Stock Exchange (the "Exchange") on each day the Exchange is open
for trading (the "Value Time"). The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively. Net asset value per share
is determined separately for each class of shares by dividing the value of the
total assets of a Fund attributable to the share of that class, less all
liabilities, by the total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale price on
the exchange it is traded as of the Value Time. Lacking any sales, the security
is valued at the calculated mean between the most recent bid quotation and the
most recent asked quotation (the "Calculated Mean") on such exchange as of the
Value Time. Lacking a Calculated Mean the security is valued at the most recent
bid quotation on such exchange as of the Value Time. An equity security which is
traded on the National Association of Securities Dealers Automated Quotation
("Nasdaq") system will be valued at its most recent sale price on such system as
of the Value Time. Lacking any sales, the security is valued at the most recent
bid quotation as of the Value Time. The value of an
25
<PAGE>
equity security not quoted on the Nasdaq System, but traded in another
over-the-counter market, is its most recent sale price if there are any sales of
such security on such market as of the Value Time. Lacking any sales, the
security is valued at the Calculated Mean quotation for such security as of the
Value Time. Lacking a Calculated Mean quotation the security is valued at the
most recent bid quotation as of the Value Time.
Debt securities, other than money market instruments, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Money market instruments
with an original maturity of sixty days or less maturing at par shall be valued
at amortized cost, which the Board believes approximates market value. If it is
not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide market maker. If it is not possible to value a particular debt
security pursuant to the above methods, the Investment Manager of the particular
fund may calculate the price of that debt security, subject to limitations
established by the Board.
An exchange traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate on the
valuation date.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Valuation Committee, the value of a portfolio asset as
determined in accordance with these procedures does not represent the fair
market value of the portfolio asset, the value of the portfolio asset is taken
to be an amount which, in the opinion of the Valuation Committee, represents
fair market value on the basis of all available information. The value of other
portfolio holdings owned by a Fund is determined in a manner which, in the
discretion of the Valuation Committee most fairly reflects fair market value of
the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, MA, 02110, a subsidiary of Scudder Kemper, is
responsible for determining the daily net asset value per share of the Funds and
maintaining all accounting records related thereto. Pursuant to each Fund's
accounting agreement, 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.
Payments to Scudder Fund Accounting Corporation for the three most recent fiscal
periods are as follows:
26
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Fiscal Year/Period Fiscal Year/Period Fiscal Year/Period
Fund Ended ____: Ended ____: Ended ____:
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kemper-Dreman Financial Services
Fund
-----------------------------------------------------------------------------------------------------------
Kemper U.S. Growth and Income
Fund
-----------------------------------------------------------------------------------------------------------
Kemper Contrarian Fund
-----------------------------------------------------------------------------------------------------------
Kemper-Dreman High Return
Equity Fund
-----------------------------------------------------------------------------------------------------------
Kemper Small Cap Value Fund
-----------------------------------------------------------------------------------------------------------
Value Fund - Kemper Shares
-----------------------------------------------------------------------------------------------------------
</TABLE>
[ADD FOOTNOTES FOR ANY EXPENSE REIMBURSEMENT]
Purchase 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 which class of shares the order is for.
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. 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>
----------------------------------------------------------------------------------------------------------------
Sales Annual 12b-1 Fees(as a % of
Charge average daily 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
(4. 5% for Kemper Global
Income Fund)
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Class B Maximum contingent 0.75% Shares convert to Class A
deferred sales charge of shares six years after
4% of redemption proceeds; issuance
declines to zero after six
years
----------------------------------------------------------------------------------------------------------------
27
<PAGE>
----------------------------------------------------------------------------------------------------------------
Sales Annual 12b-1 Fees(as a % of
Charge average daily net assets) Other Information
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
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 value of 2% or more of the certificate value is normally required).
Initial Sales Charge Alternative -- Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
As a Percentage As a Percentage Allowed to Dealers as a
of of Net Percentage of
Amount of Purchase Offering Price Asset Value* Offering Price
------------------ -------------- ------------ --------------
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over 0.00** 0.00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales
charge as discussed below.
*** Commission is payable by KDI as discussed below.
Each Fund receives the entire net asset value of all its Class A shares sold.
Kemper Distributors, Inc. ("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.
28
<PAGE>
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 Kemper Mutual Funds
listed under "Special Features -- Class A Shares -- Combined Purchases" totals
at least $1,000,000 (the "Large Order NAV Purchase Privilege") including
purchases of Class A shares pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features described under "Special Features;"
or (b) a participant-directed qualified retirement plan described in Code
Section 401(a) or a participant-directed non-qualified deferred compensation
plan described in Code Section 457 or a participant-directed qualified
retirement plan described in Code Section 403(b)(7) which is not sponsored by a
K-12 school district, provided in each case that such plan has not less than 200
eligible employees] (the "Large Order NAV Purchase Privilege"). Redemption
within two years of shares purchased under the Large Order NAV Purchase
Privilege may be subject to a contingent deferred sales charge. See "Purchase,
Repurchase and Redemption of Shares -- Contingent Deferred Sales Charge -- Large
Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of a Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount record keeping system made available
through KSvC. For purposes of determining the appropriate commission percentage
to be applied to a particular sale under the foregoing schedule, 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 and including
purchases of class R shares of certain Scudder funds. The privilege of
purchasing Class A shares of a Fund at net asset value under the Large Order NAV
Purchase Privilege is not available if another net asset value purchase
privilege also applies.
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 at its discretion pay investment
dealers and other financial services firms a concession, payable quarterly, at
an annual rate of up to 0.25% of net assets attributable to such shares
maintained and serviced by the firm. A firm becomes eligible for the concession
based upon assets in accounts attributable to shares purchased under this
privilege in the month after the month of purchase and the concession continues
until terminated by KDI. The privilege of purchasing Class A shares of a 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 Manager , its principal underwriter or certain affiliated companies,
for themselves or members of their families; (b) registered representatives and
employees of broker-dealers having selling group agreements with KDI and
officers, directors and employees of service agents of the Funds, for themselves
or their spouses or dependent children; (c) shareholders who owned shares of
Kemper Value Series, Inc. ("KVS") on September 8, 1995, and have continuously
owned shares of KVS (or a Kemper Fund acquired by exchange of KVS shares) since
that date, for themselves or members of their families; (d) any trust, pension,
profit-sharing or other benefit plan for only such persons; (e) persons who
29
<PAGE>
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm; and (f) persons who purchase shares of the Fund
through KDI as part of an automated billing and wage deduction program
administered by RewardsPlus of America for the benefit of employees of
participating employer groups. Class A shares may be sold at net asset value in
any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the 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 advisors registered under the Investment Advisors Act of 1940
and other financial services firms that adhere to certain standards established
by KDI, including a requirement that such shares be sold for the benefit of
their clients participating in an investment advisory program under which such
clients pay a fee to the investment advisor or other firm for portfolio
management and other services. Such shares are sold for investment purposes and
on the condition that they will not be resold except through redemption or
repurchase by the Funds. The Funds may also issue Class A shares at net asset
value in connection with the acquisition of the assets of or merger or
consolidation with another investment company, or to shareholders in connection
with the investment or reinvestment of income and capital gain dividends.
Class A shares of 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.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Purchase, Repurchase and Redemption of Shares -- Contingent
Deferred Sales Charge -- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by each Fund 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.
30
<PAGE>
Purchase of Class C Shares. The public offering price of the Class C shares of a
Fund is the next determined net asset value. No initial sales charge is imposed.
Since Class C shares are sold without an initial sales charge, the full amount
of the investor's purchase payment will be invested in Class C shares for his or
her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Purchase, Repurchase and Redemption of Shares -- Contingent Deferred Sales
Charge -- Class C Shares." KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of such shares. For
periods after the first year, KDI currently intends to pay firms for sales of
Class C shares a distribution fee, payable quarterly, at an annual rate of 0.75%
of net assets attributable to Class C shares maintained and serviced by the
firm. KDI is compensated by each Fund for services as distributor and principal
underwriter for Class C shares. See "Investment Manager and Underwriter."
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. Orders for Class
B shares or Class C shares by employer sponsored employee benefit plans using
the subaccount record keeping system made available through the Shareholder
Service Agent will be invested instead in Class A shares at net asset value
where the combined subaccount value in a Fund or Kemper Mutual Funds listed
under "Special Features - Class A Shares - Combined Purchases" is in excess of
$5 million including purchases pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features described under "Special Features."
For more information about the three sales arrangements, consult your financial
representative or the Shareholder Service Agent. Financial services firms may
receive different compensation depending upon which class of shares they sell.
General. Shares of 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 a Fund determines that it
has received payment of the proceeds of the check. The time required for such a
determination will vary and cannot be determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by a Fund at the applicable net asset value
per share of such Fund. The amount received by a shareholder upon redemption or
repurchase may be more or less than the amount paid for such shares depending on
the market value of a Trust's portfolio securities at the time.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemption of Class B or Class C shares by certain classes of persons or through
certain types of transactions are provided because of anticipated economies in
sales and sales related efforts.
Tax Identification Number. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires each Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. Each Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security or tax identification number. A shareholder
may avoid involuntary redemption by providing the applicable Fund with a tax
identification number during the 30-day
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notice period. Shareholders should direct their inquiries to Kemper Service
Company, 811 Main Street, Kansas City, Missouri 64105-2005 or to the firm from
which they received this Statement of Additional Information.
Redemptions and Exchanges
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 ("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 a Fund to
determine the value of its net assets, or (c) for such other periods as the
Securities and Exchange Commission may by order permit for the protection of a
Fund's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to each Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares and the assessment of the administrative services fee with
respect to each class does not result in a Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date.
The Fund has authorized certain members of the National Association of
Securities Dealers, Inc. ("NASD"), other than KDI to accept purchase and
redemption orders for a 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.
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
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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, Repurchase and Redemption of Shares -- Initial
Sales Charge Alternative -- Class A Shares"), the redemption of Class B shares
within six years may be subject to a contingent deferred sales charge (see
"Contingent Deferred Sales Charge -- Class B Shares" below), and the redemption
of Class C shares within the first year following purchase may be subject to a
contingent deferred sales charge (see "Contingent Deferred Sales Charge -- Class
C Shares" below).
Because of the high cost of maintaining small accounts, the 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 a Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephone instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, as long
as the reasonable verification procedures are followed. The verification
procedures include recording instructions, requiring certain identifying
information before acting upon instructions and sending written confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor, guardian and custodial account
holders, provided the trustee, executor, guardian or custodian is named in the
account registration. Other institutional account holders may exercise this
special privilege of redeeming shares by telephone request or written request
without signature guarantee subject to the same conditions as individual account
holders and subject to the limitations on liability described under "General"
above, provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Funds reserve the right to terminate or modify
this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which 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
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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 a 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 Fund or the Shareholder Servicing Agent deems it appropriate under then
current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Funds are not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Funds currently do not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of a 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.
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Contingent Deferred
Year of Redemption After Purchase Sales Charge
--------------------------------- ------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
-- Systematic Withdrawal Plan" below) and (d) for redemptions made pursuant to
any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2; and (e)
for redemptions to satisfy required minimum distributions after age 70 1/2 from
an IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's Kemper IRA accounts). The contingent deferred sales
charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to 10% of the total value of
plan assets invested in a Fund), (c) redemptions in connection with
distributions qualifying under the hardship provisions of the Internal Revenue
Code and (d) redemptions representing returns of excess contributions to such
plans.
Contingent Deferred Sales Charge- - Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived in the event of: (a)
redemptions by a participant-directed qualified retirement plan described in
Code Section 401(a) or a participant-directed non-qualified deferred
compensation plan described in Code Section 457; (b) redemptions by employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent; (c) redemption of shares of a
shareholder (including a registered joint owner) who has died; (d) redemption of
shares of a shareholder (including a registered joint owner) who after purchase
of the shares being redeemed becomes totally disabled (as evidenced by a
determination by the federal Social Security Administration); (e) redemptions
under 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.]
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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. In the event no
specific order is requested when redeeming shares subject to a contingent
deferred sales charge, the redemption will be made first from shares
representing reinvested dividends and then from the earliest purchase of shares.
KDI receives any contingent deferred sales charge directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of a Fund
or any Kemper Mutual Fund listed under "Special Features -- Class A Shares --
Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
a Fund or of the listed Kemper Mutual Funds. A shareholder of a Fund or Kemper
Mutual Fund who redeems Class A shares purchased under the Large Order NAV
Purchase Privilege (see "Purchase, Repurchase and Redemption of Shares --
Initial Sales Charge Alternative -- Class A Shares") or Class B shares or Class
C shares and incurs a contingent deferred sales charge may reinvest up to the
full amount redeemed at net asset value at the time of the reinvestment in Class
A shares, Class B shares or Class C shares, as the case may be, of a Fund or of
Kemper Mutual Funds. The amount of any contingent deferred sales charge also
will be reinvested. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares of 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 a Funds'
shares, the reinvestment in the same Fund may be subject to the "wash sale"
rules if made within 30 days of the redemption, resulting in a postponement of
the recognition of such loss for federal income tax purposes. In addition, upon
a reinvestment, the shareholder may not be permitted to take into account sales
charges incurred on the original purchase of shares in computing their taxable
gain or loss. The reinvestment privilege may be terminated or modified at any
time.
SPECIAL FEATURES
Class A Shares - Combined Purchases. 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 Aggressive Growth Fund, Kemper Asian Growth Fund, Kemper
Blue Chip Fund, Kemper California Tax-Free Income Fund, Kemper Cash Reserves
Fund, Kemper Contrarian Fund, Kemper Emerging Markets Growth Fund, Kemper
Florida Tax-Free Income Fund, Kemper Global Blue Chip Fund, Kemper Global Income
Fund, Kemper Growth Fund, Kemper High Yield Fund, Kemper High Yield Fund II,
Kemper High Yield Opportunity Fund, Kemper Horizon 10+ Portfolio, Kemper Horizon
20+ Portfolio, Kemper Horizon 5 Portfolio, Kemper Income and Capital
Preservation Fund, Kemper Intermediate Municipal Bond Fund, Kemper International
Fund, Kemper International Research Fund, Kemper Large Company Growth Fund
(currently available only to employees of Scudder Kemper Investments, Inc.; not
available in all states), Kemper Latin America Fund, Kemper Municipal Bond Fund,
Kemper New Europe Fund, Kemper New York Tax-Free Income Fund, Kemper Ohio
Tax-Free Income Fund, Kemper Research Fund (currently available only
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to employees of Scudder Kemper Investments, Inc.; not available in all states),
Kemper Retirement Fund -- Series II, Kemper Retirement Fund -- Series III,
Kemper Retirement Fund -- Series IV, Kemper Retirement Fund -- Series V, Kemper
Retirement Fund -- Series VI, Kemper Retirement Fund -- Series VII, Kemper S&P
500 Index Fund, Kemper Short-Term U.S. Government Fund, Kemper Small Cap Value
Fund, Kemper Small Cap Value+Growth Fund (currently available only to employees
of Scudder Kemper Investments, Inc.; not available in all states), Kemper Small
Capitalization Equity Fund, Kemper Strategic Income Fund, Kemper Target 2010
Fund, Kemper Technology Fund, Kemper Total Return Fund, Kemper U.S. Government
Securities Fund, Kemper U.S. Growth and Income Fund, Kemper U.S. Mortgage Fund,
Kemper Value+Growth Fund, Kemper Worldwide 2004 Fund, Kemper-Dreman Financial
Services Fund, Kemper-Dreman High Return Equity Fund ("Kemper Mutual Funds").
Except as noted below, there is no combined purchase credit for direct purchases
of shares of Zurich Money Funds, Cash Equivalent Fund, Tax-Exempt California
Money Market Fund, Cash Account Trust, Investors Municipal Cash Fund or
Investors Cash Trust ("Money Market Funds"), which are not considered "Kemper
Mutual Funds" for purposes hereof. For purposes of the Combined Purchases
feature described above as well as for the Letter of Intent and Cumulative
Discount features described below, employer sponsored employee benefit plans
using the subaccount record keeping system made available through the
Shareholder Service Agent or its affiliates may include: (a) Money Market Funds
as "Kemper Mutual Funds," (b) all classes of shares of any Kemper Mutual Fund,
and (c) the value of any other plan investments, such as guaranteed investment
contracts and employer stock, maintained on such subaccount record keeping
system.
Class A Shares -- Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation credit" toward the completion of the Letter, but
no price adjustment will be made on such shares. Only investments in Class A
shares of a Fund are included for 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 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
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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 any contingent deferred sales charge being imposed at
the time of exchange. For purposes of the contingent deferred sales charge that
may be imposed upon the redemption of the shares received on exchange, amounts
exchanged retain their original cost and purchase date.
Class C Shares. Class C shares of 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 determining whether there is a contingent deferred sales
charge that may be imposed upon the redemption of the Class C shares received by
exchange, amounts exchanged retain their cost and purchase.
General. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15 Day Hold Policy"). The Fund reserves
the right to invoke the 15-Day Hold Policy of exchanges of $1,000,000 or less
if, in the Investment Manager's judgment, the exchange activity may have an
adverse effect on the fund. In particular, a pattern of exchanges that coincides
with a "market timing" strategy may be disruptive to the Kemper fund and
therefore may be subject to the 15-Day Hold Policy. For purposes of determining
whether the 15 Day Hold Policy applies to a particular exchange, the value of
the shares to be exchanged shall be computed by aggregating the value of shares
being exchanged for all accounts under common control, direction, or advice,
including without limitation, accounts administered by a financial services firm
offering market timing, asset allocation or similar services. The total value of
shares being exchanged must at least equal the minimum investment requirement of
the Kemper Fund into which they are being exchanged. Exchanges are made based on
relative dollar values of the shares involved in the exchange. There is no
service fee for an exchange; however, dealers or other firms may charge for
their services in effecting exchange transactions. Exchanges will be effected by
redemption of shares of the fund held and purchase of shares of the other fund.
For federal income tax purposes, any such exchange constitutes a sale upon which
a gain or loss may be realized, depending upon whether the value of the shares
being exchanged is more or less than the shareholder's adjusted cost basis.
Shareholders interested in exercising the exchange privilege may obtain
prospectuses of the other funds from dealers, other firms or KDI. Exchanges may
be accomplished by a written request to KSvC, Attention: Exchange Department,
P.O. Box 419557, Kansas City, Missouri 64141-6557, or by telephone if the
shareholder has given authorization. Once the authorization is on file, the
Shareholder Service Agent will honor requests by telephone at 1-800-621-1048,
subject to the limitations on liability under "Purchase, Repurchase and
Redemption of Shares -- General." Any share certificates must be deposited prior
to any exchange of such shares. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
telephone exchange privilege. The exchange privilege is not a right and may be
suspended, terminated or modified at any time. Except as otherwise permitted by
applicable regulations, 60 days' prior written notice of any termination or
material change will be provided. Exchanges may only be made for Kemper Funds
that are eligible for sale in the shareholder's state of residence. Currently,
Tax-Exempt California Money Market Fund is available for sale
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only in California and the portfolios of Investors Municipal Cash Fund are
available for sale only in certain states.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of 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 "Purchase, Repurchase and Redemption of Shares -- General." Once
enrolled in EXPRESS-Transfer, a shareholder can initiate a transaction by
calling Kemper Shareholder Services toll free at 1-800-621-1048 Monday through
Friday, 8:00 a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this
privilege by sending written notice to KSvC, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable time to act upon the request.
EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of 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, Class A shares purchased under the Large Order NAV Purchase Privilege
and Class C shares in their first year following the purchase may be redeemed
under a systematic withdrawal plan is 10% of the net asset
39
<PAGE>
value of the account. Shares are redeemed so that the payee will receive payment
approximately the first of the month. Any income and capital gain dividends will
be automatically reinvested at net asset value. A sufficient number of full and
fractional shares will be redeemed to make the designated payment. Depending
upon the size of the payments requested and fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, 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"). 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. 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 the Fund's custodian describe the current
fees payable for its services as custodian. Investors should consult with their
own tax advisers before establishing a retirement plan.
ADDITIONAL TRANSACTION INFORMATION
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of 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 or other financial services firms may be subject to
various federal and state laws regarding the services described above and may be
required to register as dealers pursuant to state law. If banking firms were
prohibited from acting in any capacity or providing any of the described
services, management would consider what action, if any, would be appropriate.
KDI does not believe that termination of a relationship with a bank would result
in any material adverse consequences to 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
Kemper Service Company ("KSvC"), (iii) the registered representative placing the
trade is a member of ProStar, a group of persons designated by KDI in
acknowledgment of their dedication to the employee benefit plan area and (iv)
the purchase is not otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the 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.
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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."
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Funds' shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Funds' shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Funds' transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Funds through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Funds through the Shareholder Service Agent for
these services. This Statement of Additional Information should be read in
connection with such firms' material regarding their fees and services.
The Funds reserve the right to withdraw all or any part of the offering made by
this Statement of Additional Information 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 a class of a Fund normally
are permitted to continue to purchase additional shares of such class or Fund
and to have dividends reinvested.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this Statement of Additional Information.
DIVIDENDS. The 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 its foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and
long-term capital gains as its Board 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 paid by a Fund as to each class of its shares will be calculated in
the same manner, at the same time and on the same day. The level of income
dividends per share (as a percentage of net asset value) will be lower for Class
B and Class C shares than for Class A shares primarily as a result of the
distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same portion for
each class.
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Income and capital gain dividends, if any, for a Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
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 gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset value;
or
(2) To receive both income and capital gain dividends in cash.
Any dividends of a Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have Fund dividends
invested in shares of the same class of another Kemper Fund at the net asset
value of such class of such other fund. See "Purchase, Repurchase, and
Redemption of Shares", "Special Features - Class A Shares - Combined Purchases",
for a list of such other Kemper Funds. To use this privilege of investing a
Fund's dividends in shares of another Kemper Fund, shareholders must maintain a
minimum account value of $1,000 in the Fund distributing the dividends. The
Funds will reinvest dividend checks (and future dividends) in shares of that
same Fund and class if checks are returned as undeliverable. Dividends and other
distributions of a Fund in the aggregate amount of $10 or less are automatically
reinvested in shares of the Fund unless the shareholder requests that such
policy not be applied to the shareholder's account.
PERFORMANCE INFORMATION
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 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 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.
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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 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. 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.
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.
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KEMPER-DREMAN FINANCIAL SERVICES FUND -- AS OF NOVEMBER 30, 2000
Average Class Class Class
Annual Total Returns A Shares B Shares C Shares
-------------------- -------- -------- --------
Life of Class (+) % % %
Ten Years % % %
Five Years % % %
Three Years % % %
One Year % % %
U.S. GROWTH AND INCOME FUND -- NOVEMBER 30, [DATE]
Average Class Class Class
Annual Total Returns A Shares B Shares C Shares
-------------------- -------- -------- --------
Life of Class (+) % % %
Ten Years % % %
Five Years % % %
Three Years % % %
One Year % % %
KEMPER CONTRARIAN FUND AND KEMPER SMALL CAP VALUE FUND
Performance figures for Class B and C shares of Kemper Contrarian Fund and
Kemper Small Cap Value Fund for the period September 11, 1995 to November 30,
1999 reflect the actual performance of these classes of shares. Returns for
Class B and C shares for the period March 18, 1988 (Kemper Contrarian Fund) and
May 22, 1992 (Kemper Small Cap Value Fund) to September 11, 1995 are derived
from the historical performance of Class A shares, adjusted to reflect the
operating expenses applicable to Class B and C shares, which may be higher or
lower than those of Class A shares. The performance figures are also adjusted to
reflect the maximum sales charge of 5.75% for Class A shares and the maximum
current contingent deferred sales charge of 4% for Class B shares and 1% for
Class C shares.
The returns in the chart below assume reinvestment of distributions at net asset
value and represent both actual past performance figures and adjusted
performance figures of the Class A shares of Kemper Contrarian Fund and Kemper
Small Cap Value Fund, and Class S shares of Value Fund as described above; they
do not guarantee future results. Investment return and principal value will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
KEMPER CONTRARIAN FUND - AS OF NOVEMBER 30, 2000
Average Class Class Class
Annual Total Returns A Shares B Shares C Shares
-------------------- -------- -------- --------
Life of Class (+) % % %
Ten Years % % %
Five Years % % %
Three Years % % %
One Year % % %
(+) Since March 18, 1988 for Class A shares. Since September 11, 1995 for
Class B and Class C shares.
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<PAGE>
KEMPER SMALL CAP VALUE FUND - AS OF NOVEMBER 30, 2000
Average Class Class Class
Annual Total Returns A Shares B Shares C Shares
-------------------- -------- -------- --------
Life of Class (+) % % %
Ten Years % % %
Five Years % % %
One Year % % %
(+) Since May 22, 1992 for Class A shares. Since September 11, 1995 for
Class B and Class C shares.
* Because Class B and C shares were not introduced until September 11, 1995, the
total return for Class B and C shares for the periods prior to their
introduction is based upon the performance of Class A shares from the
commencement of investment operations, March 18, 1988 (Kemper Contrarian Fund)
and May 22, 1992 (Kemper Small Cap Value Fund) through September 11, 1995.
Actual performance of Class B and C shares is shown beginning September 11,
1995.
KEMPER VALUE FUND
Performance figures for Class A, B and C shares of Kemper Value Fund for the
period April 16, 1998 to November 30, 1999 reflect the actual performance of
these classes of shares. Returns for Class A, B and C shares for the period
December 31, 1992 to April 16, 1998 are derived from the historical performance
of Class S shares, adjusted to reflect the operating expenses applicable to
Class A, B and C shares, which may be higher or lower than those of Class S
shares. The performance figures are also adjusted to reflect the maximum sales
charge of 5.75% for Class A shares and the maximum current contingent deferred
sales charge of 4% for Class B shares and 1% for Class C shares.
KEMPER VALUE FUND - AS OF NOVEMBER 30, 2000
Average Class Class Class
Annual Total Returns A Shares B Shares C Shares
-------------------- -------- -------- --------
Life of Class (+) % % %
Ten Years % % %
Five Years % % %
One Year % % %
(+) Since December 31, 1992 for Class A shares. Since April 16, 1998 for Class B
and Class C shares.
** Because Class A, B and C shares were not introduced until April 16, 1998, the
total return for Class A, B and C shares for the period prior to their
introduction is based upon the performance of Class S shares from the
commencement of investment operations, December 31, 1992 through April 16, 1998.
Actual performance of Class A, B and C shares is shown beginning April 16, 1998.
KEMPER-DREMAN HIGH RETURN EQUITY FUND
Performance figures for Class B and C shares of the Fund for the period
September 11, 1995 to November 30, 1999 reflect the actual performance of these
classes of shares. Returns for Class B and C shares for the period March 18,
1988 to September 11, 1995 are derived from the historical performance of Class
A shares, adjusted to reflect the operating expenses applicable to Class B and C
shares, which may be higher or lower than those of Class A shares. The
performance figures are also adjusted to reflect the maximum sales charge of
5.75% for Class A shares and the maximum current contingent deferred sales
charge of 4% for Class B shares and 1% for Class C shares.
The returns in the chart below assume reinvestment of distributions at net asset
value and represent both actual past performance figures and adjusted
performance figures of the Class A shares of the Fund, adjusted as described
above; they do not guarantee future results. Investment return and principal
value will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
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KEMPER-DREMAN HIGH RETURN EQUITY FUND - AS OF NOVEMBER 30, 2000
Average Class Class Class
Annual Total Returns A Shares B Shares C Shares
-------------------- -------- -------- --------
Life of Class (+) % % %
Ten Years % % %
Five Years % % %
One Year % % %
(+) Since March 18, 1988 for class A shares. Since September 11, 1995 for Class
B and Class C shares.
* Because Class B and C shares were not introduced until September 11, 1995, the
total return for Class B and C shares for the period prior to their introduction
is based upon the performance of Class A shares from the commencement of
investment operations, March 18, 1988 through September 11, 1995. Actual
performance of Class B and C shares is shown beginning September 11, 1995.
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.
FUND ORGANIZATION
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, 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. U.S. Growth and Income Fund is a series of Kemper
Securities Trust formerly known as Kemper Growth and Income Fund) ("KST"). KST
was organized as a business trust under the laws of Massachusetts on October 2,
1997. Financial Services Fund is a series of Kemper Equity Trust ("KET"). KET
was organized as a business trust under the laws of Massachusetts on
January 6, 1998. Value Fund is a series of Value Equity Trust ("VET", and
together with KST and VET, the "Trusts"). VET was organized as a business trust
under the laws of Massachusetts on October 16, 1985. VET's predecessor was
organized as a Delaware corporation in May 1966. The Trusts 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 Trusts 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 Manager and its affiliates; and (b) the following investment advisory
clients of the Manager 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 Trusts offer three classes of shares - 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
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<PAGE>
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 Boards of
Trustees of the Trusts 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 Funds' activities are supervised by KVS' or the Trusts' Boards of Directors
or Trustees, as applicable. 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 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. The Trusts are not required to hold and have no
current intention of holding annual shareholder meetings, although special
meetings may be called for purposes such as electing or removing Trustees,
changing fundamental investment policies or approving an investment management
contract. Subject to the Declarations of Trust and By Laws of the Trusts,
shareholders may remove Trustees. Shareholders will be assisted in communicating
with other shareholders in connection with removing a Trustee as if Section
16(c) of the 1940 Act were applicable. Under the Agreement and Declaration of
Trust of each Trust, shareholder meetings will be held in connection with the
following matters: (a) the election or
47
<PAGE>
removal of trustees if a meeting is called for such purpose; (b) the adoption of
any contract for which approval by shareholders is required by the 1940 Act; (c)
any termination of a Fund or a class to the extent and as provided in the
Declaration of Trust; (d) any amendment of a Declaration of Trust (other than
amendments changing the name of a Fund, supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision thereof); and (e) such additional matters as may be required by law,
the Declarations of Trust, the By-laws of the Trusts, or any registration of a
Fund with the Securities and Exchange Commission or any state, or as the
trustees may consider necessary or desirable. The shareholders also would vote
upon changes in fundamental policies or restrictions.
The Trusts' Declaration of Trust specifically authorizes the Board of Trustees
to terminate a Fund or any class by notice to the shareholders without
shareholder approval.
Each Trust may issue an unlimited number of shares of beneficial interest in one
or more series or Funds, all having a par value of $.01, which may be divided by
the Board of Trustees into classes of shares. The Board of Trustees of each
trust may authorize the issuance of additional classes and additional Funds if
deemed desirable, each with its own investment objective, policies and
restrictions. Since each Trust may offer multiple Portfolios, they are known as
a "series company." Currently, each Trust offers three classes of shares of the
Fund. These are Class A, Class B and Class C. VET also offers Scudder shares of
Value Fund. 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 each such class' Rule 12b-1 Plan. Shares of each class also have
equal rights with respect to dividends, assets and liquidation of the Fund
subject to any preferences (such as resulting from different Rule 12b-1
distribution fees), rights or privileges of any classes of shares of the Fund.
Shares are fully paid and nonassessable when issued, are transferable without
restriction and have no preemptive or conversion rights. If shares of more than
one 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 trustees, or when voting by class is
appropriate.
Master/feeder structure
The Board has the discretion to retain the current distribution arrangement for
each Fund while investing in a master fund in a master/feeder structure fund as
described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
INVESTMENT MANAGER
Scudder Kemper Investments, Inc. (the "Investment Manager"), 345 Park Avenue,
New York, NY, an investment counsel firm, acts as investment adviser to the
Funds. This organization, the predecessor of which is Scudder, Stevens & Clark,
Inc., is one of the most experienced investment counsel firms in the U. S. It
was established as a partnership in 1919 and pioneered the practice of providing
investment counsel to individual clients on a fee basis. In 1928 it introduced
the first no-load mutual fund to the public. In 1953 the Investment Manager
introduced Scudder International Fund, Inc., the first mutual fund available in
the U.S. investing internationally in securities of issuers in several foreign
countries. The predecessor firm reorganized from a partnership to a corporation
on June 28, 1985. On December 31, 1997, Zurich Insurance Company ("Zurich")
acquired a majority interest in the Investment Manager, and Zurich Kemper
Investments, Inc., a Zurich
48
<PAGE>
subsidiary, became part of the Investment Manager. The Investment Manager's name
changed to Scudder Kemper Investments, Inc. On September 7, 1998, the businesses
of Zurich (including Zurich's 70% interest in Scudder Kemper) and the financial
services businesses of B.A.T Industries p.l.c. ("B.A.T") were combined to form a
new global insurance and financial services company known as Zurich Financial
Services Group. By way of a dual holding company structure, former Zurich
shareholders initially owned approximately 57% of Zurich Financial Services
Group, with the balance initially owned by former B.A.T shareholders. On October
17, 2000, the dual-headed holding company structure of Zurich Financial Services
Group, comprised of Allied Zurich p.l.c. in the United Kingdom and Zurich Allied
in Switzerland, was unified into a single Swiss holding company, Zurich
Financial Services.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Investment Manager's income is professional fees
received from providing continuous investment advice. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations as well as providing investment advice to over [XX] open and
closed-end mutual funds.
The Investment Manager maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Investment Manager receives
published reports and statistical compilations from issuers and other sources,
as well as analyses from brokers and dealers who may execute portfolio
transactions for the Investment Manager's clients. However, the Investment
Manager regards this information and material as an adjunct to its own research
activities. The Investment Manager's international investment management team
travels the world, researching hundreds of companies. In selecting the
securities in which the Funds may invest, the conclusions and investment
decisions of the Investment Manager with respect to the Funds are based
primarily on the analyses of its own research department.
Certain investments may be appropriate for a fund and also for other clients
advised by the Investment Manager. Investment decisions for a fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Investment Manager to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by a fund. Purchase and sale orders for a fund may be combined
with those of other clients of the Investment Manager in the interest of
achieving the most favorable net results to that fund.
In certain cases, the investments for a fund are managed by the same individuals
who manage one or more other mutual funds advised by the Investment Manager,
that have similar names, objectives and investment styles. You should be aware
that the Funds are likely to differ from these other mutual funds in size, cash
flow pattern and tax matters. Accordingly, the holdings and performance of the
Fundscan be expected to vary from those of these other mutual funds.
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.
49
<PAGE>
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 or
Directors.
The Advisor pays the compensation and expenses of all Trustees or Directors,
officers and executive employees of the Trust or Corporation, as applicable,
affiliated with the Advisor and makes available, without expense to the Trust or
Corporation, the services of such Trustees or Directors, officers and employees
of the Advisor as may duly be elected officers or Trustees or Directors of the
Trust or Corporation, subject to their individual consent to serve and to any
limitations imposed by law, and provides the Trust's or Corporation's office
space and facilities, as applicable.
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.
In reviewing the terms of the Agreements and in discussions with the Advisor
concerning such Agreements, the Trustees of the Trusts who are not "interested
persons" of the Trusts 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.
50
<PAGE>
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 Trusts may have dealings with the Trusts
as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Trusts.
The current investment management fee rates are payable monthly at the annual
rates shown below:
<TABLE>
<CAPTION>
Financial High Return Small Cap
Average Daily Net Assets Contrarian Fund Services 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>
U.S. Growth and
Average Daily Net Assets Income Fund Value Fund
------------------------ ----------- ----- ----
$0 - $250 million 0.60% 0.70%
$250 million - $500 million 0.57 0.70
$500 million - $1 billion 0.57 0.65
$1 billion - $2.5 billion 0.55 0.65
$2.5 billion - $5 billion 0.53 0.65
$5 billion - $7.5 billion 0.53 0.65
$7.5 billion - $10 billion 0.53 0.65
$10 billion - $12.5 billion 0.53 0.65
Over $12.5 billion 0.53 0.65
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.
Fund Fiscal 2000 Fiscal 1999 Fiscal 1998*
---- ----------- ----------- ------------
Contrarian Fund $2,257,000 $1,660,000
Financial Services Fund $1,544,000 $721,000**
High Return Equity Fund $36,773,000 $29,284,000
Small Cap Value Fund $5,893,000 $8,166,000
Small Cap Relative Value Fund** $19,219 $3,000***
U.S. Growth and Income Fund $0 $0
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<PAGE>
Fund Fiscal 2000 Fiscal 1999 Fiscal 1998*
---- ----------- ----------- ------------
Value Fund $3,893,119 $3,214,035
* Fiscal year end for Small Cap Relative Value Fund, U.S. Growth and Income
Fund and Value Fund is 9/30. Fiscal year end for Contrarian Fund, Financial
Services Fund, High Return Equity Fund and Small Cap Value Fund is 11/30.
** March 9, 1998 - September 30, 1998
*** May 6, 1998 - September 30, 1998
The Manager may serve as adviser to other funds with investment objectives and
policies similar to those of the Funds that may have different distribution
arrangements or expenses, which may affect performance.
FINANCIAL SERVICES FUND AND HIGH RETURN EQUITY FUND SUB-ADVISOR. 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 Advisor. 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-Advisor.
The table below shows the total sub-advisory fees paid by the Funds for the last
three fiscal periods.
Fund Fiscal 2000 Fiscal 1999 Fiscal 1998
---- ----------- ----------- -----------
Financial Services Fund $503,457.02 $86,000**
High Return Equity $11,663,393.35 $9,776,000
* 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
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<PAGE>
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 Advisor.
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 Advisor.
Code of Ethics
The Funds, the Investment Manager and principal underwriter have each adopted
codes of ethics under rule 17j-1 of the Investment Company Act. Board members,
officers of the Funds and employees of the Investment Manager and principal
underwriter are permitted to make personal securities transactions, including
transactions in securities that may be purchased or held by the Funds, subject
to requirements and restrictions set forth in the applicable Code of Ethics. The
Investment Manager's Code of Ethics contains provisions and requirements
designed to identify and address certain conflicts of interest between personal
investment activities and the interests of the Funds. Among other things, the
Investment Manager's Code of Ethics prohibits certain types of transactions
absent prior approval, imposes time periods during which personal transactions
may not be made in certain securities, and requires the submission of duplicate
broker confirmations and quarterly reporting of securities transactions.
Additional restrictions apply to portfolio managers, traders, research analysts
and others involved in the investment advisory process. Exceptions to these and
other provisions of the Investment Manager's Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
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 a Fund, including the payment of service fees. For the
services under the administrative agreement, each Fund pays KDI an
administrative services fee, payable monthly, at the annual rate of up to 0.25%
of average daily net assets of each class of the Fund. KDI has entered into
related arrangements with various broker-dealer firms and other service or
administrative firms ("firms"), that provide services and facilities for their
customers or clients who are investors of a Fund. The firms provide such office
space and equipment, telephone facilities and personnel as is necessary or
beneficial for providing information and services to their clients. Such
services and assistance may include, but are not limited to, establishing and
maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding a Fund, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation. With respect to
Class A shares, KDI pays each firm a service fee, 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. In addition, KDI may from time to time, from its own resources, pay
certain firms additional amounts for ongoing administrative services and
assistance provided to their customers and clients who are shareholders of a
Fund.
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<PAGE>
Administrative services fees paid by each Fund are set forth below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Administrative Service Fees Paid by Fund
---------------------------------------------------------------------------------------------------------
Total Service Service Fees Paid by
Fiscal Fees Paid by KDI to
Fund Year Class A Class B Class C KDI to Firms KDI Affiliated Firms
---- ---- ------- ------- ------- ------------ --------------------
---------------------------------------------------------------------------------------------------------
<S> <C>
Kemper-Dreman Financial
Services Fund 2000
---------------------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------------------------------
1998
---------------------------------------------------------------------------------------------------------
Kemper U.S. Growth and
Income Fund 2000
---------------------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------------------------------
1998
---------------------------------------------------------------------------------------------------------
Kemper Contrarian Fund 2000
---------------------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------------------------------
1998
---------------------------------------------------------------------------------------------------------
Kemper-Dreman High Return
Equity Fund 2000
---------------------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------------------------------
1998
---------------------------------------------------------------------------------------------------------
Kemper Small Cap Value Fund 2000
---------------------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------------------------------
1998
---------------------------------------------------------------------------------------------------------
Value Fund -- Kemper Shares 2000
---------------------------------------------------------------------------------------------------------
1999
---------------------------------------------------------------------------------------------------------
1998
---------------------------------------------------------------------------------------------------------
</TABLE>
[ADD FOOTNOTES FOR SHORTER PERIODS, EXPENSE REIMBURSEMENT & ETC.]
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for a Fund. Currently, the
administrative services fee payable to KDI is payable at the annual rate of
0.25% based upon Fund assets in accounts for which a firm provides
administrative services and, effective January 1, 2000, each Fund will pay KDI
an administrative service fee at the annual rate of 0.15% based upon Fund assets
in accounts for which there is no firm (other than KDI) listed on the Fund's
records. The effective administrative services fee rate to be charged against
all assets of a Fund while this procedure is in effect will depend upon the
proportion of Fund assets that is in accounts for which a firm of record
provides administrative services.
Certain trustees or officers of the Funds are also directors or officers of
Scudder Kemper or KDI as indicated under "Officers and Trustees."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. State Street Bank and
Trust Company ("SSB"), 225 Franklin Street, Boston, Massachusetts 02110, as
custodian, has custody of all securities and cash of each Fund. It attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by each Fund.
SSB is also each Fund's transfer agent and dividend-paying agent. Pursuant to a
services agreement with Kemper Service Company ("KSvC"), an affiliate of Scudder
Kemper, serves as "Shareholder Service Agent" of the Contrarian, High Return
Equity and Small Cap Value Funds and, as such, performs all of KSvC'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
Financial Services Fund and U.S. Growth and Income Fund.
54
<PAGE>
Scudder Service Corporation ("SSC") acts as the transfer agent and
dividend-paying agent, as well as the Shareholder Service Agent of Value Fund.
For the Contrarian, High Return Equity and Small Cap Value Funds, IFTC receives
as transfer agent, 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 charges, annual fees associated
with the contingent deferred sales charges (Class B Shares only), an asset-based
fee of 0.08% and out-of-pocket reimbursement.
----------------------------------------------------------------------------
Fund Fees SSB Paid to KSvC
----------------------------------------------------------------------------
Kemper-Dreman Financial Services Fund
----------------------------------------------------------------------------
Kemper U.S. Growth and Income Fund
----------------------------------------------------------------------------
Kemper Contrarian Fund
----------------------------------------------------------------------------
Kemper-Dreman High Return Equity Fund
----------------------------------------------------------------------------
Kemper Small Cap Value Fund
----------------------------------------------------------------------------
Value Fund - Kemper Shares
----------------------------------------------------------------------------
[ADD FOOTNOTES FOR SHORTER PERIODS, EXPENSE REIMBURSEMENT & ETC.]
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Funds' independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
(except for Kemper Value Fund, which uses PricewaterhouseCoopers LLP, 160
Federal Street, Boston, Massachusetts 02110) 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 Financial Services Fund,
U.S. Growth and Income Fund and Value Fund.
TRUSTEES AND OFFICERS
The officers and Board members of the Funds, their birth dates, their principal
occupations and their affiliations, if any, with the Advisor 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.
55
<PAGE>
All Funds except Value Fund:
----------------------------
<TABLE>
<CAPTION>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Fund Occupation** Services, Inc.
--------------------- --------- ------------ ----------------
<S> <C> <C> <C>
JAMES E. AKINS (10/15/26) Board Member, Consultant on International, --
2904 Garfield Terrace N.W. Director of KVAL, Political and Economic Affairs;
Washington, D.C.; Trustee of Securities formerly, a career United States
Trust Foreign Service Officer; Energy
Advisor for the White House;
United States Ambassador to Saudi
Arabia, 1973-1976.
JAMES R. EDGAR (07/22/46) 1927 Trustee Distinguished Fellow, Institute --
County Road, 150E, Seymour, of Government and Public Affairs,
Illinois; University of Illinois; Director,
Kemper Insurance Companies;
formerly, Governor of the State
of Illinois, 1991-1999.
ARTHUR R. GOTTSCHALK (2/13/25) Trustee Retired; formerly, President, --
10642 Brookridge Drive, Frankfort, Illinois Manufacturers
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. --
Trustee and Chairman
for Value Series only
56
<PAGE>
All Funds except Value Fund:
----------------------------
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Fund Occupation** Services, Inc.
--------------------- --------- ------------ ----------------
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.
MARK S. CASADY (9/21/60) + President * Managing Director, Scudder Kemper.
PHILIP J. COLLORA (11/15/45)## Vice President, and Senior Vice President, Scudder
Secretary. Kemper
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
57
<PAGE>
All Funds except Value Fund:
----------------------------
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Fund Occupation** Services, Inc.
--------------------- --------- ------------ ----------------
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, Scudder --
Kemper; formerly, Associate,
Dechert Price & Rhoads (law firm)
1989 to 1997
THOMAS F. SASSI (11/7/42) ++ Vice President , Managing Director, Scudder --
Kemper Value Series, Kemper; formerly, consultant with
Inc. only: an unaffiliated investment
consulting firm and an officer of
an unaffiliated investment
banking firm from 1993 to 1996
JAMES M. EYSENBACH (4/1/62)@ Vice President , Senior Vice President, Scudder --
Kemper Securities Kemper.
Trust and Value
Series:
KATHLEEN T. MILLARD (12/30/60)++ Vice President, Managing Director of Scudder --
Securities Trust Only Kemper Investments
WILLIAM F. TRUSCOTT Vice President, Vice President, Scudder Kemper. --
(9/14/60)
58
<PAGE>
Value Fund only:
----------------
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Fund Occupation** Services, Inc.
--------------------- --------- ------------ ----------------
Lynn S. Birdsong (52)*#++ President Managing Director, Scudder Kemper Senior Vice
President
Paul Bancroft III (68) Honorary 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 and
Suite 400 Chief Operating Officer,
1995 University Ave. Physicians Online, Inc.
San Francisco, CA 94704 (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 Venture --
83 Walnut Street Partners; General Partner, Deer &
Wellesley, MA 02481-2101 Company; Director, James River
Corp.; Director Galile Corp.,
Director of various privately
held companies
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
59
<PAGE>
Value Fund only:
----------------
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Fund Occupation** Services, Inc.
--------------------- --------- ------------ ----------------
Kathryn L. Quirk (45)*#++ Trustee, Vice Managing Director of Scudder Senior Vice
President and Kemper Investments, Inc. President, Chief
Assistant Secretary Legal Officer
and 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 State
for Economic, Business and
New York, NY 10019 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 present,
1120 Fifth Avenue Corporate Vice President of
New York, NY 10128-0144 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)
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.
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
60
<PAGE>
Value Fund only:
----------------
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Fund Occupation** Services, Inc.
--------------------- --------- ------------ ----------------
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 & Rhoads
(law firm) 1989-1997
Robert D. Tymoczko (29)& Vice President Assistant Vice President of --
Scudder Kemper Investments, Inc.
since August, 1997; previously
employed by The Law & Economics
Consulting Group, Inc. as an
economic consultant.
Lois R. Roman (35) Vice President Senior Vice President of Scudder --
Kemper Investments, Inc.
</TABLE>
* Mr. Birdsong and Ms. Quirk are considered by the Trust and its counsel
to be persons who are "interested persons" of the Advisor 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
& Address: 101 California Street, Suite 4100, San Francisco, CA 94111
* "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. ("KVAL") 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 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.
61
<PAGE>
Kemper Equity Small Cap U.S. Growth Kemper
Name of Trustee Trust* Relative Value and Income Securities Trust
--------------- ------ -------------- ---------- ----------------
James E. Akins
James R. Edgar
Arthur R. Gottschalk
Frederick T. Kelsey
Fred B. Renwick
John G. Weithers
* Compensation paid for Financial Services Fund is the same as for Kemper
Equity Trust. Financial Services Fund is the only series of Kemper
Equity Trust.
<TABLE>
<CAPTION>
Kemper Total Compensation
Contrarian High Return Small Cap Value Kemper Funds Paid
Name of Trustee Fund Equity Value Series Trust to Trustees**
--------------- ---- ------ ----- ------------ -------------
<S> <C> <C> <C> <C> <C>
James E. Akins
James R. Edgar
Arthur R. Gottschalk*
Frederick T. Kelsey
Fred B. Renwick
John G. Weithers
</TABLE>
* Includes deferred fees and interest pursuant to deferred compensation
agreements with certain Kemper funds. Deferred amounts accrue interest
monthly at a rate equal to the yield of Zurich Money Funds - Zurich
Money Market fund. The total deferred amount and interest accrued for
the fiscal year ended November 30, 1999 for KVS is $66,700 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.
62
<PAGE>
Value Equity Trust* All Scudder Funds
-------------------- -----------------
Paid by Paid by Paid by Paid by
Name the Trust the Advisor(1) the Funds The Advisor(1)
---- --------- -------------- --------- --------------
Paul Bancroft III,
Honorary Trustee+
Sheryle J. Bolton,
Trustee**
William T. Burgin,
Trustee
Thomas J. Devine,
Honorary Trustee+
Keith R. Fox,
Trustee
William H. Luers,
Trustee**
Wilson Nolen,
Honorary Trustee+
Joan E. Spero,***
Trustee
Robert G. Stone, Jr.
Honorary Trustee
(1) The Advisor paid the compensation to the Trustees for meetings
associated with the Advisor's alliance with Zurich Insurance Company.
See "Investment Advisor" for additional informa tion.
* Value Equity Trust consists of two funds: Scudder Large Company Value
Fund and Value Fund.
** Elected as Trustee of the Trust in October 1997.
*** Elected as Trustee of the Trust in September 1998.
+ Elected as an Honorary Trustee after serving as a Tru stee.
# Includes pension or retirement benefits received as Director of The
Japan Fund.
Members of the Board of Trustees who are employees of the Advisor or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Advisor, or its affiliates, as a result of
which they may be deemed to participate in fees paid by each Fund.
Principal Holders of Secur ities
As of December 31, 2000 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.
63
<PAGE>
Kemper Small Cap Relative Value Fund
--------------------------------------------------------------------------------
NAME CLASS PERCENTAGE
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Kemper Value Fund
--------------------------------------------------------------------------------
NAME CLASS PERCENTAGE
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Kemper-Dreman Financial Services Fund
--------------------------------------------------------------------------------
NAME CLASS PERCENTAGE
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64
<PAGE>
Kemper Contrarian Fund
--------------------------------------------------------------------------------
NAME CLASS PERCENTAGE
--------------------------------------------------------------------------------
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Kemper-Dreman High Return Equity Fund
--------------------------------------------------------------------------------
NAME CLASS PERCENTAGE
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Kemper Small Cap Value Fund
--------------------------------------------------------------------------------
NAME CLASS PERCENTAGE
--------------------------------------------------------------------------------
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65
<PAGE>
Kemper U.S Growth & Income Fund
--------------------------------------------------------------------------------
NAME CLASS PERCENTAGE
--------------------------------------------------------------------------------
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Kemper Value Fund
As of December 31, 2000, ____% of the outstanding Kemper Class A shares of the
Fund were held in the name of [ ], who may be deemed to be the beneficial owner
of certain of these shares, but disclaims any beneficial ownership therein.
Distributor
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with each Fund, Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Advisor, and a wholly-owned subsidiary of the Advisor, 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.
66
<PAGE>
<TABLE>
<CAPTION>
Commissions Commissions
Retained by Underwriter Commissions Paid to
Fund Fiscal Year Underwriter Paid to All Firms Affiliated Firms
---- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
Contrarian Fund 2000
1999 $71,000 $409,000 $0
1998 $52,000 $581,000 $5,000
Financial Services Fund 2000
1999 $38,000 $277,000 $0
1998 $86,000 $3,035,000 $0
High Return Equity Fund 2000
1999 $941,000 $5,255,000 $6,000
1998 $2,099,000 $17,133,000 $228,000
Small Cap Value Fund 2000
1999 $60,000 $597,000 $0
1998 $233,000 $2,515,000 $57000
U.S. Growth and Income 2000
Fund
1999 $6,000 $85,534 $0
1998*** $5,000 $292,000 $0
Value Fund 2000
1999 $102,805 $419,039 $0
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 each Funds'
Rule 12b-1 Plan during the last three fiscal periods.
For its services under the distribution agreements, 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 agreements, 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 received on redemptions
of Class C shares. See "Redemption or Repurchase of Shares - Contingent Deferred
Charge - Class C Shares."
67
<PAGE>
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.
68
<PAGE>
<TABLE>
<CAPTION>
Total
Distribution Contingent Distribution Distribution
Fees Paid by Deferred Sales Fees Paid by Fees Paid by
Fund Class Fund to Charge to Underwriter Underwriter to
B Shares Fiscal Year Underwriter Underwriter to Firms Affiliated Firms
-------- ----------- ----------- ----------- -------- ----------------
<S> <C> <C> <C> <C>
Contrarian Fund 2000
1999 $869,704 $299,113 $1,106,108 --
1998 $648,000 $117,000 $903,000 --
Financial Services Fund 2000
1999 $734,974 $636,753 $591,150
1998 $397,000 $122,000 $3,952,000 $33,000
High Return Equity Fund 2000
1999 $17,001,312 $8,014,691 $15,000,556 --
1998 $13,773,000 2,717,000 $34,050,000 --
Small Cap Value Fund 2000
1999 $2,421,349 $1,782,676 $1,372,426 --
1998 $3,293,000 $857,000 $4,888,000 --
U.S. Growth and Income 2000
Fund
1999 $88,046 $31,134 $235,689 --
1998 $12,000 2,000 $256,000
Value Fund 2000
1999 $221,360 $127,862 $446,342 $0
1998 $28,037 $9,480 $674,408 $0
</TABLE>
<TABLE>
<CAPTION>
Other Distribution Expenses Paid by Underwriter
-----------------------------------------------
Fund Class Fiscal Advertising Prospectus Marketing and Misc. Operating Interest
B Shares Year and Literature Printing Sales Expenses Expenses Expense
-------- ---- -------------- -------- -------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Contrarian Fund 2000
1999 $80,253 $8,132 $231,443 $45,362 $369,293
1998 $119,000 $12,000 $231,000 $54,000 $286,000
Financial Services Fund 2000
1999 $91,349 $7,137 $224,248 $43,249 $463,498
1998 $240,000 $28,000 $597,000 $82,000 $234,000
High Return Equity Fund 2000
1999 $1,752,092 $154,337 $4,686,468 $545,818 $8,399,964
1998 $4,192,000 $425,000 $8,215,000 $1,224,000 $6,398,000
Small Cap Value Fund 2000
1999 $165,456 $13,708 $415,726 $60,566 $1,604,952
1998 $969,000 $94,000 $1,736,000 $80,000 $1,730,000
U.S. Growth and Income 2000
Fund
1999 $23,830 $2,622 $61,529 $23,262 $51,505
1998 $11,000 $1,000 $28,000 $9,000 $10,000
Value Fund 2000
1999 $60,046 $6,328 $152,257 $25,791 $139,152
1998 $11,890 $1,657 $36,916 $12,606 $15,135
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Total
Distribution Contingent Distribution Distribution
Fees Paid by Deferred Sales Fees Paid by Fees Paid by
Fund Class Fund to Charge to Underwriter Underwriter to
C Shares Fiscal Year Underwriter Underwriter to Firms Affiliated Firms
-------- ----------- ----------- ----------- -------- ----------------
<S> <C> <C> <C> <C>
Contrarian Fund 2000
1999 $123,649 $5,140 $0
$121,450
1998 $70,000 $3,000 $73,000 --
Financial Services Fund 2000
1999 $125,064 $37,892 $123,614 $0
1998 $60,000 $7,000 $2,000 $2,000
High Return Equity Fund 2000
1999 $3,718,706 $226,922 $4,036,037 $0
1998 $2,588,000 $105,000 $2,886,000 --
Small Cap Value Fund 2000
1999 $540,324 $32,048 $596,138 $0
1998 $803,000 $40,000 $984,000 --
U.S. Growth and Income 2000
Fund
1999 $33,670 $1,808 $30,718 $0
1998 $12,000 $2,000 $256,000
Value Fund 2000
1999 $41,401 $3,695 $39,091 $0
1998 $4,063 $127 $2,833 $0
</TABLE>
<TABLE>
<CAPTION>
Other Distribution Expenses Paid by Underwriter
-----------------------------------------------
Fund Class Fiscal Advertising Prospectus Marketing and Misc. Operating Interest
C Shares Year and Literature Printing Sales Expenses Expenses Expense
-------- ---- -------------- -------- -------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Contrarian Fund 2000
1999 $25,493 $10,935 $76,388 $19,113 $24,924
1998 $22,000 $2,000 $44,000 $16,000 $17,000
Financial Services Fund 2000
1999 $28,022 $2,380 $75,123 $21,034 $18,039
1998 $48,000 $6,000 $121,000 $17,000 $6,000
High Return Equity Fund 2000
1999 $688,960 $63,105 $1,894,756 $233,751 $716,487
1998 $956,000 $99,000 $1,915,000 $292,000 $428,000
Small Cap Value Fund 2000
1999 $67,936 $6,101 $184,287 $28,246 $243,035
1998 $296,000 $29,000 $540,000 $99,000 $185,000
U.S. Growth and Income 2000
Fund
1999 $13,314 $1,462 $34,784 $22,635 $4,355
1998 $11,000 $1,000 $28,000 $9,000 $10,000
Value Fund 2000
1999 $10,726 $1,214 $28,806 $8,113 $2,708
1998 $1,880 $273 $5,906 $7,228 $161
</TABLE>
(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.
*** Amounts shown are after expense waiver.
70
<PAGE>
Rule 12b-1 Plans. Each Trust has adopted on behalf of the Funds, in accordance
with Rule 12b-1 under the 1940 Act, separate Rule 12b-1 distribution plans
pertaining to each Fund's Class B and Class C shares (each a "Plan"). Under each
Plan, the Fund pays KDI a distribution fee, payable monthly, at the annual rate
of [0.75%] of the average daily net assets attributable to its Class B or Class
C shares. Under each Plan, KDI may compensate various financial services firms
("Firms") for sales of Fund shares and may pay other commissions, fees and
concessions to such Firms. The distribution fee compensates KDI for expenses
incurred in connection with activities primarily intended to result in the sale
of a Fund's Class B or Class C shares, including the printing of prospectuses
and reports for persons other than existing shareholders and the preparation,
printing and distribution of sales literature and advertising materials.
Among other things, each Plan provides that KDI will prepare reports for the
Board on a quarterly basis for each class showing amounts paid to the various
Firms and such other information as the Board may reasonably request. Each Plan
will continue in effect indefinitely, provided that such continuance is approved
at least annually by vote of a majority of the Board, and a majority of the
Board Members who are not "interested persons" (as defined in the 1940 Act) of
the Funds and who have no direct or indirect financial interest in the operation
of the Plan ("Qualified Board Members"), cast at an in-person meeting called for
such purpose, or by vote of at least a majority of the outstanding voting
securities of the applicable class. Any material amendment to a Plan must be
approved by vote of a majority of the Board, and of the Qualified Board Members.
An amendment to a Plan to increase materially the amount to be paid to KDI by a
Fund for distribution services with respect to the applicable class must be
approved by a majority of the outstanding voting securities of that class. While
each Plan is in effect, the selection and nomination of Board Members who are
not "interested persons" shall be committed to the discretion of the Board
Members who are not themselves "interested persons". If a Plan is terminated (or
not renewed) with respect to either class, the Plan with respect to the other
class may continue in effect unless it also has been terminated (or not
renewed).
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.
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 Funds, 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 Funds 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
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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 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.
To the extent that dividends from domestic corporations constitute a portion of
a 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.
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.
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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 a Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Equity options (including covered call options on portfolio stock) written or
purchased by a Fund will be subject to tax under Section 1234 of the Code. In
general, no loss is recognized by a 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 a Fund's
portfolio. If a 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 a Fund and all listed
nonequity options written or purchased by a 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 a Fund's portfolio.
Positions of a 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 a 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 a Fund.
Positions of a 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 a 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. Each Fund intends to monitor its transactions in
options and futures and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, Section 1259 of the Code may require a
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if a Fund enters into a short sale,
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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 a Fund's taxable year, if certain
conditions are met.
Similarly, under Section 1233(h) of the Code, if a Fund enters into a short sale
of property that becomes substantially worthless, that 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 a 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 such
Fund each year, even though such 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 such Fund which must
be distributed to shareholders in order to maintain the qualification of such
Fund as a regulated investment company and to avoid federal income tax at the
Fund level. If a 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.
Each 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 applicable investment company
with their taxpayer identification numbers and with required certifications
regarding their status under the federal income tax law. Withholding may also be
required if a shareholder or a Fund is notified by the IRS or a broker that the
taxpayer identification number furnished by the shareholder is incorrect or that
the shareholder has previously failed to report interest or dividend income. If
the withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in additional shares, will be reduced by the
amounts required to be withheld.
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 each Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
The Contrarian Fund, High Return Equity Fund and Small Cap Value Fund are
Maryland corporations. The Financial Services Fund, Small Cap Relative Value
Fund, Value Fund and U.S. Growth and Income Fund are Massachusetts business
trusts. Generally, each individual Fund should not be subject to income or
franchise tax in the State of Maryland or the Commonwealth of Massachusetts,
except to the extent that such individual Fund incurs federal taxable income, if
any, and provided that such individual Fund continues to be treated as a
regulated investment company under Subchapter M of the Code.
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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 a Fund may be subject to state, local and foreign taxes on Fund
distributions and dispositions of Fund shares.
Shareholders should consult their tax advisors about the application of the
provisions of tax law in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Investment Manager.
The primary objective of the Investment Manager 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 Investment Manager seeks to evaluate the overall
reasonableness of brokerage commissions paid (to the extent applicable) through
the familiarity of the Distributor with commissions charged on comparable
transactions, as well as by comparing commissions paid by a Fund to reported
commissions paid by others. The Investment Manager routinely reviews commission
rates, execution and settlement services performed and makes internal and
external comparisons.
a Fund's purchases and sales of fixed-income securities are generally placed by
the Investment Manager 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 Investment Manager's practice to place such orders with
broker/dealers who supply research, market and statistical information to a
Fund. The term "research, market and statistical information" 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 Investment Manager is authorized when placing portfolio transactions 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, market or statistical information. The Investment
Manager may (with the exception of Value Fund) 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 Investment Manager will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Investment
Manager; the Distributor will place orders on behalf of a Fund with issuers,
underwriters or other brokers and dealers. The Distributor will not receive any
commission, fee or other remuneration from a Fund for this service.
Although certain research, market and statistical services from broker/dealers
may be useful to a Fund and to the Investment Manager, it is the opinion of the
Investment Manager that such information only supplements the Investment
Manager's own research effort since the information must still be analyzed,
weighed, and
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reviewed by the Investment Manager's staff. Such information may be useful to
the Investment Manager in providing services to clients other than a Fund, and
not all such information is used by the Investment Manager in connection with a
Fund. Conversely, such information provided to the Investment Manager by
broker/dealers through whom other clients of the Investment Manager effect
securities transactions may be useful to the Investment Manager in providing
services to a Fund.
The Board reviews, 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.
[INSERT INDIVIDUAL DISCLOSURE REGARDING BROKERAGE COMMISSIONs PAID IN THE LAST
THREE YEARS.]
Portfolio Turnover
Portfolio turnover rate is defined by the SEC as the ratio of the lesser of
sales or purchases to the monthly average value of such securities owned during
the year, excluding all securities whose remaining maturities at the time of
acquisition were one year or less.
Higher levels of activity by a Fund result in higher transaction costs and may
also result in taxes on realized capital gains to be borne by the Fund's
shareholders. Purchases and sales are made for a Fund whenever necessary, in
management's opinion, to meet a Fund's objective.
Portfolio turnover rates for the three most recent fiscal periods are as
follows:
[See Item 12(e) of Form N-1A - Also explain any significant variation in a
fund's portfolio turnover rates over the two most recently completed FYs or any
anticipated variation in the portfolio turnover rate from that reported for the
last fiscal year in response to Item 9.]
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Fiscal Year/Period Fiscal Year/Period Fiscal Year/Period
Fund Ended _____: Ended _____: Ended _____:
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kemper-Dreman Financial Services Fund
------------------------------------------------------------------------------------------------------------
Kemper U.S. Growth and Income Fund
------------------------------------------------------------------------------------------------------------
Kemper Contrarian Fund
------------------------------------------------------------------------------------------------------------
Kemper-Dreman High Return Equity Fund
------------------------------------------------------------------------------------------------------------
Kemper Small Cap Value Fund
------------------------------------------------------------------------------------------------------------
Value Fund - Kemper Shares
------------------------------------------------------------------------------------------------------------
</TABLE>
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-621-1048.
FINANCIAL STATEMENTS
The financial statements appearing in each Fund's Annual Report to Shareholders
are incorporated herein by reference. Each Fund's Annual Report accompanies this
Statement of Additional Information.
APPENDIX -- RATINGS OF INVESTMENTS
Standard & Poor's Corporation Bond Ratings
AAA. Debt rated AAA had the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
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AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC and C. Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Moody's Investors Service, Inc., Bond Ratings
AAA. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
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.
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Fitch Long-Term Debt Ratings
AAA
Highest credit quality. `AAA' ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA
Very high credit quality. `AA' ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A
High credit quality. `A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB
Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
BB
Speculative. `BB' ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B
Highly speculative. `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C
High default risk. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon sustained, favorable business or economic
developments. A `CC' rating indicates that default of some kind appears
probable. `C' ratings signal imminent default.
DDD, DD, D
Default. The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. 'DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. 'DD' indicates
potential recoveries in the range of 50%-90%, and 'D' the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated 'DDD' have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated 'DD' and 'D' are generally undergoing a formal
reorganization or liquidation process; those rated 'DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated 'D' have a
poor prospect for repaying all obligations.
Fitch Short-Term Debt Ratings
F1
Highest credit quality. Indicates the Best capacity for timely payment of
financial commitments; may have an added "+" to denote any exceptionally strong
credit feature.
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F2
Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3
Fair credit quality. The capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B
Speculative. Minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
C
High default risk. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic
environment.
D
Default. Denotes actual or imminent payment default.
Commercial Paper Ratings
Commercial paper rated by Standard & Poor's Ratings Services ("S&P") has the
following characteristics: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated "A" or better. The issuer has
access to at least two additional channels of borrowing. Basic earnings and cash
flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1 or A-2.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service, Inc. ("Moody's"). Among the factors
considered by it in assigning ratings are the following: (1) evaluation of the
management of the issuer; (2) economic evaluation of the issuer's industry or
industries and an appraisal of speculative-type risks which may be inherent in
certain areas; (3) evaluation of the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the issuer;
and (8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations. Relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated Prime-1 or 2.
Municipal Notes
Moody's: The highest ratings for state and municipal short-term obligations are
"MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG 3" in the case of
an issue having a variable rate demand feature). Notes rated "MIG 1" or "VMIG 1"
are judged to be of the "best quality". Notes rated "MIG 2" or "VMIG 2" are of
"high quality," with margins or protection "ample although not as large as in
the preceding group". Notes rated "MIG 3" or "VMIG 3" are of "favorable
quality," with all security elements accounted for but lacking the strength of
the preceding grades.
S&P: The "SP-1" rating reflects a "very strong or strong capacity to pay
principal and interest". Notes issued with "overwhelming safety characteristics"
will be rated "SP-1+". The "SP-2" rating reflects a "satisfactory capacity" to
pay principal and interest.
Fitch: The highest ratings for state and municipal short-term obligations are
"F-1+," "F-1," and "F-2".
79
<PAGE>
LONG-TERM
INVESTING
IN A
SHORT-TERM
WORLD(SM)
February 1, 2001
Prospectus
KEMPER SMALL CAP VALUE FUND
Class S
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
[LOGO] KEMPER FUNDS
<PAGE>
HOW THE INVESTING IN
FUND WORKS THE FUND
4 Kemper Small Cap 15 How To Buy Sell and
Value Fund Exchange Class S Shares
10 Other Policies And 17 Policies You Should
Risks Know About
21 Understanding
Distributions And Taxes
<PAGE>
How The Fund Works
This fund invests in common stocks, as a way of seeking growth of your
investment.
The fund invests mainly in companies whose stock prices appear low in light of
other measures of worth, such as earnings, book value or cash flow.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency, and you could
lose money by investing in them.
<PAGE>
TICKER SYMBOLS CLASS S
Kemper
Small Cap Value Fund
FUND GOAL The fund seeks long-term capital
appreciation.
4
<PAGE>
--------------------------------------------------------------------------------
The Fund's Main 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 ($-- billion or less as of
12/31/00).
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
weighs 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.
[ICON]
--------------------------------------------------------------------------------
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 the fund is permitted to use various
types of derivatives (contracts whose value is based on, for example, indices,
currencies or securities), the managers don't intend to use them as principal
investments and may not use them at all.
5
<PAGE>
--------------------------------------------------------------------------------
The Main Risks Of Investing In The Fund
There are several risk factors that could hurt the fund's
performance, cause you to lose money or make the fund perform
less well than other investments.
As with most stock funds, the most important factor with this
fund is how stock markets perform -- in this case, the 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 sector, any
factors affecting that sector could affect portfolio
securities. For example, the emergence of new technologies
could hurt electronics or medical technology companies.
6
<PAGE>
Other factors that could affect performance include:
o the managers could be wrong in their analysis of
companies, sectors, economic trends or other matters
o value stocks may be out of favor for certain periods
o foreign securities 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, market conditions might make it hard to
value some investments or to get an attractive price
for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This fund may make sense for value-oriented investors who are interested in
small-cap market exposure with potentially lower risk than a growth-oriented
small-cap fund.
7
<PAGE>
--------------------------------------------------------------------------------
Performance
Because this class of shares does not have a full calendar year of performance
to report as of the date of this prospectus, no bar chart and performance table
are provided.
8
<PAGE>
--------------------------------------------------------------------------------
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
--------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
$ $ $ $
--------------------------------------------------------------------------------
9
<PAGE>
Other Policies and Risks
While the sections on the previous pages describe the main points
of the fund's strategy and risks, there are a few other issues to
know about:
o Although major changes tend to be infrequent, the fund's Board
could change the fund's investment goal without seeking
shareholder approval.
o As a temporary defensive measure, the fund could shift up to 50%
of its assets into investments such as money market securities.
This could prevent losses, but would mean that the fund was not
pursuing its goal.
o The fund's equity investments are mainly common stocks, but may
also include other types of equities such as preferred or
convertible stocks.
o The fund may trade securities actively. This could raise
transaction costs (thus lowering performance) and could mean
higher taxable distributions.
Euro conversion
Funds that invest in foreign securities 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. The investment adviser is working
to address euro-related issues as they occur and has been notified
that other key service providers are taking similar steps. Still,
there's some risk that this problem could materially affect a
fund's operation (including its ability to calculate net asset
value and to handle purchases and redemptions), its investments or
securities markets in general.
For more information
This prospectus doesn't tell you about every policy or risk of
investing in the fund.
If you want more information on the fund's allowable securities and
investment practices and the characteristics and risks of each one,
you may want to request a copy of the Statement of Additional
Information (the back cover tells you how to do this).
Keep in mind that there is no assurance that any mutual fund will
achieve its goal.
10
<PAGE>
--------------------------------------------------------------------------------
[ICON] Scudder Kemper, the company with overall responsibility for managing
the fund, takes a team approach to asset management.
--------------------------------------------------------------------------------
Who Manages and Oversees the Fund
The investment adviser
The fund's investment adviser 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's asset management teams include investment
professionals, economists, research analysts, traders and other
investment specialists, located in offices across the United States
and around the world.
As payment for serving as investment adviser, Scudder Kemper
receives a management fee from the fund. For the 12 months through
the most recent fiscal year end, the actual amount the fund paid in
management fees was --% of its average daily net assets.
The fund has entered into a new investment management agreement
with Scudder Kemper. The table below describes the new fee rates
for the fund.
-----------------------------------------------------------------
Investment Management Fee
-----------------------------------------------------------------
Average Daily Net Assets Fee Rate
-----------------------------------------------------------------
first $250 million 0.75%
-----------------------------------------------------------------
next $750 million 0.72%
-----------------------------------------------------------------
next $1.5 billion 0.70%
-----------------------------------------------------------------
next $2.5 billion 0.68%
-----------------------------------------------------------------
next $2.5 billion 0.65%
-----------------------------------------------------------------
next $2.5 billion 0.64%
-----------------------------------------------------------------
next $2.5 billion 0.63%
-----------------------------------------------------------------
more than $12.5 billion 0.62%
-----------------------------------------------------------------
11
<PAGE>
[ICON]
--------------------------------------------------------------------------------
FUND MANAGERS
The following people handle the day-to-day management of
the fund.
James M. Eysenbach Calvin S. Young
Lead Portfolio Manager o Began investment career
in 1988
o Began investment career o Joined the advisor in
in 1984 1990
o Joined the advisor in o Joined the fund team
1986 in 1999
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.
12
<PAGE>
The Board
A mutual fund's Board is responsible for the general oversight of the fund's
business. The majority of the Board is not affiliated with Scudder Kemper. These
independent members have primary responsibility for assuring that the fund is
managed in the best interests of its shareholders.
The following people comprise the fund's Board.
Linda C. Coughlin Keith R. Fox
o Managing Director, o General Partner, The Exeter
Scudder Kemper Investments, Inc. Group of Funds
o President of the fund
Joan E. Spero
Henry P. Becton, Jr. o President, Doris Duke
o President, WGBH Educational Foundation Charitable Foundation
Dawn-Marie Driscoll Jean Gleason Stromberg
o Executive Fellow, Center for Business o Consultant
Ethics, Bentley College
o President, Driscoll Associates Jean C. Tempel
(consulting firm) o Managing Director, First Light
Capital, LLC (venture capital
Edgar Fiedler firm)
o Senior Fellow and Economic
Counsellor, The Conference Steven Zaleznick
Board, Inc. (not-for-profit business o President and Chief Executive
research organization) Officer, AARP Services, Inc.
13
<PAGE>
How to invest in the fund
The following pages tell you how to invest in the fund and what to
expect as a shareholder. If you're investing directly with Scudder,
all of this information applies to you.
If you're investing through a "third party provider" -- for
example, a workplace retirement plan, financial supermarket or
financial adviser -- your provider may have its own policies or
instructions, and you should follow those.
<PAGE>
How to Buy, Sell and Exchange Class S Shares
Buying Shares Use these instructions to invest directly. Make out your check to
"The Scudder Funds."
--------------------------------------------------------------------------------
Class S First investment Additional investments
--------------------------------------------------------------------------------
$2,500 or more for $100 or more for regular
regular accounts accounts
$1,000 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
--------------------------------------------------------------------------------
By mail or o Fill out and sign an Send a Scudder investment slip
express application or short note that includes:
(see below)
o Send it to us at the o fund and class name
appropriate address,
along with an o account number
investment check
o check payable to "The Scudder
Funds"
--------------------------------------------------------------------------------
By wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
--------------------------------------------------------------------------------
By phone -- o Call 1-800-SCUDDER for
instructions
--------------------------------------------------------------------------------
With an automatic o Fill in the o To set up regular investments
investment plan information on your from a bank checking account,
application and call 1-800-SCUDDER
include a voided check
--------------------------------------------------------------------------------
Using QuickBuy -- o Call 1-800-SCUDDER
--------------------------------------------------------------------------------
On the Internet o Go to "funds and o Call 1-800-SCUDDER to ensure
prices" at you have electronic services
www.scudderdirect.com
o Print out a prospectus o Register at www.scudder.com
and a new account
application o Follow the instructions for
buying shares with money from
o Complete and return your bank account
the application with
your check
--------------------------------------------------------------------------------
[ICON] Regular mail:
The Scudder Funds, PO Box 2291, Boston, MA 02107-2291
Express, registered or certified mail:
The Scudder Funds, 66 Brooks Drive, Braintree, MA 02184-3839
Fax number: 1-800-821-6234 (for exchanging and selling only)
15
<PAGE>
Exchanging or Selling Shares Use these instructions to exchange or sell shares
in an account opened directly with Scudder.
--------------------------------------------------------------------------------
Class S Exchanging into another Selling shares fund
--------------------------------------------------------------------------------
$2,500 or more to open a Some transactions, including
new account ($1,000 or most for over $100,000, can
more for IRAs) only be ordered in writing; if
you're in doubt, see page 19
$100 or more for
exchanges between
existing accounts
--------------------------------------------------------------------------------
By phone or wire o Call 1-800-SCUDDER for o Call 1-800-SCUDDER for
instructions instructions
--------------------------------------------------------------------------------
Using SAIL(TM) o Call 1-800-343-2890 o Call 1-800-343-2890 and
and follow the follow the instructions
instructions
--------------------------------------------------------------------------------
By mail, Your instructions should Your instructions should
express or fax include: include:
(see previous
page) o the fund, class, and o the fund, class and account
account number you're number from which you want to
exchanging out of sell shares
o the dollar amount or o the dollar amount or number
number of shares you of shares you want to sell
want to exchange
o your name(s), signature(s)
o the name and class of and address, as they appear
the fund you want to on your account
exchange into
o a daytime telephone number
o your name(s),
signature(s), and
address, as they
appear on your account
o a daytime telephone
number
--------------------------------------------------------------------------------
With an automatic -- o To set up regular cash
withdrawal plan payments from a Scudder
account, call 1-800-SCUDDER
--------------------------------------------------------------------------------
Using QuickSell -- o Call 1-800-SCUDDER
--------------------------------------------------------------------------------
On the Internet o Register at --
www.scudder.com
o Follow the
instructions for
making on-line
exchanges
--------------------------------------------------------------------------------
16
<PAGE>
--------------------------------------------------------------------------------
[ICON] Questions? You can speak to a Scudder representative between 8 a.m. and
8 p.m. Eastern time on any fund business day by calling 1-800-SCUDDER
(Class S).
--------------------------------------------------------------------------------
Policies You Should Know About
Along with the instructions on the previous pages, the policies
below may affect you as a shareholder. Some of this information,
such as the section on dividends and taxes, applies to all
investors, including those investing through investment providers.
If you are investing through an investment provider, check the
materials you got from them. As a general rule, you should follow
the information in those materials wherever it contradicts the
information given here. Please note that an investment provider may
charge its own fees.
In either case, keep in mind that the information in this
prospectus applies only to the fund's Class S shares. The fund does
have other share classes, which are described in separate
prospectuses and which have different fees, requirements, and
services.
In order to reduce the amount of mail you receive and to help
reduce fund expenses, we generally send a single copy of any
shareholder report and prospectus to each household. If you do not
want the mailing of these documents to be combined with those for
other members of your household, please call or 1-800-SCUDDER
(Class S).
Policies about transactions
The fund is open for business each day the New York Stock Exchange
is open. The fund calculates its share price every business day, as
of the close of regular trading on the Exchange (typically 4 p.m.
eastern 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 Scudder Service Corporation, 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 Scudder Service Corporation 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.
17
<PAGE>
--------------------------------------------------------------------------------
[ICON] The Scudder Web site can be a valuable resource for shareholders with
Internet access. To get up-to-date information, review balances or even
place orders for exchanges, go to www.scudder.com (Class S).
--------------------------------------------------------------------------------
Automated phone information is available 24 hours a day. You can
use your automated phone services to get information on Scudder
funds generally and on accounts held directly at Scudder. If you
signed up for telephone services, you can also use this service to
make exchanges and sell shares.
For Class S shares
-------------------------------------------------------------------
Call SAIL(TM), the Scudder Automated Information Line, at
1-800-343-2890
-------------------------------------------------------------------
QuickBuy and QuickSell let you set up a link between a Scudder
account and a bank account. Once this link is in place, you can
move money between the two with a phone call. You'll need to make
sure your bank has Automated Clearing House (ACH) services. To set
up QuickBuy or QuickSell on a new account, see the account
application; to add it to an existing account, call 1-800-SCUDDER
(Class S).
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 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 receive wires, we will deduct a $5 fee
from all wires sent from us to your bank. Your bank may charge its
own fees for handling wires. The fund can only accept wires of $100
or more.
Exchanges are a shareholder privilege, not a right: we may reject
any exchange order, particularly when there appears to be a pattern
of "market timing" or other frequent purchases and sales. We may
also reject purchase orders, for these or other reasons.
18
<PAGE>
--------------------------------------------------------------------------------
[ICON] If you ever have difficulty placing an order by phone or fax, you can
always send us your order in writing.
--------------------------------------------------------------------------------
When you want to sell more than $100,000 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.
Money from shares you sell is normally sent out within one business
day of when your order is processed (not when it is received),
although it could be delayed for up to seven days. There are also
two circumstances when it could be longer: when you are selling
shares you bought recently by check and that check hasn't cleared
yet (maximum delay: 15 days) or when unusual circumstances prompt
the SEC to allow further delays.
How the fund calculates share price
For each share class, the price at which you buy shares is the net
asset value per share, or NAV. To calculate NAV, each share class
of the fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
We typically use market prices to value securities. However, when a
market price isn't available, or when we have reason to believe it
doesn't represent market realities, we may use fair value methods
approved by the fund's Board. In such a case, the fund's value for
a security is likely to be different from quoted market prices.
19
<PAGE>
To the extent that the fund invests in securities that are traded
primarily in foreign markets, the value of its holdings could
change at a time when you aren't able to buy or sell fund shares.
This is because some foreign markets are open on days when the fund
doesn't price its shares.
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if you
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 for Class S shareholders, close your account and send you the
proceeds if your balance falls below $1,000; for Class S
shareholders, charge you $10 a year if your account balance
falls below $2,500; in either case, we will give you 60 days
notice so you can either increase your balance or close your
account (these policies don't apply to retirement accounts, to
investors with $100,000 or more in Scudder fund shares or in any
case where a fall in share price created the low balance)
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 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, the 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 value of the fund's net assets, whichever is less
o change, add or withdraw various services, fees and account
policies (for example, we may change or terminate the exchange
privilege at any time)
20
<PAGE>
--------------------------------------------------------------------------------
[ICON] 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.
--------------------------------------------------------------------------------
Understanding Distributions and Taxes
By law, a mutual fund is required to pass through to its
shareholders virtually all of its net earnings. A fund can earn
money in two ways: by receiving interest, dividends or other income
from securities it holds, and by selling securities for more than
it paid for them. (A fund's earnings are separate from any gains or
losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The fund intends to pay dividends and distributions to its
shareholders annually in December, and if necessary may do so at
other times as well.
You can choose how to receive your dividends and distributions. You
can have them all automatically reinvested in fund shares or all
sent to you by check. Tell us your preference on your application.
If you don't indicate a preference, your dividends and
distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
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.
21
<PAGE>
The tax status of the fund earnings you receive, and your own fund
transactions, generally depends on their type:
Generally taxed at ordinary income rates
-------------------------------------------------------------------
o short-term capital gains from selling fund shares
-------------------------------------------------------------------
o taxable income dividends you receive from the fund
-------------------------------------------------------------------
o short-term capital gains distributions you receive from the fund
-------------------------------------------------------------------
o long-term capital gains from selling fund shares
-------------------------------------------------------------------
o long-term capital gains distributions you receive from the fund
-------------------------------------------------------------------
You may be able to claim a tax credit or deduction for your share
of any foreign taxes the fund pays.
Your fund will send you detailed tax information every January.
These statements tell you the amount and the tax category of any
dividends or distributions you received. They also have certain
details on your purchases and sales of shares. The tax status of
dividends and distributions is the same whether you reinvest them
or not. Dividends or distributions declared in the last quarter of
a given year are taxed in that year, even though you may not
receive the money until the following January.
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.
22
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from the fund's
management team about recent market conditions and the effects of a
fund's strategies on its performance. They also have detailed
performance figures, a list of everything the fund owns, and the
fund's financial statements. Shareholders get these reports
automatically. For more copies, call 1-800-SCUDDER (Class S).
Statement of Additional Information (SAI) -- This tells you more
about the fund's features and policies, including additional risk
information. The SAI is incorporated by reference into this
document (meaning that it's legally part of this prospectus).
If you'd like to ask for copies of these documents, please contact
Scudder or the SEC (see below). If you're a shareholder and have
questions, please contact Scudder. Materials you get from Scudder
are free; those from the SEC involve a copying fee. If you like,
you can look over these materials at the SEC's Public Reference
Room in Washington, DC or request them electronically at
[email protected].
Scudder Funds SEC
PO Box 2291 450 Fifth Street,
Boston, MA N.W.
02107-2291 Washington, D.C.
20549-6009
1-800-SCUDDER 1-202-942-8090
www.scudder.com www.sec.gov
SEC File Number 811-5385
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns and the fund's financial statements. Shareholders
get these reports automatically. For more copies, call (800) 621-1048.
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 20549-0102
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 Number
Kemper Small Cap Value Fund 811-5385
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
<PAGE>
Kemper Value Series, Inc.
Kemper Small Cap Value Fund ("Small Cap Value Fund")
Class S
STATEMENT OF ADDITIONAL INFORMATION
February 1, 2001
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus for the Fund, as amended from time to
time, a copy of which may be obtained without charge by contacting Kemper
Distributors, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606,
1-800-621-1048, or from the firm from which this Statement of Additional
Information was obtained.
This Statement of Additional Information is incorporated by reference
into the prospectus.
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT POLICIES AND TECHNIQUES............................................2
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ADDITIONAL INFORMATION ABOUT INVESTMENT TECHNIQUES............................2
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INVESTMENT RESTRICTIONS......................................................21
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NET ASSET VALUE..............................................................22
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Purchase of Shares........................................................24
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FUND ORGANIZATION............................................................32
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INVESTMENT MANAGER...........................................................35
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Code of Ethics............................................................38
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TRUSTEES AND OFFICERS........................................................39
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Principal Holders of Securities...........................................42
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PORTFOLIO TRANSACTIONS.......................................................46
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Brokerage Commissions.....................................................46
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Portfolio Turnover........................................................47
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FINANCIAL STATEMENTS.........................................................48
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APPENDIX -- RATINGS OF INVESTMENTS...........................................48
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INVESTMENT POLICIES AND TECHNIQUES SMALL CAP VALUE FUND.
The Small Cap Value Fund's investment objective is to seek long-term capital
appreciation. It will invest principally in a diversified portfolio of equity
securities of small companies with market capitalizations ranging from $100
million to $1 billion that the investment manager believes to be undervalued.
Under normal market conditions, at least 65% of the total assets of the Fund
will be invested in securities of companies whose market capitalizations are
less than $1 billion.
The Fund will invest primarily in common stocks of companies with a record of
earnings, low price-earnings ratios, reasonable returns on equity and sound
finances which, in the opinion of the investment manager, have intrinsic value.
Such securities are generally traded on the New York Stock Exchange, the
American Stock Exchange and in the over-the-counter market. The Fund will invest
principally in a diversified portfolio of equity securities of companies that
the investment manager believes to be undervalued. Securities of a company may
be undervalued as a result of overreaction by investors to unfavorable news
about a company, industry or the stock markets in general or as a result of a
market decline, poor economic conditions, tax-loss selling or actual or
anticipated unfavorable developments affecting the company.
The Fund may invest in preferred stocks, convertible securities and warrants,
enter into repurchase agreements and reverse repurchase agreements, and engage
in strategic transactions. The Fund may also invest up to 20% of assets in
foreign securities, including emerging markets. The Fund will not invest more
than 15%, of the value of its net assets in illiquid securities.
While it is anticipated that under normal circumstances the Fund will be fully
invested, in order to conserve assets during temporary defensive periods when
the Investment Manager deems it appropriate, the Fund may invest up to 50% 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.
ADDITIONAL INFORMATION ABOUT INVESTMENT TECHNIQUES
The following section includes disclosure about investment practices and
techniques which may be utilized by the fund. Specific limitations and policies
regarding the use of these techniques may be found in the fund's "Investment
Objective and Policies" section, as well as in "Investment Restrictions" below.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Fund may engage or a financial
instrument which the Fund may purchase are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. (the "Investment Manager"), in
its discretion, might, but is not required to, use in managing the Fund's
portfolio assets. The Investment Manager may, in its discretion, at any time
employ such practice, technique or instrument for one or more funds but not for
all funds advised by it. Furthermore, it is possible that certain types of
financial instruments or investment techniques described herein may not be
available, permissible, economically feasible or effective for their intended
purposes in all markets. Certain practices, techniques, or instruments may not
be principal activities of the Fund but, to the extent employed, could from time
to time have a material impact on the Fund's performance.
Borrowing. The Fund will borrow only when the Investment Manager believes that
borrowing will benefit the Fund after taking into account considerations such as
the costs of the borrowing. Borrowing by the Fund will involve special risk
considerations. Although the principal of the Fund's borrowings will be fixed,
the Fund's assets may change in value during the time a borrowing is
outstanding, proportionately increasing exposure to capital risk.
Common Stocks. Common stock is issued by companies to raise cash for business
purposes and represents a proportionate interest in the issuing companies.
Therefore, the Fund participates in the success or failure of any company in
which it holds stock. The market values of common stock can fluctuate
significantly, reflecting the business performance of the issuing company,
investor perception and general economic and financial market movements. Despite
the risk of price volatility, however, common stocks have historically offered a
greater
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potential for long-term gain on investment, compared to other classes of
financial assets such as bonds or cash equivalents, although there can be no
assurance that this will be true in the future.
Convertible Securities. The Fund may invest in convertible securities, that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stock. Investments in convertible securities can provide
an opportunity for capital appreciation and/or income through interest and
dividend payments by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest are either fixed income
or zero coupon debt securities which may be converted or exchanged at a stated
or determinable exchange ratio into underlying shares of common stock. The
exchange ratio for any particular convertible security may be adjusted from time
to time due to stock splits, dividends, spin-offs, other corporate distributions
or scheduled changes in the exchange ratio. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Convertible securities
generally offer lower yields than non-convertible securities of similar quality
because of their conversion or exchange features.
Of course, like all debt securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities. Convertible securities may be issued as fixed income
obligations that pay current income or as zero coupon notes and bonds, including
Liquid Yield Option Notes ("LYONs"(TM)).
Depositary Receipts. The Fund may invest in sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs"), International Depositary Receipts ("IDRs") and
other types of Depositary Receipts (which, together with ADRs, GDRs and IDRs are
hereinafter referred to as "Depositary Receipts"). Depositary receipts provide
indirect investment in securities of foreign issuers. Prices of unsponsored
Depositary Receipts may be more volatile than if they were sponsored by the
issuer of the underlying securities. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the stock of unsponsored
Depositary Receipts are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of the Depositary Receipts. ADRs are Depositary
Receipts which are bought and sold in the United States and are typically issued
by a U.S. bank or trust company which evidence ownership of underlying
securities by a
3
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foreign corporation. GDRs, IDRs and other types of Depositary Receipts are
typically issued by foreign banks or trust companies, although they may also be
issued by United States banks or trust companies, and evidence ownership of
underlying securities issued by either a foreign or a United States corporation.
Generally, Depositary Receipts in registered form are designed for use in the
United States securities markets and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. For purposes
of the Fund's investment policies, the Fund's investments in ADRs, GDRs and
other types of Depositary Receipts will be deemed to be investments in the
underlying securities. Depositary Receipts, including those denominated in U.S.
dollars will be subject to foreign currency exchange rate risk. However, by
investing in U.S. dollar-denominated 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.
However, certain Depositary Receipts may not be listed on an exchange and
therefore may be illiquid securities.
Investing in Emerging Markets. The Fund's investments in foreign securities may
be in developed countries or in countries considered by the Fund's Investment
Manager to have developing or "emerging" markets, which involves 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 the 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,
the 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 Investment
Manager believes that these characteristics may be expected to continue in the
future.
Most emerging securities markets have substantially less volume and are subject
to less governmental supervision than U.S. securities markets. Securities of
many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. In addition, there is less regulation
of securities exchanges, securities dealers, and listed and unlisted companies
in emerging markets than in the U.S.
Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
not kept pace with the volume of securities transactions. Delays in settlement
could result in temporary periods when a portion of the assets of the Fund is
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities are generally higher than costs associated with transactions in U.S.
securities. Such transactions also involve additional costs for the purchase or
sale of foreign currency.
Certain emerging markets require prior governmental approval of
investments by foreign persons, limit the amount of investment by foreign
persons in a particular company, limit the investment by foreign persons only to
a specific class of securities of a company that may have less advantageous
rights than the classes available for purchase by domiciliaries of the countries
and/or impose additional taxes on foreign investors. Certain emerging markets
may also restrict investment opportunities in issuers in industries deemed
important to national interest.
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<PAGE>
Certain 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 or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments.
In the course of investment in emerging markets, the Fund will be
exposed to the direct or indirect consequences of political, social and economic
changes in one or more emerging markets. While the Fund will manage its assets
in a manner that will seek to minimize the exposure to such risks, there can be
no assurance that adverse political, social or economic changes will not cause
the Fund to suffer a loss of value in respect of the securities in the Fund's
portfolio.
The risk also exists that an emergency situation may arise in one or
more emerging markets as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in such
markets may not be readily available. The Fund may suspend redemption of its
shares for any period during which an emergency exists, as determined by the
Securities and Exchange Commission. Accordingly if the Fund believes that
appropriate circumstances exist, it will promptly apply to the Securities and
Exchange Commission for a determination that an emergency is present. During the
period commencing from the Fund's identification of such condition until the
date of the Securities and Exchange Commission action, the Fund's securities in
the affected markets will be valued at fair value determined in good faith by or
under the direction of the Fund's Board.
Volume and liquidity in most foreign markets are less than in the U.S.,
and securities of many foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Fixed commissions on foreign securities
exchanges are generally higher than negotiated commissions on U.S. exchanges,
although the Fund endeavors to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of business and industry practices, securities exchanges, brokers,
dealers and listed companies than in the U.S. Mail service between the U.S. and
foreign countries may be slower or less reliable than within the U.S., thus
increasing the risk of delayed settlements of portfolio transactions or loss of
certificates for certificated portfolio securities. In addition, with respect to
certain emerging markets, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect the Fund's investments in those countries.
Moreover, individual emerging market economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
The Fund may have limited legal recourse in the event of a default with
respect to certain debt obligations it holds. If the issuer of a fixed-income
security owned by the Fund defaults, the Fund may incur additional expenses to
seek recovery. Debt obligations issued by emerging market country governments
differ from debt obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on private debt,
must be pursued in the courts of the defaulting party itself. The Fund's ability
to enforce its rights against private issuers may be limited. The ability to
attach assets to enforce a judgment may be limited. Legal recourse is therefore
somewhat diminished. Bankruptcy, moratorium and other similar laws applicable to
private issuers of debt obligations may be substantially different from those of
other countries. The political context, expressed as an emerging market
governmental issuer's willingness to meet the terms of the debt obligation, for
example, is of considerable importance. In addition, no assurance can be given
that the holders of commercial bank debt may not contest payments to the holders
of debt obligations in the event of default under commercial bank loan
agreements.
Income from securities held by the Fund could be reduced by a
withholding tax at the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. The Fund's net asset
5
<PAGE>
value may also be affected by changes in the rates or methods of taxation
applicable to the Fund or to entities in which the Fund has invested. The
Investment Manager will consider the cost of any taxes in determining whether to
acquire any particular investments, but can provide no assurance that the taxes
will not be subject to change.
Many emerging markets have experienced substantial, and, in some
periods, extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many emerging market countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of the
largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in the
Fund's portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
The ability of emerging market country governmental issuers to make
timely payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a withdrawal
of external funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations. In addition,
the cost of servicing emerging market debt obligations can be affected by a
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
Foreign Securities. Investing in foreign securities involves certain special
considerations, including those set forth below, which are not typically
associated with investing in U.S. securities and which may favorably or
unfavorably affect the Fund's performance. As foreign companies are not
generally subject to uniform
6
<PAGE>
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies, there may be
less publicly available information about a foreign company than about a
domestic company. Many foreign securities markets, while growing in volume of
trading activity, have substantially less volume than the U.S. market, and
securities of some foreign issuers are less liquid and more volatile than
securities of domestic issuers. Similarly, volume and liquidity in most foreign
bond markets is less than in the U.S. and, at times, volatility of price can be
greater than in the U.S. Fixed commissions on some foreign securities exchanges
and bid to asked spreads in foreign bond markets are generally higher than
commissions or bid to asked spreads on U.S. markets, although the Investment
Manager will endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less governmental supervision and regulation of
securities exchanges, brokers and listed companies in foreign countries than in
the U.S. It may be more difficult for the Fund's agents to keep currently
informed about corporate actions in foreign countries which may affect the
prices of portfolio securities. Communications between the U.S. and foreign
countries may be less reliable than within the U.S., thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. Payment for securities without delivery may be required in
certain foreign markets. In addition, with respect to certain foreign countries,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect U.S.
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. The management of the Fund
seeks to mitigate the risks associated with the foregoing considerations through
continuous professional management.
Euro. The implementation of the Euro may result in uncertainties for European
securities and the operation of the Fund. The Euro was introduced on January 1,
1999 by eleven members countries of the European Economic and Monetary Union
(EMU). Implementation of the Euro requires the redenomination of European debt
and equity securities over a period of time, which may result in various
accounting differences and/or tax treatments which would not otherwise occur.
Additional questions are raised by the fact that certain other European
Community members, including the United Kingdom, did not officially implement
the Euro on January 1, 1999.
High Yield/High Risk Bonds. The Fund may also purchase debt securities which are
rated below investment-grade (commonly referred to as "junk bonds"), that is,
rated below Baa by Moody's or below BBB by S&P and unrated securities judged to
be of equivalent quality as determined by the Investment Manager. These
securities usually entail greater risk (including the possibility of default or
bankruptcy of the issuers of such securities), generally involve greater
volatility of price and risk to principal and income, and may be less liquid,
than securities in the higher rating categories. The lower the ratings of such
debt securities, the more their risks render them like equity securities.
Securities rated D may be in default with respect to payment of principal or
interest. See the Appendix to this Statement of Additional Information for a
more complete description of the ratings assigned by ratings organizations and
their respective characteristics.
Issuers of 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 a sustained period of rising interest rates, 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 yield securities because
such securities are generally unsecured and are often subordinated to other
creditors of the issuer. Prices and yields of high yield securities will
fluctuate over time and, during
7
<PAGE>
periods of economic uncertainty, volatility of high yield securities may
adversely affect the Fund's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The Fund may have difficulty disposing of certain high yield (high risk)
securities because they may have a thin trading market. Because not all dealers
maintain markets in all high yield securities, the Fund anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. The lack of a liquid secondary market may have an adverse effect on
the market price and the Fund's ability to dispose of particular issues and may
also make it more difficult for the Fund to obtain accurate market quotations
for purposes of valuing the Fund's assets. Market quotations generally are
available on many high yield issues only from a limited number of dealers and
may not necessarily represent firm bids of such dealers or prices for actual
sales. Adverse publicity and investor perceptions may decrease the values and
liquidity of high yield securities. These securities may also involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
Credit quality in the high-yield securities market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
generally the policy of the Investment Manager not to rely exclusively on
ratings issued by established credit rating agencies, but to supplement such
ratings with its own independent and on-going review of credit quality. The
achievement of the Fund's investment objective by investment in such securities
may be more dependent on the Investment Manager's credit analysis than is the
case for higher quality bonds. Should the rating of a portfolio security be
downgraded, the Investment Manager will determine whether it is in the best
interests of the Fund to retain or dispose of such security.
Prices for below investment-grade securities may be affected by legislative and
regulatory developments. Also, Congress has from time to time considered
legislation which would restrict or eliminate the corporate tax deduction for
interest payments in these securities and regulate corporate restructurings.
Such legislation may significantly depress the prices of outstanding securities
of this type.
Illiquid Securities and Restricted Securities. The Fund may purchase securities
that are subject to legal or contractual restrictions on resale ("restricted
securities"). Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; (iii) in limited quantities after they have been
held for a specified period of time and other conditions are met pursuant to an
exemption from registration; or (iv) in a public offering for which a
registration statement is in effect under the Securities Act of 1933, as
amended. Issuers of restricted securities may not be subject to the disclosure
and other investor protection requirements that would be applicable if their
securities were publicly traded.
Restricted securities are often illiquid, but they may also be liquid. For
example, restricted securities that are eligible for resale under Rule 144A are
often deemed to be liquid. ).
[The Fund's Board has approved guidelines for use by the Investment Manager in
determining whether a security is liquid or illiquid. Among the factors the
Investment Manager may consider in reaching liquidity decisions relating to Rule
144A securities are: (1) the frequency of trades and quotes for the security;
(2) the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to make a market
in the security; and (4) the nature of the security and the nature of the market
for the security (i.e., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of the transfer).]
Issuers of restricted securities may not be subject to the disclosure and other
investor protection requirement that would be applicable if their securities
were publicly traded. Where a registration statement is required for the resale
of restricted securities, the Fund may be required to bear all or part of the
registration expenses. The Fund may be deemed to be an "underwriter" for
purposes of the Securities Act of 1933, as amended when
8
<PAGE>
selling restricted securities to the public and, in such event, the Fund may be
liable to purchasers of such securities if the registration statement prepared
by the issuer is materially inaccurate or misleading.
The Fund may also purchase securities that are not subject to legal or
contractual restrictions on resale, but that are deemed illiquid. Such
securities may be illiquid, for example, because there is a limited trading
market for them.
The Fund may be unable to sell a restricted or illiquid security. In addition,
it may be more difficult to determine a market value for restricted or illiquid
securities. Moreover, if adverse market conditions were to develop during the
period between the Fund's decision to sell a restricted or illiquid security and
the point at which the Fund is permitted or able to sell such security, the Fund
might obtain a price less favorable than the price that prevailed when it
decided to sell.
This investment practice, therefore, could have the effect of increasing the
level of illiquidity of the Fund.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the SEC which permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Manager. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating funds, including the following: (1) no fund may borrow money
through the program unless it receives a more favorable interest rate than a
rate approximating the lowest interest rate at which bank loans would be
available to any of the participating funds under a loan agreement; and (2) no
fund may lend money through the program unless it receives a more favorable
return than that available from an investment in repurchase agreements and, to
the extent applicable, money market cash sweep arrangements. In addition, the
Fund may participate in the program only if and to the extent that such
participation is consistent with the fund's investment objectives and policies
(for instance, money market funds would normally participate only as lenders and
tax exempt funds only as borrowers). Interfund loans and borrowings may extend
overnight, but could have a maximum duration of seven days. Loans may be called
on one day's notice. The Fund may have to borrow from a bank at a higher
interest rate if an interfund loan is called or not renewed. Any delay in
repayment to a lending fund could result in a lost investment opportunity or
additional costs. The program is subject to the oversight and periodic review of
the Boards of the participating funds. To the extent the Fund is actually
engaged in borrowing through the interfund lending program, the Fund, as a
matter of non-fundamental policy, may not borrow for other than temporary or
emergency purposes (and not for leveraging), except that the Fund may engage in
reverse repurchase agreements and dollar rolls for any purpose.
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
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of substantially all the companies in the S&P 500 in substantially the same
weighting and seeks to closely track the price performance and dividend yield of
the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Investment-Grade Bonds. The Fund may purchase "investment-grade" bonds, which
are those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P or, if
unrated, judged to be of equivalent quality as determined by the Investment
Manager. Moody's considers bonds it rates Baa to have speculative elements as
well as investment-grade characteristics. To the extent that the Fund invests in
higher-grade securities, the Fund will not be able to avail itself of
opportunities for higher income which may be available at lower grades.
Investment of Uninvested Cash Balances. The Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the SEC, the Fund may use
Uninvested Cash to purchase shares of affiliated funds including money market
funds, short-term bond funds and Scudder Cash Management Investment Trust, or
one or more future entities for which Scudder Kemper Investments acts as trustee
or investment advisor that operate as cash management investment vehicles and
that are excluded from the definition of investment company pursuant to section
3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (collectively, the
"Central Funds") in excess of the limitations of Section 12(d)(1) of the
Investment Company Act. Investment by the Fund in shares of the Central Funds
will be in accordance with the Fund's investment policies and restrictions as
set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Fund's ability to
manage Uninvested Cash.
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The Fund will invest Uninvested Cash in Central Funds only to the extent that
the Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers or other financial institutions, and are required to be secured
continuously by collateral in cash or liquid assets, maintained on a current
basis at an amount at least equal to the market value and accrued interest of
the securities loaned. The Fund has the right to call a loan and obtain the
securities loaned on five days' notice or, in connection with securities trading
on foreign markets, within such longer period of time which coincides with the
normal settlement period for purchases and sales of such securities in such
foreign markets. During the existence of a loan, the Fund continues to receive
the equivalent of any distributions paid by the issuer on the securities loaned
and also receives compensation based on investment of the collateral. The risks
in lending securities, as with other extensions of secured credit, consist of a
possible delay in recovery and a loss of rights in the collateral should the
borrower of the securities fail financially. Loans may be made only to firms
deemed by the Investment Manager to be of good standing and will not be made
unless, in the judgment of the Investment Manager, the consideration to be
earned from such loans would justify the risk.
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. The 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 the 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 privatizations will be successful or that
governments will not re-nationalize enterprises that have been privatized.
In the case of the enterprises in which the 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 or 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 an 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 the 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
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enterprises may not be able to operate effectively in a competitive market and
may suffer losses or experience bankruptcy due to such competition.
Real Estate Investment Trusts ("REITs"). REITs are sometimes informally
characterized as equity REITs, mortgage REITs and hybrid REITs. Investment in
REITs may subject the Fund to risks associated with the direct ownership of real
estate, such as decreases in real estate values, overbuilding, increased
competition and other risks related to local or general economic conditions,
increases in operating costs and property taxes, changes in zoning laws,
casualty or condemnation losses, possible environmental liabilities, regulatory
limitations on rent and fluctuations in rental income. Equity REITs generally
experience these risks directly through fee or leasehold interests, whereas
mortgage REITs generally experience these risks indirectly through mortgage
interests, unless the mortgage REIT forecloses on the underlying real estate.
Changes in interest rates may also affect the value of the Fund's investment in
REITs. For instance, during periods of declining interest rates, certain
mortgage REITs may hold mortgages that the mortgagors elect to prepay, which
prepayment may diminish the yield on securities issued by those REITs.
Certain REITs have relatively small market capitalizations, which may tend to
increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended, and to maintain exemption from the registration requirements of the
Investment Company Act of 1940, as amended. 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.
Repurchase Agreements. The Fund may invest in repurchase agreements pursuant to
its investment guidelines. In a repurchase agreement, the Fund acquires
ownership of a security and simultaneously commits to resell that security to
the seller, typically a bank or broker/dealer.
A repurchase agreement provides a means for the Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., the Fund) acquires a security ("Obligation") and the seller
agrees, at the time of sale, to repurchase the Obligation at a specified time
and price. Securities subject to a repurchase agreement are held in a segregated
account and, as described in more detail below, the value of such securities is
kept at least equal to the repurchase price on a daily basis. The repurchase
price may be higher than the purchase price, the difference being income to the
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to the Fund together with the repurchase price upon repurchase.
In either case, the income to the Fund is unrelated to the interest rate on the
Obligation itself. Obligations will be held by the custodian or in the Federal
Reserve Book Entry System.
[It is not clear whether a court would consider the Obligation
purchased by the Fund subject to a repurchase agreement as being owned by the
Fund or as being collateral for a loan by the Fund to the seller.] In the event
of the commencement of bankruptcy or insolvency proceedings with respect to the
seller of the Obligation before repurchase of the Obligation under a repurchase
agreement, the Fund may encounter delay and incur costs before being able to
sell the security. Delays may involve loss of interest or decline in price of
the Obligation. [If the court characterizes the transaction as a loan and the
Fund has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
risk of losing some or all of the principal and income involved in the
transaction.] As with any unsecured debt Obligation purchased for the Fund, the
Investment Manager seeks to reduce the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the Obligation. Apart from the risk of bankruptcy
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or insolvency proceedings, there is also the risk that the seller may fail to
repurchase the Obligation, in which case the Fund may incur a loss if the
proceeds to the Fund of the sale to a third party are less than the repurchase
price. However, if the market value (including interest) of the Obligation
subject to the repurchase agreement becomes less than the repurchase price
(including interest), the Fund will direct the seller of the Obligation to
deliver additional securities so that the market value (including interest) of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase such securities at an agreed time and
price. The Fund maintains a segregated account in connection with outstanding
reverse repurchase agreements. The Fund will enter into reverse repurchase
agreements only when the Investment Manager believes that the interest income to
be earned from the investment of the proceeds of the transaction will be greater
than the interest expense of the transaction. Such transactions may increase
fluctuations in the market value of Fund assets and its yield.
Small Company Risk. The Investment Manager believes that many small companies
may have sales and earnings growth rates which exceed those of larger companies,
and that such growth rates may in turn be reflected in more rapid share price
appreciation over time. However, investing in smaller company stocks involves
greater risk than is customarily associated with investing in larger, more
established companies. For example, smaller companies can have limited product
lines, markets, or financial and managerial resources. Smaller companies may
also be dependent on one or a few key persons, and may be more susceptible to
losses and risks of bankruptcy. Also, the securities of smaller companies may be
thinly traded (and therefore have to be sold at a discount from current market
prices or sold in small lots over an extended period of time). Transaction costs
in smaller company stocks may be higher than those of larger companies.
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 Manager's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of the Fund, and
the
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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 Manager's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put 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
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taking or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Manager must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Manager. The staff of the
SEC currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing 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
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Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, foreign sovereign debt,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
Fund will not sell put options if, as a result, more than 50% of the Fund's
total assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be consistent
with applicable regulatory requirements and in particular the rules and
regulations of the Commodity Futures Trading Commission and will be entered into
for bona fide hedging, risk management (including duration management) or other
portfolio and return enhancement management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
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
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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 Manager.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
The Fund generally will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund 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 Manager considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Manager believes
that the value of schillings will decline against the U.S. dollar, the Manager
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a
17
<PAGE>
direction that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Manager, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Manager's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, 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 Manager 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
18
<PAGE>
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 Manager.
If there is a default by the Counterparty, the Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid 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
19
<PAGE>
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.
Warrants. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by the Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
When-Issued Securities. The Fund may from time to time purchase equity and debt
securities on a "when-issued", "delayed delivery" or "forward delivery" basis.
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
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. When the Fund purchases such securities, it immediately assumes the
risks of ownership, including the risk of price fluctuation. Failure to deliver
a security purchased on this basis may result in a loss or missed opportunity to
make an alternative investment.
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. While such securities
may be sold prior to the settlement date, the Fund intends to purchase them 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 this basis, it will record the transaction and reflect the value of
the security in determining its net asset value. The market value of the
securities may be more or less than the purchase price. The Fund will establish
a segregated account in which it will maintain cash and liquid securities equal
in value to commitments for such securities.
20
<PAGE>
Zero Coupon Securities. The 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. The effect of owning instruments which do not make
current interest payments is that a fixed yield is earned not only on the
original investment but also, in effect, on all discount accretion during the
life of the obligation. This implicit reinvestment of earnings at the same rate
eliminates the risk of being unable to reinvest distributions at a rate as high
as the implicit yield on the zero coupon bond, but at the same time eliminates
any opportunity to reinvest earnings at higher rates. For this reason, zero
coupon bonds are subject to substantially greater price fluctuations during
periods of changing market interest rates than those of comparable securities
that pay interest currently, which fluctuation is greater as the period to
maturity is longer. Zero coupon securities which are convertible into common
stock offer the opportunity for capital appreciation (or depreciation) as
increases (or decreases) in 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.
INVESTMENT RESTRICTIONS
The following restrictions may not be changed with respect to the Fund without
the approval of a majority of the outstanding voting securities of the Fund
which, under the 1940 Act and the rules thereunder and as used in this Statement
of Additional Information, means the lesser of (i) 67% of the shares of the Fund
present at a meeting if the holders of more than 50% of the outstanding shares
of the Fund are present in person or by proxy, or (ii) more than 50% of the
outstanding shares of the Fund.
The Fund has elected to be classified as a diversified series of an open-end
investment company.
As a matter of fundamental policy, the Fund will not:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(3) purchase physical commodities or contracts relating to
physical commodities;
(4) concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(5) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(6) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities; and
21
<PAGE>
(7) make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
The Fund has adopted the following non-fundamental restrictions, which may be
changed by the Board without shareholder approval. The Fund may not:
(1) borrow money in an amount greater than 10% of its total
assets, except (i) for temporary or emergency purposes and
(ii) by engaging in reverse repurchase agreements, dollar
rolls, or other investments or transactions described in the
Fund's registration statement which may be deemed to be
borrowings;
(2) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value);
(7) lend portfolio securities in an amount greater than 5% (30%
for Kemper U.S. Growth and Income Fund)of its total assets;
and
(8) invest more than 15% of net assets in illiquid securities.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease beyond the specified limit resulting from a change in
values or net assets will not be considered a violation.
NET ASSET VALUE
The net asset value per share of the Fund is the value of one share and is
determined separately for each class by dividing the value of the Fund's net
assets attributable to the class by the number of shares of that class
outstanding. The 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 "Value Time"). The Exchange is
scheduled to be closed on the following holidays: New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas, and on the preceding Friday or
subsequent Monday when one of these holidays falls on a Saturday or Sunday,
respectively. Net asset value per share is determined separately for each class
of shares by dividing the value of the total assets of the Fund attributable to
the share of that class, less all liabilities, by the total number of shares
outstanding.
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<PAGE>
An exchange-traded equity security is valued at its most recent sale price on
the exchange it is traded as of the Value Time. Lacking any sales, the security
is valued at the calculated mean between the most recent bid quotation and the
most recent asked quotation (the "Calculated Mean") on such exchange as of the
Value Time. Lacking a Calculated Mean the security is valued at the most recent
bid quotation on such exchange as of the Value Time. An equity security which is
traded on the National Association of Securities Dealers Automated Quotation
("Nasdaq") system will be valued at its most recent sale price on such system as
of the Value Time. Lacking any sales, the security is valued at the most recent
bid quotation as of the Value Time. The value of an equity security not quoted
on the Nasdaq System, but traded in another over-the-counter market, is its most
recent sale price if there are any sales of such security on such market as of
the Value Time. Lacking any sales, the security is valued at the Calculated Mean
quotation for such security as of the Value Time. Lacking a Calculated Mean
quotation the security is valued at the most recent bid quotation as of the
Value Time.
Debt securities, other than money market instruments, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Money market instruments
with an original maturity of sixty days or less maturing at par shall be valued
at amortized cost, which the Board believes approximates market value. If it is
not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide market maker. If it is not possible to value a particular debt
security pursuant to the above methods, the Investment Manager of the particular
fund may calculate the price of that debt security, subject to limitations
established by the Board.
An exchange traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate on the
valuation date.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Valuation Committee, the value of a portfolio asset as
determined in accordance with these procedures does not represent the fair
market value of the portfolio asset, the value of the portfolio asset is taken
to be an amount which, in the opinion of the Valuation Committee, represents
fair market value on the basis of all available information. The value of other
portfolio holdings owned by the Fund is determined in a manner which, in the
discretion of the Valuation Committee most fairly reflects fair market value of
the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, MA, 02110, a subsidiary of Scudder Kemper, is
responsible for determining the daily net asset value per share of the Funds and
maintaining all accounting records related thereto. Pursuant to the Fund's
accounting agreement, the Fund pays 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.
Payments to Scudder Fund Accounting Corporation for the three most recent fiscal
periods are as follows:
23
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Fiscal Year/Period Fiscal Year/Period Fiscal Year/Period
Fund Ended ____: Ended ____: Ended ____:
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kemper Small Cap Value Fund
------------------------------------------------------------------------------------------------------------------
</TABLE>
PURCHASES
Additional Information About Opening an Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Class S
through Scudder Investor Services, Inc. by letter, fax, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have certified a tax identification number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. Investors interested in investing in
Class S must call 1-800-SCUDDER to get an account number. During the call the
investor will be asked to indicate the Fund name, class name, amount to be wired
($2,500 minimum for Class S and $1,000 for Class AARP), name of bank or trust
company from which the wire will be sent, the exact registration of the new
account, the tax identification number or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, Boston, MA 02101, ABA Number 011000028, DDA
Account 9903-5552. The investor must give the Scudder fund name, class name,
account name and the new account number. Finally, the investor must send a
completed and signed application to the Fund promptly.
The minimum initial purchase amount is less than $2,500 for Class S
under certain plan accounts.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Contact the Distributor at 1-800-SCUDDER for additional
information. A confirmation of the purchase will be mailed out promptly
following receipt of a request to buy. Federal regulations require that payment
be received within three business days. If payment is not received within that
time, the order is subject to cancellation. In the event of such cancellation or
cancellation at the purchaser's request, the purchaser will be responsible for
any loss incurred by the Fund or the principal underwriter by reason of such
cancellation. If the purchaser is a shareholder, each Trust shall have the
authority, as agent of the shareholder, to redeem shares in the account in order
to reimburse the Fund or the principal underwriter for the loss incurred. Net
losses on such transactions which are not recovered from the purchaser will be
absorbed by the principal underwriter. Any net profit on the liquidation of
unpaid shares will accrue to the Fund.
Minimum Balances
Shareholders should maintain a share balance worth at least $2,500 for
Class S. For fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act
24
<PAGE>
accounts, the minimum balance is $1,000 for Class S. These amounts may be
changed by the Board of Trustees. A shareholder may open an account with at
least $1,000 ($500 for fiduciary/custodial accounts), if an automatic investment
plan (AIP) of $100/month is established. Scudder group retirement plans and
certain other accounts have similar or lower minimum share balance requirements.
The Funds reserve the right, following 60 days' written notice to
applicable shareholders, to:
o for Class S assess an annual $10 per Fund charge (with the Fee
to be paid to the Fund) for any non-fiduciary/non-custodial
account without an automatic investment plan (AIP) in place
and a balance of less than $2,500 for Class S shareholders;
and
o redeem all shares in Fund accounts below $1,000 where a
reduction in value has occurred due to a redemption, exchange
or transfer out of the account. The Fund will mail the
proceeds of the redeemed account to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days written notice to applicable shareholders.
Additional Information About Making Subsequent Investments By Quickbuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the Fund may hold
the redemption proceeds for a period of up to seven business days. If you
purchase shares and there are insufficient funds in your bank account the
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing an QuickBuy Enrollment Form. After sending in an enrollment form
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund
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will not be liable for acting upon instructions communicated by telephone that
they reasonably believe to be genuine.
Investors interested in making subsequent investments should call
1-800-SCUDDER for Class S for further instruction.
Checks
A certified check is not necessary, but checks are only
accepted subject to collection at full face value in U.S. funds and
must be drawn on, or payable through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be
uncollectible, the Fund reserves the right to cancel the purchase immediately
and the purchaser may be responsible for any loss incurred by the Fund or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Fund will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted in, placing future orders in any of the
Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
per share next computed after receipt of the application in good order. Net
asset value normally will be computed for each class as of the close of regular
trading on each day during which the Exchange is open for trading. Orders
received after the close of regular trading on the Exchange will be executed at
the next business day's net asset value. If the order has been placed by a
member of the NASD, other than the Distributor, it is the responsibility of that
member broker, rather than the Fund, to forward the purchase order to Scudder
Service Corporation (the "Transfer Agent") in Boston by the close of regular
trading on the Exchange.
There is no sales charge in connection with the purchase of shares of
any class of the Fund.
Share Certificates
Due to the desire of the Fund's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Fund.
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Other Information
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for its shares. Those
brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Fund's Board and the Distributor, also the Fund's principal underwriter, each
has the right to limit the amount of purchases by, and to refuse to sell to, any
person. The Trustees and the Distributor may suspend or terminate the offering
of shares of the Fund at any time for any reason.
The "Tax Identification Number" section of the Application must be completed
when opening an account. Applications and purchase orders without a certified
tax identification number and certain other certified information (e.g., from
exempt organizations a certification of exempt status), will be returned to the
investor. The Fund reserves the right, following 30 days' notice, to redeem all
shares in accounts without a correct certified Social Security or tax
identification number. A shareholder may avoid involuntary redemption by
providing the applicable Fund with a tax identification number during the 30-day
notice period.
The Fund may issue shares at net asset value in connection with any merger or
consolidation with, or acquisition of the assets of, any investment company or
personal holding company, subject to the requirements of the 1940 Act.
EXCHANGES AND REDEMPTIONS
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder Fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $2,500 for Class S.
When an exchange represents an additional investment into an existing account,
the account receiving the exchange proceeds must have identical registration,
address, and account options/features as the account of origin. Exchanges into
an existing account must be for $100 or more for Class S. If the account
receiving the exchange proceeds is to be different in any respect, the exchange
request must be in writing and must contain an original signature guarantee.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at respective net asset
values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund, at current net asset value, through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
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Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. Each Trust and the Transfer Agent each reserves the right to suspend
or terminate the privilege of the Automatic Exchange Program at any time. There
is no charge to the shareholder for any exchange described above. An exchange
into another fund is a redemption of shares, and therefore may result in tax
consequences (gain or loss) to the shareholder, and the proceeds of such an
exchange may be subject to backup withholding. (See "TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Funds employ
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Funds
and the Transfer Agent each reserves the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time.
The Scudder Funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from Scudder Investor Services, Inc. a prospectus of
the Scudder fund into which the exchange is being contemplated. The exchange
privilege may not be available for certain Scudder Funds or classes of Scudder
Funds. For more information, please call 1-800-SCUDDER (for Class S).
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Redemption By Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $100,000 and have the proceeds mailed
to their address of record. Shareholders may also request by telephone to have
the proceeds mailed or wired to their predesignated bank account. In order to
request wire redemptions by telephone, shareholders must have completed and
returned to the Transfer Agent the application, including the designation of a
bank account to which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish the telephone redemption
privilege must complete the appropriate section on the
application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder pension and profit-sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption proceeds
should either return a Telephone Redemption Option Form
(available upon request), or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
If a request for a redemption to a shareholder's bank account is made
by telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is
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made that the redemption check be mailed to the designated bank account. There
will be a $5 charge for all wire redemptions.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a
participant in the Federal Reserve System, redemption proceeds must be
wired through a commercial bank which is a correspondent of the savings
bank. As this may delay receipt by the shareholder's account, it is
suggested that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire transfer
information with the telephone redemption authorization. If appropriate
wire information is not supplied, redemption proceeds will be mailed to
the designated bank.
The Fund employs procedure, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption requests by telephone (technically a repurchase agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption By Quicksell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and have elected to participate in
the QuickSell program may sell shares of the Fund by telephone. Redemptions must
be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account in two or three business days
following your call. For requests received by the close of regular trading on
the Exchange, normally 4 p.m. Eastern time, Shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing the following business day. QuickSell
transactions are not available for Scudder IRA accounts and most other
retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing a QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
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Redemption By Mail Or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with signature(s) guaranteed.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to any redemptions to
ensure that all necessary documents accompany the request. When shares are held
in the name of a corporation, trust, fiduciary agent, attorney or partnership,
the Transfer Agent requires, in addition to the stock power, certified evidence
of authority to sign. These procedures are for the protection of shareholders
and should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within seven (7) business days after receipt by the Transfer Agent of a
request for redemption that complies with the above requirements. Delays of more
than seven (7) days of payment for shares tendered for repurchase or redemption
may result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information call 1-800-SCUDDER.
Redemption-in-Kind
The Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Fund and valued as they are for purposes of computing the Fund's net asset
value (a redemption-in-kind). If payment is made in securities, a shareholder
may incur transaction expenses in converting these securities into cash. The
Fund has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which the Fund is obligated to redeem shares, with respect to any one
shareholder during any 90 day period, solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning of the
period.
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder receives in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than the shareholder's cost depending on the
net asset value at the time of redemption or repurchase. A wire charge may be
applicable for redemption proceeds wired to an investor's bank account.
Redemption of shares, including redemptions undertaken to effect an exchange for
shares of another Scudder fund, may result in tax consequences (gain or loss) to
the shareholder and the proceeds of such redemptions may be subject to backup
withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefore may be
suspended at times during which (a) the Exchange is closed,
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other than customary weekend and holiday closings, (b) trading on the Exchange
is restricted for any reason, (c) an emergency exists as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine the value of
its net assets, or (d) the SEC has by order permitted such a suspension for the
protection of each Trust's shareholders, provided that applicable rules and
regulations of the SEC (or any succeeding governmental authority) shall govern
as to whether the conditions prescribed in (b) or (c) exist.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional Shares of the Fund. A change of instructions for the method
of payment may be given to the Transfer Agent in writing at least five days
prior to a dividend record date. Shareholders may change their dividend option
by calling 1-800-SCUDDER for Class S or by sending written instructions to the
Transfer Agent. Please include your account number with your written request.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of the same class of the same Fund.
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through Scudder's Direct
Distributions Program. Shareholders who elect to participate in the Direct
Distributions Program, and whose predesignated checking account of record is
with a member bank of Automated Clearing House Network (ACH) can have income and
capital gain distributions automatically deposited to their personal bank
account usually within three business days after the Fund pays its distribution.
A Direct Distributions request form can be obtained by calling 1-800-SCUDDER for
Class S. Confirmation Statements will be mailed to shareholders as notification
that distributions have been deposited.
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"). 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. 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 the Fund's custodian describe the current
fees payable for its services as custodian. Investors should consult with their
own tax advisers before establishing a retirement plan.
DIVIDENDS. The Fund normally distributes annual dividends of net investment
income. The Fund distributes any net realized short-term and long-term capital
gains at least annually 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.
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The Fund may at any time vary its foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and
long-term capital gains as its Board determines appropriate under the then
current circumstances. In particular, and without limiting the foregoing, the
Fund may make additional distributions of net investment income or capital gain
net income in order to satisfy the minimum distribution requirements contained
in the Internal Revenue Code (the "Code").
Dividends paid by the Fund as to each class of its shares will be calculated in
the same manner, at the same time and on the same day. The level of income
dividends per share (as a percentage of net asset value) will be lower for Class
B and Class C shares than for Class A shares primarily as a result of the
distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same portion for
each class.
Income and capital gain dividends, if any, for the Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
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 gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset value;
or
(2) To receive both income and capital gain dividends in cash.
Any dividends of the Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have Fund dividends
invested in shares of the same class of another Kemper Fund at the net asset
value of such class of such other fund. To use this privilege of investing the
Fund's dividends in shares of another Kemper Fund, shareholders must maintain a
minimum account value of $1,000 in the Fund distributing the dividends. The Fund
will reinvest dividend checks (and future dividends) in shares of that same Fund
and class if checks are returned as undeliverable. Dividends and other
distributions of the Fund in the aggregate amount of $10 or less are
automatically reinvested in shares of the Fund unless the shareholder requests
that such policy not be applied to the shareholder's account.
PERFORMANCE INFORMATION
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures will be calculated in the following manner:
Average Annual Total Return
Average annual total return is the average annual compound rate of
return for the periods of one year and the life of the Fund, ended on the last
day of a recent calendar quarter. Average annual total return quotations reflect
changes in the price of the Fund's shares and assume that all dividends and
capital gains distributions during the respective periods were reinvested in
Fund shares. Average annual total return is calculated by finding the average
annual compound rates of return of a hypothetical investment over such periods,
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
T = Average Annual Total Return
P = a hypothetical initial payment of $1,000
n = number of years
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ERV = ending redeemable value: ERV is the value, at
the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Cumulative Total Return
Cumulative total return is the compound rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of the Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rate of return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P) -1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at
the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Total Return
Total return is the rate of return on an investment for a specified
period of time calculated in the same manner as cumulative total return.
Quotations of the Fund's performance are historical and are not
intended to indicate future performance. An investor's shares when redeemed may
be worth more or less than their original cost. Performance of the Fund will
vary based on changes in market conditions and the level of the Fund's expenses.
There may be quarterly periods following the periods reflected in the
performance bar chart in the Fund's prospectus which may be higher or lower than
those included in the bar chart.
FUND ORGANIZATION
Small Cap Value Fund is 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, 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. KVS
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 may offer multiple funds, each is known as a
"series company." Currently, KVS offers five classes of shares of the Fund.
These are Class S, 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 Manager and its affiliates; and (b) the following
investment advisory clients of the Manager and its investment advisory
affiliates that invest at least $1 million in the 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.
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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 the Fund have equal noncumulative voting rights except
that Class B and Class C shares have separate and exclusive voting rights with
respect to the Rule 12b-1 Plan. Shares of each class also have equal rights with
respect to dividends, assets and liquidation of such Fund subject to any
preferences (such as resulting from different Rule 12b-1 distribution fees),
rights or privileges of any classes of shares of the Fund. Shares of the Fund
are fully paid and nonassessable when issued, are transferable without
restriction and have no preemptive or conversion rights. The Board of Directors
of KVS 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.
The Fund's activities are supervised by KVS' Board of Directors, as applicable.
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. 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 KVS' 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 KVS' 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 Director 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 Directors have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Directors, 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 Directors may be removed (provided the aggregate number of Directors
after such removal shall not be less than one) with cause, by the action of
two-thirds of the remaining Directors. Any Trustee may be removed at any meeting
of shareholders by vote of two-thirds of the Outstanding Shares. The Directors
shall promptly call a meeting of the shareholders for the purpose of voting upon
the question of removal of any such Director 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 Directors will assist shareholder communications to the
extent provided for in Section 16(c) under the 1940 Act. A majority of the
Directors shall be present in person at any regular or special meeting of the
Directors 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 Directors present at any such meetings, at which a quorum is present, shall
be the act of the Directors.
The Fund is 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 will assist in communications with other
shareholders as required by Section 16(c) of the 1940 Act.
34
<PAGE>
Master/feeder structure
The Board has the discretion to retain the current distribution arrangement for
the Fund while investing in a master fund in a master/feeder structure fund as
described below.
A master/feeder fund structure is one in which the Fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
INVESTMENT MANAGER
Scudder Kemper Investments, Inc. (the "Investment Manager"), 345 Park Avenue,
New York, NY, an investment counsel firm, acts as investment adviser to the
Fund. This organization, the predecessor of which is Scudder, Stevens & Clark,
Inc., is one of the most experienced investment counsel firms in the U. S. It
was established as a partnership in 1919 and pioneered the practice of providing
investment counsel to individual clients on a fee basis. In 1928 it introduced
the first no-load mutual fund to the public. In 1953 the Investment Manager
introduced Scudder International Fund, Inc., the first mutual fund available in
the U.S. investing internationally in securities of issuers in several foreign
countries. The predecessor firm reorganized from a partnership to a corporation
on June 28, 1985. On December 31, 1997, Zurich Insurance Company ("Zurich")
acquired a majority interest in the Investment Manager, and Zurich Kemper
Investments, Inc., a Zurich subsidiary, became part of the Investment Manager.
The Investment Manager's name changed to Scudder Kemper Investments, Inc. On
September 7, 1998, the businesses of Zurich (including Zurich's 70% interest in
Scudder Kemper) and the financial services businesses of B.A.T Industries p.l.c.
("B.A.T") were combined to form a new global insurance and financial services
company known as Zurich Financial Services Group. By way of a dual holding
company structure, former Zurich shareholders initially owned approximately 57%
of Zurich Financial Services Group, with the balance initially owned by former
B.A.T shareholders. On October 17, 2000, the dual-headed holding company
structure of Zurich Financial Services Group, comprised of Allied Zurich p.l.c.
in the United Kingdom and Zurich Allied in Switzerland, was unified into a
single Swiss holding company, Zurich Financial Services.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Investment Manager's income is professional fees
received from providing continuous investment advice. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations as well as providing investment advice to over [XX] open and
closed-end mutual funds.
The Investment Manager maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Investment Manager receives
published reports and statistical compilations from issuers and other sources,
as well as analyses from brokers and dealers who may execute portfolio
transactions for the Investment Manager's clients.
35
<PAGE>
However, the Investment Manager regards this information and material as an
adjunct to its own research activities. The Investment Manager's international
investment management team travels the world, researching hundreds of companies.
In selecting the securities in which the Funds may invest, the conclusions and
investment decisions of the Investment Manager with respect to the Funds are
based primarily on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other clients
advised by the Investment Manager. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Investment Manager to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale orders for the Fund may be
combined with those of other clients of the Investment Manager in the interest
of achieving the most favorable net results to that fund.
In certain cases, the investments for the Fund are managed by the same
individuals who manage one or more other mutual funds advised by the Investment
Manager, that have similar names, objectives and investment styles. You should
be aware that the Funds are likely to differ from these other mutual funds in
size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of the Fundscan be expected to vary from those of these other mutual
funds.
The 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.
Under the Agreements, the Advisor provides the Fund with continuing investment
management for the Fund's portfolio consistent with the Fund's investment
objectives, policies and restrictions and determines what securities shall be
purchased for the portfolio of the Fund, what portfolio securities shall be held
or sold by the Fund and what portion of the Fund's assets shall be held
uninvested, subject always to the provisions of the Trust's Declaration of Trust
and By-Laws, the 1940 Act and the Code and to the 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 the Fund.
The Advisor also renders significant administrative services (not otherwise
provided by third parties) necessary for the 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 the
Fund (such as the Fund's transfer agent, pricing agents, custodian, accountants
and others); preparing and making filings with the SEC and other regulatory
agencies; assisting in the preparation and filing of the Fund's federal, state
and local tax returns; preparing and filing the Fund's federal excise tax
returns; assisting with investor and public relations matters; monitoring the
valuation of securities and the calculation of net asset value; monitoring the
registration of shares of the Fund under applicable federal and state securities
laws; maintaining the Fund's books and records to the extent not otherwise
maintained by a third party; assisting in establishing accounting policies of
the Fund; assisting in the resolution of accounting and legal issues;
establishing and monitoring the Fund's operating budget; processing
36
<PAGE>
the payment of the Fund's bills; assisting the Fund in, and otherwise arranging
for, the payment of distributions and dividends; and otherwise assisting the
Fund in the conduct of its business, subject to the direction and control of the
Directors.
The Advisor pays the compensation and expenses of all Directors, officers and
executive employees of the Corporation, as applicable, affiliated with the
Advisor and makes available, without expense to the Corporation, the services of
such Directors, officers and employees of the Advisor as may duly be elected
officers or Directors of the Corporation, subject to their individual consent to
serve and to any limitations imposed by law, and provides the Corporation's
office space and facilities, as applicable.
Under the Agreement the Fund is responsible for all of its other expenses
including organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; the calculation of net asset value; taxes and
governmental fees; the fees and expenses of the transfer agent; the cost of
preparing stock certificates and any other expenses including clerical expenses
of issue, redemption or repurchase of shares; the expenses of and the fees for
registering or qualifying securities for sale; the fees and expenses of
Directors, officers and employees of the Corporation who are not affiliated with
the Advisor; the cost of printing and distributing reports and notices to
shareholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses incurred in connection with litigation, proceedings and claims and the
legal obligation it may have to indemnify its officers and Directors with
respect thereto.
The Agreement expressly provides that the Advisor shall not be required to pay a
pricing agent of the Fund for portfolio pricing services, if any.
In reviewing the terms of the Agreements and in discussions with the Advisor
concerning such Agreements, the Directors of KVS who are not "interested
persons" of KVS have been represented by Vedder, Price, Kaufman & Kammholz, as
independent counsel at the Fund's expense.
The Agreement provides that the Advisor shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the 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 the Fund's custodian bank. It is the Advisor's
opinion that the terms and conditions of those transactions which have occurred
were not influenced by existing or potential custodial or other Fund
relationships.
None of the officers or Directors of KVS may have dealings with KVS as
principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of KVS.
The current investment management fee rates are payable monthly at the annual
rates shown below:
Small Cap
Average Daily Net Assets Value Fund
------------------------ ----------
$0 - $250 million 0.75%
$250 million - $1 billion 0.72
$1 billion - $2.5 billion 0.70
$2.5 billion - $5 billion 0.68
$5 billion - $7.5 billion 0.65
$7.5 billion - $10 billion 0.64
$10 billion - $12.5 billion 0.63
Over $12.5 billion 0.62
37
<PAGE>
The table below shows the total investment management fees paid by the Fund for
the last three fiscal years.
Fund Fiscal 2000 Fiscal 1999 Fiscal 1998
---- ----------- ----------- -----------
Small Cap Value Fund $5,893,000 $8,166,000
The Manager may serve as adviser to other funds with investment objectives and
policies similar to those of the Fund that may have different distribution
arrangements or expenses, which may affect performance.
Code of Ethics
The Fund, the Investment Manager and principal underwriter have each adopted
codes of ethics under rule 17j-1 of the Investment Company Act. Board members,
officers of the Fund and employees of the Investment Manager and principal
underwriter are permitted to make personal securities transactions, including
transactions in securities that may be purchased or held by the Funds, subject
to requirements and restrictions set forth in the applicable Code of Ethics. The
Investment Manager's Code of Ethics contains provisions and requirements
designed to identify and address certain conflicts of interest between personal
investment activities and the interests of the Fund. Among other things, the
Investment Manager's Code of Ethics prohibits certain types of transactions
absent prior approval, imposes time periods during which personal transactions
may not be made in certain securities, and requires the submission of duplicate
broker confirmations and quarterly reporting of securities transactions.
Additional restrictions apply to portfolio managers, traders, research analysts
and others involved in the investment advisory process. Exceptions to these and
other provisions of the Investment Manager's Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. State Street Bank and
Trust Company ("SSB"), 225 Franklin Street, Boston, Massachusetts 02110, as
custodian, has custody of all securities and cash of the Fund. It attends to the
collection of principal and income, and payment for and collection of proceeds
of securities bought and sold by the Fund. SSB is also the Fund's transfer agent
and dividend-paying agent. Pursuant to a services agreement with Kemper Service
Company ("KSvC"), an affiliate of Scudder Kemper, serves as "Shareholder Service
Agent" of the Fund and, as such, performs all of KSvC's duties as transfer agent
and dividend paying agent. KSVC also serves as the transfer agent and
dividend-paying agent.
IFTC receives as transfer agent, 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 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, an asset-based fee of
0.08% and out-of-pocket reimbursement.
-------------------------------------------------------------------------------
Fund Fees SSB Paid to KSvC
---- ---------------------
-------------------------------------------------------------------------------
Small Cap Value Fund
-------------------------------------------------------------------------------
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Fund's independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606
audit and report on the Fund's annual financial statements, review certain
regulatory reports and the Fund's federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Fund. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
LEGAL COUNSEL. Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street,
Chicago, Illinois 60601, serves as legal counsel to the Fund.
38
<PAGE>
TRUSTEES AND OFFICERS
The officers and Board members of the Fund, their birth dates, their principal
occupations and their affiliations, if any, with the Advisor 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>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Fund Occupation** Services, Inc.
--------------------- --------- ------------ --------------
<S> <C> <C> <C>
JAMES E. AKINS (10/15/26) Director of KVAL Consultant on International, --
2904 Garfield Terrace N.W. Political and Economic Affairs;
Washington, D.C.; formerly, a career United States
Foreign Service Officer; Energy
Advisor for the White House;
United States Ambassador to Saudi
Arabia, 1973-1976.
JAMES R. EDGAR (07/22/46) 1927 Trustee Distinguished Fellow, Institute --
County Road, 150E, Seymour, of Government and Public Affairs,
Illinois; University of Illinois; Director,
Kemper Insurance Companies;
formerly, Governor of the State
of Illinois, 1991-1999.
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 --
Trustee and Chairman
39
<PAGE>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Fund Occupation** Services, Inc.
--------------------- --------- ------------ --------------
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.
MARK S. CASADY (9/21/60) + President * Managing Director, Scudder Kemper.
PHILIP J. COLLORA (11/15/45)## Vice President, and Senior Vice President, Scudder
Secretary Kemper
ANN M. McCREARY (11/6/56) ++ Vice President Managing Director, Scudder Kemper.
KATHRYN L. QUIRK (12/3/52)++ Vice President* Managing Director, Scudder Kemper.
LINDA J. WONDRACK (9/12/64) + Vice President Senior Vice President, Scudder
Kemper.
40
<PAGE>
Position with
Underwriter,
Position Principal Scudder Investor
Name, Age and Address with Fund Occupation** Services, Inc.
--------------------- --------- ------------ --------------
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, Scudder --
Kemper; formerly, Associate,
Dechert Price & Rhoads (law firm)
1989 to 1997
THOMAS F. SASSI (11/7/42) ++ Vice President Managing Director, Scudder --
Kemper; formerly, consultant with
an unaffiliated investment
consulting firm and an officer of
an unaffiliated investment
banking firm from 1993 to 1996
JAMES M. EYSENBACH (4/1/62)@ Vice President Senior Vice President, Scudder --
Kemper.
WILLIAM F. TRUSCOTT Vice President Vice President, Scudder Kemper. --
9/14/60
</TABLE>
Total Compensation Kemper
Name of Trustee Small Cap Value Funds Paid to Trustees**
--------------- --------------- ------------------------
James E. Akins
James R. Edgar
Arthur R. Gottschalk*
41
<PAGE>
Frederick T. Kelsey
Fred B. Renwick
John G. Weithers
* Includes deferred fees and interest pursuant to deferred compensation
agreements with certain Kemper funds. Deferred amounts accrue interest
monthly at a rate equal to the yield of Zurich Money Funds - Zurich Money
Market fund. The total deferred amount and interest accrued for the fiscal
year ended November 30, 1999 for KVS is $66,700 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.
Principal Holders of Securities
As of December 31, 2000 the officers and Board members as a group owned less
than 1% of the Fund, and the following owned of record more than 5% of the
outstanding stock of the fund, as set forth below.
Small Cap Value Fund
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
NAME CLASS PERCENTAGE
---- ----- ----------
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
</TABLE>
Distributor
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with the Fund, Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Advisor, and a wholly-owned subsidiary of the Advisor, is the principal
underwriter and distributor for the shares of the Fund and acts as agent of the
Fund in the continuous offering of its shares. KDI bears all its expenses of
providing services pursuant to the distribution agreement, including the payment
of any commissions. The Fund pays the cost for the prospectus and shareholder
reports to be set in type and printed for existing shareholders, and KDI, as
principal underwriter, pays for the printing and distribution of copies thereof
used in connection with the offering of shares to prospective investors. KDI
also pays for supplementary sales literature and advertising costs. KDI may
enter into related selling group agreements with various broker-dealers,
including affiliates of KDI, that provide distribution services.
TAXES. The Fund intends 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, the Fund must satisfy certain income and asset diversification
requirements, and must distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term
42
<PAGE>
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 the 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 the Fund for reinvestment,
requiring federal income taxes to be paid thereon by the Fund, the Fund intends
to elect to treat such capital gains as having been distributed to shareholders.
As a result, each shareholder will report such capital gains as long-term
capital gains, will be able to claim a relative share of federal income taxes
paid by the Fund on such gains as a credit against personal federal income tax
liability, and will be entitled to increase the adjusted tax basis on Fund
shares by the difference between such gains reported and the individual tax
credit.
Certain foreign currency-related gains and losses earned by the Fund may be
treated as ordinary income or loss.
The current position of the Internal Revenue Service is to treat the 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 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 the 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. The Fund intends to declare or distribute dividends during the
appropriate periods of an amount sufficient to prevent imposition of the 4%
excise tax.
A shareholder who redeems shares of the Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the adjusted cost basis of the shares. Any loss
recognized on the redemption of shares held six months or less will be treated
as long-term capital loss to the extent that the shareholder has received any
long-term capital gain dividends on such shares. An exchange of the Fund's
shares for shares of another fund is treated as a redemption and reinvestment
for federal income tax purposes upon which gain or loss may be recognized. A
shareholder who has redeemed shares of the Fund or other Kemper Mutual Fund
(other than shares of Kemper Cash Reserves Fund not acquired by exchange from
another Kemper Mutual Fund) may reinvest the amount redeemed at net asset value
at the time of the reinvestment in shares of the Fund or in shares of a Kemper
Mutual Fund within six months of the redemption as described in the prospectus
under "Redemption or Repurchase of Shares -- Reinvestment Privilege." If
redeemed shares were held less than 91 days, then the lesser of (a) the sales
charge waived on the reinvested shares, or (b) the sales charge incurred on the
redeemed shares, is included in the basis of the reinvested shares and is not
included in the basis of the redeemed shares. If a shareholder realized a loss
on the redemption or exchange of the Fund's shares and reinvests in shares of
the same Fund 30 days before or after the redemption or exchange, the
transactions may be subject to the wash sale rules resulting in a postponement
of the recognition of such loss for federal income tax purposes.
Investment income derived from certain American Depository Receipts may be
subject to foreign income taxes withheld at the source. Because the amount of
the Fund's investments in various countries will change from time to time, it is
not possible to determine the effective rate of such taxes in advance.
Shareholders who are non-resident aliens are subject to U.S. withholding tax on
ordinary income dividends (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by any applicable tax treaty.
43
<PAGE>
To the extent that dividends from domestic corporations 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.
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 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
44
<PAGE>
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 intends to monitor its transactions in
options and futures and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, Section 1259 of the Code may require the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, under Section 1233(h) of the Code, if the Fund enters into a short
sale of property that becomes substantially worthless, that 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 such Fund each year, even though such 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 such Fund which
must be distributed to shareholders in order to maintain the qualification of
such 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.
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 applicable investment company
with their taxpayer identification numbers and with required certifications
regarding their status under the federal income tax law. Withholding may also be
required if a shareholder or the Fund is notified by the IRS or a broker that
the taxpayer identification number furnished by the shareholder is incorrect or
that the shareholder has previously
45
<PAGE>
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.
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 a Maryland corporation. Generally, the Fund should not be subject to
income or franchise tax in the State of Maryland, except to the extent that the
Fund incurs federal taxable income, if any, and 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.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Investment Manager.
The primary objective of the Investment Manager in placing orders for the
purchase and sale of securities for the Fund is to obtain the most favorable net
results, taking into account such factors as price, commission where applicable,
size of order, difficulty of execution and skill required of the executing
broker/dealer. The Investment Manager seeks to evaluate the overall
reasonableness of brokerage commissions paid (to the extent applicable) through
the familiarity of the Distributor with commissions charged on comparable
transactions, as well as by comparing commissions paid by the Fund to reported
commissions paid by others. The Investment Manager routinely reviews commission
rates, execution and settlement services performed and makes internal and
external comparisons.
The Fund's purchases and sales of fixed-income securities are generally placed
by the Investment Manager with primary market makers for these securities on a
net basis, without any brokerage commission being paid by the Fund. Trading
does, however, involve transaction costs. Transactions with dealers serving as
primary market
46
<PAGE>
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 Investment Manager's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Fund. The term "research, market and statistical information" 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 Investment Manager is authorized when placing portfolio transactions for the
Fund to pay a brokerage commission in excess of that which another broker might
charge for executing the same transaction on account of execution services and
the receipt of research, market or statistical information. The Investment
Manager may place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Investment Manager will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Investment
Manager; the Distributor will place orders on behalf of the Fund with issuers,
underwriters or other brokers and dealers. The Distributor will not receive any
commission, fee or other remuneration from the Fund for this service.
Although certain research, market and statistical services from broker/dealers
may be useful to the Fund and to the Investment Manager, it is the opinion of
the Investment Manager that such information only supplements the Investment
Manager's own research effort since the information must still be analyzed,
weighed, and reviewed by the Investment Manager's staff. Such information may be
useful to the Investment Manager in providing services to clients other than the
Fund, and not all such information is used by the Investment Manager in
connection with the Fund. Conversely, such information provided to the
Investment Manager by broker/dealers through whom other clients of the
Investment Manager effect securities transactions may be useful to the
Investment Manager in providing services to the Fund.
The Board reviews, from time to time, whether the recapture for the benefit of
the Fund of some portion of the brokerage commissions or similar fees paid by
the Fund on portfolio transactions is legally permissible and advisable.
[INSERT INDIVIDUAL DISCLOSURE REGARDING BROKERAGE COMMISSIONs PAID IN
THE LAST THREE YEARS.]
Portfolio Turnover
Portfolio turnover rate is defined by the SEC as the ratio of the lesser of
sales or purchases to the monthly average value of such securities owned during
the year, excluding all securities whose remaining maturities at the time of
acquisition were one year or less.
Higher levels of activity by the Fund result in higher transaction costs and may
also result in taxes on realized capital gains to be borne by the Fund's
shareholders. Purchases and sales are made for the Fund whenever necessary, in
management's opinion, to meet the Fund's objective.
Portfolio turnover rates for the three most recent fiscal periods are as
follows:
[See Item 12(e) of Form N-1A - Also explain any significant variation in the
Fund's portfolio turnover rates over the two most recently completed FYs or any
anticipated variation in the portfolio turnover rate from that reported for the
last fiscal year in response to Item 9.]
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Fiscal Year/Period Fiscal Year/Period Fiscal Year/Period
-----------------------------------------------------------------------------------------------------------------
47
<PAGE>
-----------------------------------------------------------------------------------------------------------------
Fund Ended _____: Ended _____: Ended _____:
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Value Fund
-----------------------------------------------------------------------------------------------------------------
</TABLE>
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-621-1048.
FINANCIAL STATEMENTS
The financial statements appearing in the Fund's Annual Report to Shareholders
are incorporated herein by reference. The Fund's Annual Report accompanies this
Statement of Additional Information.
APPENDIX -- RATINGS OF INVESTMENTS
Standard & Poor's Corporation Bond Ratings
AAA. Debt rated AAA had the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC and C. Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Moody's Investors Service, Inc., Bond Ratings
AAA. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but
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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.
Fitch Long-Term Debt Ratings
AAA
Highest credit quality. `AAA' ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA
Very high credit quality. `AA' ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A
High credit quality. `A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB
Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
BB
Speculative. `BB' ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B
Highly speculative. `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C
High default risk. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon sustained, favorable business or economic
developments. A `CC' rating indicates that default of some kind appears
probable. `C' ratings signal imminent default.
DDD, DD, D
Default. The ratings of obligations in this category are based on their
prospects for achieving partial or full
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recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. 'DDD' obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. 'DD' indicates potential recoveries in the range of 50%-90%,
and 'D' the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated 'DDD' have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated 'DD' and 'D' are generally undergoing a formal
reorganization or liquidation process; those rated 'DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated 'D' have a
poor prospect for repaying all obligations.
Fitch Short-Term Debt Ratings
F1
Highest credit quality. Indicates the Best capacity for timely payment of
financial commitments; may have an added "+" to denote any exceptionally strong
credit feature.
F2
Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3
Fair credit quality. The capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B
Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C
High default risk. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic
environment.
D
Default. Denotes actual or imminent payment default.
Commercial Paper Ratings
Commercial paper rated by Standard & Poor's Ratings Services ("S&P") has the
following characteristics: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated "A" or better. The issuer has
access to at least two additional channels of borrowing. Basic earnings and cash
flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1 or A-2.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service, Inc. ("Moody's"). Among the factors
considered by it in assigning ratings are the following: (1) evaluation of the
management of the issuer; (2) economic evaluation of the issuer's industry or
industries and an appraisal of speculative-type risks which may be inherent in
certain areas; (3) evaluation of the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the issuer;
and (8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations. Relative
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strength or weakness of the above factors determines whether the issuer's
commercial paper is rated Prime-1 or 2.
Municipal Notes
Moody's: The highest ratings for state and municipal short-term obligations are
"MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG 3" in the case of
an issue having a variable rate demand feature). Notes rated "MIG 1" or "VMIG 1"
are judged to be of the "best quality". Notes rated "MIG 2" or "VMIG 2" are of
"high quality," with margins or protection "ample although not as large as in
the preceding group". Notes rated "MIG 3" or "VMIG 3" are of "favorable
quality," with all security elements accounted for but lacking the strength of
the preceding grades.
S&P: The "SP-1" rating reflects a "very strong or strong capacity to pay
principal and interest". Notes issued with "overwhelming safety characteristics"
will be rated "SP-1+". The "SP-2" rating reflects a "satisfactory capacity" to
pay principal and interest.
Fitch: The highest ratings for state and municipal short-term
obligations are "F-1+," "F-1," and "F-2".
51
<PAGE>
KEMPER VALUE SERIES, INC.
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits.
-------- ---------
<S> <C> <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 September 7, 1998
is incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement.
2
<PAGE>
(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) Underwriting and Distribution Services Agreement between the Registrant and
Kemper Distributors, Inc. dated October 1, 1999 is incorporated by reference
to Post-Effective Amendment No. 25 to the Registration Statement.
(f) Selling Group Agreement is incorporated by reference to Post-Effective
Amendment No. 23 to the Registration Statement.
(g) (g)(1) 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
(g)(2) Amendment to Custody Contract between the Registrant and State Street Bank
dated March 31, 1999 is incorporated by reference to Post-Effective
Amendment No. 25 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) Amended Fee Schedule For Administrative Services Agreement between the
Registrant and Kemper Distributors, Inc. dated January 1, 2000 is
incorporated by reference to Post-Effective Amendment No. 25 to the
Registration Statement.
(h)(5)
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)(6)
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
3
<PAGE>
Registration Statement.
(h)(7) 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 amendment.
(j) Consent of Independent Auditors to be filed by 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) Rule 18f-3 Plan is incorporated by reference to Post-Effective Amendment No.
21 to the Registration Statement.
(p) (p)(1) Code of Ethics for Scudder Kemper Investments, Inc. and certain of its
subsidiaries, including Kemper Distributors, Inc. and Scudder Investor
Services, Inc., is filed herein.
(p)(2) Code of Ethics for Kemper Value Series, Inc. is filed herein.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Fund.
-------- --------------------------------------------------------
None
4
<PAGE>
Item 25. Indemnification.
-------- ----------------
The Registrant has obtained from a major insurance carrier a directors
and officers liability policy covering certain types of errors and omissions.
The Registrant's Bylaws provide for the indemnification of Registrant's officers
and directors.
However, in accordance with Section 17(h) and 17(I) of the Investment
Company Act of 1940 and its own terms under the Bylaws, in no event will
Registrant indemnify any of its directors, officers, employees or agents against
any liability to which such person would otherwise be subject by reason of his
willful misfeasance, bad faith, gross negligence in the performance of his
duties or by reason of his reckless disregard of the duties involved in the
conduct of his or her office.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, 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 director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, 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 directors' evaluation of
the Transaction, Zurich agreed to indemnify the Registrant and the directors who
were not interested persons of ZKI or Scudder (the "Independent Directors") for
and against any liability and expenses based upon any action or omission by the
Independent Directors 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 Directors for and against any liability and
expenses based upon any misstatements or omissions by Scudder to the Independent
Directors 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
---- ------------------------------------
5
<PAGE>
<S> <C>
Stephen R. Beckwith Treasurer, Scudder Kemper Investments, Inc.**
Director, Kemper Service Company
Director, Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director and Treasurer, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Director and Chairman, Scudder Threadneedle International Ltd.
Director, Scudder Kemper Holdings (UK) Ltd. oo
Director and President, Scudder Realty Holdings Corporation *
Director, Scudder, Stevens & Clark Overseas Corporation o
Director and Treasurer, Zurich Investment Management, Inc. xx
Director and Treasurer, Zurich Kemper Investments, Inc.
Lynn S. Birdsong Director, Vice President and Chief Investment Officer, Scudder Kemper Investments,
Inc. **
Director and Chairman, Scudder Investments (Luxembourg) S.A. #
Director, Scudder Investments (U.K.) Ltd. oo
Director and Chairman of the Board, Scudder Investments Asia, Ltd. ooo
Director and Chairman, Scudder Investments Japan, Inc. +
Senior Vice President, Scudder Investor Services, Inc.
Director and Chairman, Scudder Trust (Cayman) Ltd. @@@
Director, Scudder, Stevens & Clark Australia x
Director and Vice President, Zurich Investment Management, Inc. xx
Director and President, Scudder, Stevens & Clark Corporation **
Director and President, Scudder , Stevens & Clark Overseas Corporation o
Director, Scudder Threadneedle International Ltd.
Director, Korea Bond Fund Management Co., Ltd. @@
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company xxx
Nicholas Bratt Director and Vice President, Scudder Kemper Investments, Inc.**
Vice President, Scudder MAXXUM Company***
Vice President, Scudder, Stevens & Clark Corporation**
Vice President, Scudder, Stevens & Clark Overseas Corporation o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
6
<PAGE>
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, Chairman of the Board, Zurich Holding Company of America xxx
Director, ZKI Holding Corporation xx
Harold D. Kahn Chief Financial Officer, Scudder Kemper Investments, Inc.**
Kathryn L. Quirk Director and Secretary, Scudder, Stevens & Clark Overseas Corporation o
Director, Vice President and Secretary, Scudder Defined Contribution Services,
Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President, Chief Legal Officer and Secretary, Scudder Financial
Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd. @@
Director, Scudder Threadneedle International Ltd.
Director, Chairman of the Board and Secretary, Scudder Investments Canada, Ltd.
Director, Scudder Investments Japan, Inc. +
Director and Secretary, Scudder Kemper Holdings (UK) Ltd. oo
Director and Secretary, Zurich Investment Management, Inc. xx
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc. ###
President and Director, Scudder, Stevens & Clark Overseas Corporation o
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc. @
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of
Luxembourg
Director, Scudder Threadneedle International Ltd. oo
Director, Scudder Investments Japan, Inc. +
Director, Scudder Kemper Holdings (UK) Ltd. oo
President and Director, Zurich Investment Management, Inc. xx
Director and Deputy Chairman, Scudder Investment Holdings, Ltd.
</TABLE>
* Two International Place, Boston, MA
@ 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
@@@ Grand Cayman, Cayman Islands, British West Indies
o 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
xxx Zurich Towers, 1400 American Ln., Schaumburg, IL
@@ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
7
<PAGE>
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
oo 1 South Place 5th floor, London EC2M 2ZS England
ooo One Exchange Square 29th Floor, Hong Kong
+ Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon, Minato-ku,
Tokyo 105-0001
x Level 3, 5 Blue Street North Sydney, NSW 2060
Item 27. Principal Underwriters.
-------- -----------------------
(a)
Kemper Distributors, Inc. acts as principal underwriter of the
Registrant's shares and acts as principal underwriter of the Kemper
Funds.
(b)
Information on the officers and directors of Kemper Distributors, Inc.,
principal underwriter for the Registrant is set forth below. The
principal business address is 222 South Riverside Plaza, Chicago,
Illinois 60606.
<TABLE>
<CAPTION>
(1) (2) (3)
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
<S> <C> <C> <C>
Thomas V. Bruns President None
Linda C. Coughlin Director and Vice Chairman None
Kathryn L. Quirk Director, Secretary, Chief Legal
Officer and Vice President Vice President
James J. McGovern Chief Financial Officer and Treasurer None
Linda J. Wondrack Vice President and Chief Compliance Officer Vice President
Paula Gaccione Vice President None
Michael E. Harrington Managing Director None
Todd N. Gierke Assistant Treasurer None
Philip J. Collora Assistant Secretary Vice President and Secretary
Diane E. Ratekin Assistant Secretary None
Mark S. Casady Director and Chairman President
Terrence S. McBride Vice President None
Robert Froelich Managing Director None
C. Perry Moore Senior Vice President and Managing Director None
8
<PAGE>
Lorie O'Malley Managing Director None
William F. Glavin Managing Director None
Gary N. Kocher Managing Director None
Susan K. Crenshaw Vice President None
Johnston A. Norris Managing Director and Senior Vice President None
John H. Robison, Jr. Managing Director and Senior Vice President None
Robert J. Guerin Vice President None
Kimberly S. Nassar Vice President None
Scott B. David Vice President None
</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.
9
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this 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 29th day of
November, 2000.
KEMPER VALUE SERIES, INC.
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 29th day of November, 2000
on behalf of the following persons in the capacities indicated.
<TABLE>
<S> <C>
SIGNATURE TITLE
--------- -----
/s/ Thomas W. Littauer Chairman and Trustee
--------------------------------------
Thomas W. Littauer*
/s/ James E. Akins Trustee
--------------------------------------
James E. Akins*
/s/ Linda C. Coughlin Trustee
--------------------------------------
Linda C. Coughlin
/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
</TABLE>
*By: /s/ Philip J. Collora
---------------------------
Philip J. Collora**
** Attorney-in-fact pursuant to powers of attorney contained in and
incorporated by reference to the signature pages of Post-Effective
Amendment No. 23 to the Registration Statement, filed January 30, 1998,
and Post-Effective Amendment No. 24 to the Registration Statement,
filed November 26, 1999.
<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. 26
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 28
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
KEMPER VALUE SERIES, INC.
<PAGE>
KEMPER VALUE SERIES, INC.
EXHIBIT INDEX
Exhibit (p)(1)
Exhibit (p)(2)
2
