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STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 25, 1995
KEMPER WORLDWIDE 2004 FUND
120 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60603
1-800-621-1048
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus of Kemper Worldwide 2004 Fund (the "Fund"), a
series of Kemper Target Equity Fund (the "Trust"), dated October 25, 1995. The
prospectus may be obtained without charge from the Fund.
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TABLE OF CONTENTS
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Investment Restrictions........................................... B-1
Investment Policies and Techniques................................ B-2
Dividends and Taxes............................................... B-10
Performance....................................................... B-11
Investment Manager and Underwriter................................ B-13
Portfolio Transactions............................................ B-15
Purchase and Redemption of Shares................................. B-16
Officers and Trustees............................................. B-17
Shareholder Rights................................................ B-19
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The financial statements appearing in the Fund's 1995 Annual Report to
Shareholders are incorporated herein by reference. The Annual Report accompanies
this document.
KWF4 13 10/95 (LOGO)printed on recycled paper
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INVESTMENT RESTRICTIONS
Kemper Target Equity Fund (the "Trust") has adopted the following fundamental
investment restrictions which cannot be changed with respect to Kemper Worldwide
2004 Fund (the "Fund") without approval of a "majority" of its outstanding
shares, which means the lesser of (1) 67% of the Fund's shares present at a
meeting at which the holders of more than 50% of the outstanding shares are
present in person or by proxy; or (2) more than 50% of the Fund's outstanding
shares.
The Fund may not, as a fundamental policy:
(1) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States or any foreign government or their agencies or
instrumentalities) if, as a result, more than 5% of the Fund's total assets
would be invested in securities of that issuer. With respect to 75% of its total
assets, the Fund will limit its investments in the securities of any one foreign
government issuer to 5% of the Fund's total assets.
(2) Purchase more than 10% of any class of voting securities of any issuer.
(3) Make loans to others provided that the Fund may purchase debt obligations or
repurchase agreements and it may lend its securities in accordance with its
investment objectives and policies.
(4) Borrow money except as a temporary measure for extraordinary or emergency
purposes, and then only in an amount up to one-third of the value of its total
assets, in order to meet redemption requests without immediately selling any
portfolio securities. If, for any reason, the current value of the Fund's total
assets falls below an amount equal to three times the amount of its indebtedness
from money borrowed, the Fund will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary. The Fund will not
borrow for leverage purposes and will not purchase securities or make
investments while borrowings are outstanding.
(5) Pledge, hypothecate, mortgage or otherwise encumber more than 15% of its
total assets and then only to secure borrowings permitted by restriction 4
above. (The collateral arrangements with respect to options, financial futures
and delayed delivery transactions and any margin payments in connection
therewith are not deemed to be pledges or other encumbrances.)
(6) Purchase securities on margin, except to obtain such short-term credits as
may be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with options and financial futures transactions.
(7) Make short sales of securities or other assets or maintain a short position
for the account of the Fund unless at all times when a short position is open it
owns an equal amount of such securities or other assets or owns securities
which, without payment of any further consideration, are convertible into or
exchangeable for securities or other assets of the same issue as, and equal in
amount to, the securities or other assets sold short and unless not more than
10% of the Fund's total assets is held as collateral for such sales at any one
time.
(8) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may the Fund purchase put or call
options if more than 5% of the Fund's net assets would be invested in premiums
on put and call options, combinations thereof or similar options; however, the
Fund may buy or sell options on financial futures contracts.
(9) Purchase securities (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if as a result of such purchase
25% or more of the Fund's total assets would be invested in any one industry.
(10) Invest in commodities or commodity futures contracts, although it may buy
or sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate (including real estate limited
partnerships), although it may invest in securities which are secured by real
estate and securities of issuers which invest or deal in real estate including
real estate investment trusts.
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(11) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities. The Fund may buy and sell
securities outside the United States which are not registered with the
Securities and Exchange Commission or marketable in the United States.
(12) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number (4) in the latest
fiscal period and it has no present intention of borrowing during the current
year. The Trust has adopted the following non-fundamental restrictions, which
may be changed by the Board of Trustees without shareholder approval.
The Fund may not, as a non-fundamental policy:
(i) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(ii) Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved and only if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund, (ii)
5% of the Fund's total assets would be invested in any one such company, and
(iii) 10% of the Fund's total assets would be invested in such securities.
(iii) Invest more than 15% of its net assets in illiquid securities.
(iv) Invest in interests in oil, gas or other mineral exploration or development
programs or leases, although it may invest in the securities of issuers which
invest in or sponsor such programs.
(v) Invest more than 5% of the Fund's total assets in securities of issuers
(other than obligations of, or guaranteed by, the U.S. Government, its agencies
or instrumentalities) which with their predecessors have a record of less than
three years continuous operation and equity securities of issuers which are not
readily marketable.
(vi) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Trust or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
(vii) Invest for the purpose of exercising control or management of another
issuer.
(viii) Invest more than 5% of its total assets in restricted securities,
excluding restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in restricted securities will not exceed 10% of total
assets.
(ix) Invest more than 10% of its total assets in securities of real estate
investment trusts.
INVESTMENT POLICIES AND TECHNIQUES
GENERAL. The Fund may invest in Zero Coupon Treasuries and Foreign Securities
(as defined in the prospectus) and engage in futures and options transactions
and other investment techniques in accordance with its investment objectives and
policies. See "Investment Objectives, Policies and Risk Factors" in the
prospectus. Supplemental information concerning the Fund's investments and
certain investment techniques is set forth below.
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ZERO COUPON TREASURIES. There are currently two basic types of zero coupon
securities, those created by separating the interest and principal components of
a previously issued interest-paying security and those originally issued in the
form of a face amount only security paying no interest. Zero coupon securities
of the U.S. Government and certain of its agencies and instrumentalities and of
private corporate issuers are currently available, although the Fund will
purchase only those that represent direct obligations of the U.S. Government.
Zero coupon securities of the U.S. Government that are currently available are
called STRIPS (Separate Trading of Registered Interest and Principal of
Securities) or CUBES (Coupon Under Book-Entry Safekeeping). STRIPS and CUBES are
issued under programs introduced by the U.S. Treasury and are direct obligations
of the U.S. Government. The U.S. Government does not issue zero coupon
securities directly. The STRIPS program, which is ongoing, is designed to
facilitate the secondary market stripping of selected Treasury notes and bonds
into individual interest and principal components. Under the program, the U.S.
Treasury continues to sell its notes and bonds through its customary auction
process. However, a purchaser of those notes and bonds who has access to a
book-entry account at a Federal Reserve bank may separate the specified Treasury
notes and bonds into individual interest and principal components. The selected
Treasury securities may thereafter be maintained in the book-entry system
operated by the Federal Reserve in a manner that permits the separate trading
and ownership of the interest and principal payments. The Federal Reserve does
not charge a fee for this service; however, the book-entry transfer of interest
or principal components is subject to the same fee schedule generally applicable
to the transfer of Treasury securities.
Under the program, in order for a book-entry Treasury security to be separated
into its component parts, the face amount of the security must be an amount
which, based on the stated interest rate of the security, will produce a
semi-annual interest payment of $1,000 or a multiple of $1,000. Once a
book-entry security has been separated, each interest and principal component
may be maintained and transferred in multiples of $1,000 regardless of the face
amount initially required for separation or the resulting amount required for
each interest payment.
CUBES, like STRIPS, are direct obligations of the U.S. Government. CUBES are
coupons that have previously been physically stripped from Treasury notes and
bonds, but which were deposited with the Federal Reserve and are now carried and
transferable in book-entry form only. Only stripped Treasury coupons maturing on
or after January 15, 1988, that were stripped prior to January 5, 1987, were
eligible for conversion to book-entry form under the CUBES program.
Investment banks may also strip Treasury securities and sell them under
proprietary names. These securities may not be as liquid as STRIPS and CUBES and
the Fund has no present intention of investing in these instruments.
STRIPS and CUBES are purchased at a discount from $1,000. Absent a default by
the U.S. Government, a purchaser will receive face value for each of the STRIPS
and CUBES provided the STRIPS and CUBES are held to their due dates. While
STRIPS and CUBES can be purchased on any business day, they all currently come
due on February 15, May 15, August 15 or November 15.
FINANCIAL FUTURES CONTRACTS. The Fund may enter into financial futures contracts
for the future delivery of a financial instrument, such as a security, or an
amount of foreign currency, or the cash value of a securities index. This
investment technique is designed primarily to hedge (i.e., protect) against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might adversely affect the value of securities or other assets which
the Fund holds or intends to purchase. A "sale" of a futures contract means the
undertaking of a contractual obligation to deliver the securities or the cash
value of an index or foreign currency called for by the contract at a specified
price during a specified delivery period. A "purchase" of a futures contract
means the undertaking of a contractual obligation to acquire the securities or
cash value of an index or foreign currency at a specified price during a
specified delivery period. At the time of delivery in the case of fixed income
securities pursuant to the contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than that specified in the contract. In some cases, securities
called for by a futures contract may not have been issued at the time the
contract was written.
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Although some financial futures contracts by their terms call for the actual
delivery or acquisition of securities or other assets, in most cases a party
will close out the contractual commitment before delivery without having to make
or take delivery of the underlying assets by purchasing (or selling, as the case
may be) on a commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, if effected through a member of
an exchange, cancels the obligation to make or take delivery of the underlying
securities or other assets. All transactions in the futures market are made,
offset or fulfilled through a clearing house associated with the exchange on
which the contracts are traded. The Fund will incur brokerage fees when it
purchases or sells contracts, and will be required to maintain margin deposits.
At the time the Fund enters into a futures contract, it is required to deposit
with its custodian, on behalf of the broker, a specified amount of cash or
eligible securities, called "initial margin." The initial margin required for a
futures contract is set by the exchange on which the contract is traded.
Subsequent payments, called "variation margin," to and from the broker are made
on a daily basis as the market price of the futures contract fluctuates. The
costs incurred in connection with futures transactions could reduce the Fund's
return. Futures contracts entail risks. If the investment manager's judgment
about the general direction of markets or exchange rates is wrong, the overall
performance may be poorer than if no such contracts had been entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio assets being hedged. In addition, the market prices of
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because, from the point of view of speculators, the
margin requirements in the futures market are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities or other assets and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment manager may still not result in a successful hedging
transaction. If any of these events should occur, the Fund could lose money on
the financial futures contracts and also on the value of its assets.
OPTIONS ON FINANCIAL FUTURES CONTRACTS. The Fund may purchase and write call and
put options on financial futures contracts. An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time during
the period of the option. Upon exercise, the writer of the option delivers the
futures contract to the holder at the exercise price. The Fund would be required
to deposit with its custodian initial margin and maintenance margin with respect
to put and call options on futures contracts written by it. The Fund will
establish segregated accounts or will provide cover with respect to written
options on financial futures contracts in a manner similar to that described
under "Options on Securities." Options on futures contracts involve risks
similar to those risks relating to transactions in financial futures contracts
described above. Also, an option purchased by the Fund may expire worthless, in
which case the Fund would lose the premium paid therefor.
OPTIONS ON SECURITIES. The Fund may write (sell) "covered" call options on
securities so long as it owns the underlying securities subject to the option or
an option to purchase the same underlying securities, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain for the term of the option a segregated account
consisting of cash, U.S. Government securities or other liquid high grade debt
obligations ("eligible securities") having a value at least equal to the
fluctuating market value of the optioned securities. The Fund may write
"covered" put options provided that, as long as the Fund is obligated as a
writer of a put option, the Fund will own an option to sell the underlying
securities subject to the option, having an exercise price equal to or greater
than the exercise price of the "covered" option, or it will deposit and maintain
in a segregated account eligible securities having a value equal to or greater
than the exercise price of the option. A call option gives the purchaser the
right to buy, and the writer the obligation to sell, the underlying security at
the exercise price during the option period. A put option gives the purchaser
the right to sell, and the writer has the
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obligation to buy, the underlying security at the exercise price during the
option period. The premium received for writing an option will reflect, among
other things, the current market price of the underlying security, the
relationship of the exercise price to such market price, the price volatility of
the underlying security, the option period, supply and demand and interest
rates. The exercise price of an option may be below, equal to or above the
current market value of the underlying security at the time the option is
written. The Fund may write or purchase spread options, which are options for
which the exercise price may be a fixed dollar spread or yield spread between
the security underlying the option and another security it does not own, but
that is used as a bench mark. The buyer of a put who also owns the related
security is protected by ownership of a put option against any decline in that
security's price below the exercise price less the amount paid for the option.
The ability to purchase put options allows the Fund to protect capital gains in
an appreciated security it owns, without being required to actually sell that
security. At times the Fund would like to establish a position in a security
upon which call options are available. By purchasing a call option, the Fund is
able to fix the cost of acquiring the security, this being the cost of the call
plus the exercise price of the option. This procedure also provides some
protection from an unexpected downturn in the market because the Fund is only at
risk for the amount of the premium paid for the call option which it can, if it
chooses, permit to expire.
During the option period the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying asset rise
in value, and the secured put writer retains the risk of loss should the
underlying asset decline in value. For the covered call writer, substantial
appreciation in the value of the underlying asset would result in the asset
being "called away." For the secured put writer, substantial depreciation in the
value of the underlying asset would result in the asset being "put to" the
writer. If a covered call option expires unexercised, the writer realizes a gain
and the buyer a loss in the amount of the premium. If the covered call option
writer has to sell the underlying asset because of the exercise of the call
option, it realizes a gain or loss from the sale of the underlying asset, with
the proceeds being increased by the amount of the premium.
If a secured put option expires unexercised, the writer realizes a gain and the
buyer a loss in the amount of the premium. If the secured put writer has to buy
the underlying asset because of the exercise of the put option, the secured put
writer incurs an unrealized loss to the extent that the current market value of
the underlying asset is less than the exercise price of the put option minus the
premium received.
OVER-THE-COUNTER OPTIONS. As indicated in the prospectus (see "Investment
Objectives and Policies"), the Fund may deal in over-the-counter traded options
("OTC options"). OTC options differ from exchange traded options in several
respects. They are transacted directly with dealers and not with a clearing
corporation, and there is a risk of nonperformance by the dealer as a result of
the insolvency of such dealer or otherwise, in which event the Fund may
experience material losses. However, in writing options the premium is paid in
advance by the dealer. OTC options are available for a greater variety of
securities, and a wider range of expiration dates and exercise prices, than are
exchange traded options. Since there is no exchange, pricing is normally done by
reference to information from market makers, which information is carefully
monitored by the investment manager and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, the Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying asset until the option expires or the option is exercised. Therefore,
a covered call option writer of an OTC option may not be able to sell an
underlying asset even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the assets
pledged to secure the put for other investment purposes while it is obligated as
a put writer. Similarly, a purchaser of such put or call option might also find
it difficult to terminate its position on a timely basis in the absence of a
secondary market.
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The Fund understands the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The investment manager
disagrees with this position and has found the dealers with which it engages in
OTC options transactions generally agreeable to and capable of entering into
closing transactions. The Fund has adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse effect of such
transactions upon the liquidity of the Fund's portfolio. A brief description of
such procedures is set forth below.
The Fund will only engage in OTC options transactions with dealers approved by
the investment manager pursuant to procedures adopted by the Trust's Board of
Trustees. The investment manager believes that the approved dealers should be
able to enter into closing transactions if necessary and, therefore, present
minimal credit risks to the Fund. The investment manager will monitor the
creditworthiness of the approved dealers on an on-going basis. The Fund
currently will not engage in OTC options transactions if the amount invested by
the Fund in OTC options, plus a "liquidity charge" related to OTC options
written by the Fund, plus the amount invested by the Fund in illiquid
securities, would exceed 15% of the Fund's net assets. The "liquidity charge"
referred to above is computed as described below.
The Fund anticipates entering into agreements with dealers to which the Fund
sells OTC options. Under these agreements the Fund would have the absolute right
to repurchase the OTC options from the dealer at any time at a price no greater
than a price established under the agreements (the "Repurchase Price"). The
"liquidity charge" referred to above for a specific OTC option transaction will
be the Repurchase Price related to the OTC option less the intrinsic value of
the OTC option. The intrinsic value of an OTC call option for such purposes will
be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
will be the amount by which the exercise price exceeds the current market value
of the underlying security. If there is no such agreement requiring a dealer to
allow the Fund to repurchase a specific OTC option written by the Fund, the
"liquidity charge" will be the current market value of the assets serving as
"cover" for such OTC option.
OPTIONS ON SECURITIES INDICES. The Fund also may purchase and write call and put
options on securities indices in an attempt to hedge against market conditions
affecting the values of securities that the Fund owns or intends to purchase,
and not for speculation. Through the writing or purchase of index options, the
Fund can achieve many of the same objectives as through the use of options on
individual securities. Options on securities indices are similar to options on a
security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends upon price movements in the market generally (or in a particular
industry or segment of the market), rather than upon price movements in
individual securities. Price movements in securities that the Fund owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index since the prices of such securities may be affected by
somewhat different factors and, therefore, the Fund bears the risk that a loss
on an index option would not be completely offset by movements in the price of
such securities.
The Fund will cover call options written on a securities index by owning
securities whose price changes, in the opinion of the Fund's investment manager,
are expected to be similar to those of the index, or in such other manner as may
be in accordance with applicable laws, regulations and exchange rules. Price
changes of the securities owned will probably not be perfectly correlated with
the index. The Fund will secure put options written on a securities index by
segregating liquid high-grade securities equal to the exercise price, or in such
other manner as may be in accordance with applicable laws, regulations and
exchange rules. When the Fund writes an option on a securities index, it will be
required to deposit with its custodian and mark-to-market eligible securities
equal in value to at least 100% of the exercise price in the case of a put, or
the contract value in the case of a call. In addition, if the Fund writes a call
option on a securities index at a time when the contract value exceeds the
exercise price, the
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Fund will segregate and mark-to-market, until the option expires or is closed
out, cash or cash equivalents equal in value to such excess.
The Fund may also purchase and write options on other appropriate indices, as
available, such as foreign currency indices. Options on futures contracts and
index options involve risks similar to those risks relating to transactions in
financial futures contracts described above. Also, an option purchased by the
Fund may expire worthless, in which case the Fund would lose the premium paid
therefor.
FOREIGN CURRENCY OPTIONS. A foreign currency option provides the option buyer
with the right to buy or sell a stated amount of foreign currency at the
exercise price at a specified date or during the option period. A call option
gives its owner the right, but not the obligation, to buy the currency, while a
put option gives its owner the right, but not the obligation, to sell the
currency. The option seller (writer) is obligated to fulfill the terms of the
option sold if it is exercised. However, either seller or buyer may close its
position during the option period in the secondary market for such options any
time prior to expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the Fund against an adverse movement in the
value of a foreign currency, it does not limit the gain which might result from
a favorable movement in the value of such currency. For example, if the Fund
were holding securities denominated in an appreciating foreign currency and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, it would not have to exercise its put. Similarly, if the Fund has
entered into a contract to purchase a security denominated in a foreign currency
and had purchased a foreign currency call to hedge against a rise in value of
the currency but instead the currency had depreciated in value between the date
of purchase and the settlement date, the Fund would not have to exercise its
call but could acquire in the spot market the amount of foreign currency needed
for settlement.
FOREIGN CURRENCY FUTURES TRANSACTIONS. As part of its financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Fund may use foreign currency futures contracts
and options on such futures contracts. Through the purchase or sale of such
contracts, the Fund may be able to achieve many of the same objectives as
through forward foreign currency exchange contracts more effectively and
possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and are traded on boards of trade and commodities
exchanges. It is anticipated that such contracts may provide greater liquidity
and lower cost than forward foreign currency exchange contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days ("term") from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded directly between currency traders (usually large
commercial banks) and their customers. The Fund's investment manager believes
that it is important to have the flexibility to enter into such forward
contracts when it determines that to do so is in the best interests of a Fund. A
Fund will not speculate in foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction with respect to a forward contract, the Fund will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between the Fund's entering into
a forward contract for the sale of foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, the Fund would
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund would suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain which might result should the value of such currency increase.
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The Fund will have to convert its holdings of foreign currencies into U.S.
Dollars from time to time. Although foreign exchange dealers do not charge a fee
for conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
The Fund will not enter into such forward contracts or maintain a net exposure
in such contracts when the Fund would be obligated to deliver an amount of
foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency. The Fund does not intend to enter
into forward contracts for the purchase of a foreign currency if it would have
more than 15% of the value of its total assets committed to such contracts. The
Fund's custodian bank segregates cash or liquid high-grade securities in an
amount not less than the value of the Fund's total assets committed to forward
foreign currency exchange contracts entered into for the purchase of a foreign
currency. If the value of the securities segregated declines, additional cash or
securities is added so that the segregated amount is not less than the amount of
the Fund's commitments with respect to such contracts. The Fund generally does
not enter into a forward contract with a term longer than one year.
REGULATORY RESTRICTIONS. To the extent required to comply with SEC Release No.
IC-10666, when purchasing a futures contract, writing a put option or entering
into a forward foreign currency exchange purchase, the Fund will maintain in a
segregated account cash, U.S. Government securities or liquid high-grade debt
obligations equal to the value of such contracts. The Fund will use cover in
connection with selling a futures contract.
The Fund will not engage in transactions in financial futures contracts or
options thereon for speculation, but only to attempt to hedge against changes in
market conditions affecting the values of securities or other assets which the
Fund holds or intends to purchase.
FOREIGN DEBT SECURITIES. As reflected in the prospectus, the Fund as part of its
investments in Foreign Securities may invest in fixed income securities
(normally limited to 5% of net assets). The Fund will invest in foreign fixed
income securities based on KFS's analysis without relying on published ratings.
The Fund will invest in a particular security if in the view of KFS the
increased yield offered, regardless of published ratings, is sufficient to
compensate for the assumed risk. Since investments will be based upon KFS's
analysis rather than upon published ratings, achievement of the Fund's goals may
depend more upon the abilities of KFS than would otherwise be the case.
Investment in lower rated securities, while providing greater income and
opportunity for gain than investment in higher rated securities, entails
relatively greater risk of loss of income and principal.
The Fund may invest in emerging market and other foreign fixed income
securities. Investments in emerging market and other foreign securities involve
certain risk considerations not typically associated with investing in
securities of U.S. issuers, including: (a) currency devaluations and other
currency exchange rate fluctuations; (b) political uncertainty and instability,
including military coups and armed conflict; (c) more substantial government
involvement in the economy; (d) higher rates of inflation; (e) less government
supervision and regulation of the securities markets and participants in those
markets; (f) controls on foreign investment and limitations on repatriation of
invested capital and on the Fund's ability to exchange local currencies for U.S.
Dollars; (g) greater price volatility, substantially less liquidity and
significantly smaller capitalization of securities markets; (h) absence of
uniform accounting and auditing standards; (i) generally higher commission
expenses; (j) delay in settlement of securities transactions; and (k) greater
difficulty in enforcing shareholder rights and remedies.
Emerging markets may also present greater risks of nationalization,
expropriation and other confiscation than do developed markets. Such risks are
present in markets in Eastern Europe, for example, and these and the other risks
discussed above could affect adversely the economies of such markets or the
Fund's investments in such markets.
Income on Foreign Securities may be subject to withholding and other taxes,
which would reduce the yield on such securities to the Fund and which may not be
recoverable by the Fund or its shareholders. Because the Fund may invest in
foreign currency denominated securities, changes in foreign currency exchange
rates will affect the Fund's net asset value, the value of interest earned, and
gains and losses realized on the sale of securities denominated in foreign
currencies.
B-8
<PAGE> 10
The value of the fixed income securities held by the Fund, and thus the net
asset value of the Fund's shares, generally will fluctuate with (a) changes in
the perceived creditworthiness of the issuers of those securities, (b) movements
in interest rates, and (c) changes in the relative values of the currencies in
which the Fund's investments in fixed income securities are denominated with
respect to the U.S. Dollar. The extent of the fluctuation will depend on various
factors, such as the average maturity of the Fund's investments in foreign fixed
income securities, and the extent to which the Fund hedges its interest rate,
credit and currency exchange rate risks. Many of the foreign fixed income
obligations in which the Fund will invest will have long maturities. A longer
average maturity generally is associated with a higher level of volatility in
the market value of such securities in response to changes in market conditions.
Investments in sovereign debt involve special risks. Foreign governmental
issuers of debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal or pay interest when due.
In the event of default, there may be limited or no legal recourse in that,
generally, remedies for defaults must be pursued in the courts of the defaulting
party. Political conditions, especially a sovereign entity's willingness to meet
the terms of its fixed income securities, are of considerable significance.
Also, there can be no assurance that the holders of commercial bank loans to the
same sovereign entity may not contest payments to the holders of sovereign debt
in the event of default under commercial bank loan agreements. In addition,
there is no bankruptcy proceeding with respect to sovereign debt on which a
sovereign has defaulted, and the Fund may be unable to collect all or any part
of its investment in a particular issue.
Foreign investment in certain sovereign debt is restricted or controlled to
varying degrees, including requiring governmental approval for the repatriation
of income, capital or proceed of sales by foreign investors. These restrictions
or controls may at times limit or preclude foreign investment in certain
sovereign debt or increase the costs and expenses of the Fund. A significant
portion of the sovereign debt in which the Fund may invest is issued as part of
debt restructuring and such debt is to be considered speculative.
PRIVATIZED ENTERPRISES. 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 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 the enterprise's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which 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
B-9
<PAGE> 11
offering these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
effectively operate in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements, which are
instruments under which the Fund acquires ownership of a security from a
broker-dealer or bank that agrees to repurchase the security at a mutually
agreed upon time and price (which price is higher than the purchase price),
thereby determining the yield during the Fund's holding period. In the event of
a bankruptcy or other default of a seller of a repurchase agreement, the Fund
might incur expenses in enforcing its rights, and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The securities underlying a repurchase agreement will be marked-to-
market every business day so that the value of such securities is at least equal
to the investment value of the repurchase agreement, including any accrued
interest thereon. The Fund currently does not intend to invest more than 5% of
its net assets in repurchase agreements during the current year.
SHORT SALES AGAINST-THE-BOX. The Fund may make short sales against-the-box for
the purpose of deferring realization of gain or loss for federal income tax
purposes. A short sale "against-the-box" is a short sale in which the Fund owns
at least an equal amount of the securities or other assets sold short or
securities convertible into or exchangeable for, without payment of any further
consideration, securities or other assets of the same issue as, and at least
equal in amount to, the securities or other assets sold short. The Fund may
engage in such short sales only to the extent that not more than 10% of the
Fund's total assets (determined at the time of the short sale) is held as
collateral for such sales. The Fund currently does not intend, however, to
engage in such short sales to the extent that more than 5% of its net assets
will be held as collateral therefor during the current year.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund will normally distribute annual dividends of net investment
income and any net realized short-term and long-term capital gains. The Fund may
at any time vary the foregoing dividend practice and, therefore, reserves the
right from time to time either to distribute or to retain for reinvestment such
of its net investment income and its net short-term and long-term capital gains
as the Board of Trustees determines appropriate under then current
circumstances. In particular, and without limiting the foregoing, the Fund may
make additional distributions of net investment income or capital gain net
income in order to satisfy the minimum distribution requirements contained in
the Internal Revenue Code (the "Code"). Dividends will be reinvested in shares
of the Fund unless shareholders indicate in writing that they wish to receive
them in cash or in shares of other Kemper Funds. As reflected in the prospectus
(see "Dividends and Taxes"), shareholders must reinvest all dividends and hold
their shares until the Maturity Date in order to be assured of the benefit of
the Fund's Investment Protection.
TAXES. The Fund intends to continue to qualify as a regulated investment company
under Subchapter M of the Code and, if so qualified, will not be liable for
federal income taxes to the extent its earnings are distributed. One of the
Subchapter M requirements to be satisfied is that less than 30% of the Fund's
gross income during the fiscal year must be derived from gains (not reduced by
losses) from the sale or other disposition of securities and certain other
investments held for less than three months. The Fund may be limited in its
options, futures and foreign currency transactions in order to prevent
recognition of such gains.
The Fund's options, futures and foreign currency transactions are subject to
special tax provisions that may accelerate or defer recognition of certain gains
or losses, change the character of certain gains or losses, or alter the holding
periods of certain of the Fund's securities.
Gains and losses attributable to fluctuations in the value of foreign currencies
will be characterized generally as ordinary gain or loss under Section 988 of
the Code. For example, if the Fund sold a foreign bond and part of the gain or
loss on the sale was attributable to an increase or decrease in the value of a
foreign currency, then the
B-10
<PAGE> 12
currency gain or loss would be treated as ordinary income or loss. If such
transactions result in greater net ordinary income, the dividends paid by the
Fund will be increased; if the result of such transactions is lower net ordinary
income, a portion of dividends paid could be classified as a return of capital.
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 capital gain net income for the one-year period
ending October 31, plus any undistributed net investment income from the prior
calendar year, plus any undistributed capital gain net income from the one year
period ended October 31 in the prior calendar year, minus any overdistribution
in the prior calendar year. For purposes of calculating the required
distribution, foreign currency gains or losses occurring after October 31 are
taken into account in the following 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 Fund shares held six months or less will be
treated as long-term capital loss to the extent that the shareholder has
received any long-term capital gain dividends on such shares. A shareholder who
has redeemed shares of the Fund or any other Kemper Mutual Fund listed in the
prospectus under "Special Features--Combined Purchases" may reinvest the amount
redeemed at net asset value at the time of the reinvestment in shares of the
Fund or in shares of the other Kemper Mutual Funds within six months of the
redemption as described in the prospectus under "Redemption or Repurchase of
Shares--Reinvestment Privilege." If the redeemed shares were held less than 91
days, then the lesser of (a) the sales charge waived on the reinvestment shares,
or (b) the sales charge incurred on the redeemed shares is included in the basis
of the reinvestment shares and is not included in the basis of the redeemed
shares. If a shareholder realizes a loss on the redemption or exchange of Fund
shares and reinvests in the same Fund's shares within 30 days before or after
the redemption or exchange, the transactions may be subject to the wash sale
rules resulting in a postponement of the recognition of such loss for federal
income tax purposes. An exchange of Fund shares for shares of another fund is
treated as a redemption and reinvestment for federal income tax purposes.
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.
PERFORMANCE
As described in the prospectus, the Fund's historical performance or return may
be shown in the form of "average annual total return" and "total return"
figures. These various measures of performance are described below.
The Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for the Fund for a specific period
is found by first taking a hypothetical $1,000 investment ("initial investment")
in the Fund's shares on the first day of the period, adjusting to deduct the
maximum sales charge, and computing the "redeemable value" of that investment at
the end of the period. The redeemable value is then divided by the initial
investment, and this quotient is taken to the Nth root (N representing the
number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Average annual total return may
also be calculated without deducting the maximum sales charge.
Calculation of the Fund's total return is not subject to a standardized formula,
except when calculated for the Fund's "Financial Highlights" table in the Fund's
financial statements. Total return performance for a specific period is
calculated by first taking an investment (normally assumed to be $10,000)
("initial investment") in the Fund's shares on the first day of the period,
either adjusting or not adjusting to deduct the maximum sales charge, and
computing the "ending value" of that investment at the end of the period. The
total return percentage is then
B-11
<PAGE> 13
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 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 would be reduced if such
charge were included.
The Fund's performance figures are based upon historical results and are not
representative of future performance. The Fund's shares are sold at net asset
value plus a maximum sales charge of 5.0% of the offering price. Returns and net
asset value will fluctuate. Factors affecting the Fund's performance include
general market conditions, operating expenses and investment management. Any
additional fees charged by a dealer or other financial services firm would
reduce returns described in this section. Shares of the Fund are redeemable at
the then current net asset value, which may be more or less than original cost.
The figures below show performance information for the period ended June 30,
1994. Comparative information with respect to the Dow Jones Industrial Average,
the Standard & Poor's 500 Stock Index, Europe Australia Far East ("EAFE") Index,
the Consumer Price Index and the Lipper Balanced Target Maturity Fund Index is
also included, where available. There are differences and similarities between
the investments which the Fund may purchase for its portfolio and the
investments measured by such indexes. The Fund primarily invests in zero coupon
bonds and international equities in pursuing its objectives of providing a
guaranteed return of investment on the Maturity Date (November 15, 2004) to
investors who reinvest all dividends and hold their shares to the Maturity Date
and of providing a total return. Its net asset value and returns fluctuate. No
adjustment has been made for taxes payable on dividends. The period indicated
was one of fluctuating securities prices.
<TABLE>
<CAPTION>
VALUE OF FUND JUNE 30, 1995
--------------------------------------------------------------------------------------------------------
CAPITAL
TOTAL INITIAL GAIN INCOME ENDING PERCENTAGE ENDING PERCENTAGE
RETURN $10,000 DIVIDENDS DIVIDENDS VALUE INCREASE VALUE INCREASE
TABLE INVESTMENT(1) REINVESTED REINVESTED(2) (ADJUSTED)(1) (ADJUSTED)(1) (UNADJUSTED)(3) (UNADJUSTED)(3)
- ------------------ ------------ ---------- ------------ ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(9) $ 10,518 $0 $141 $ 10,659 6.6% $ 11,216 12.2%
One Year 10,495 0 141 10,636 6.4 11,191 11.9
<CAPTION>
COMPARED TO
-------------------------------------------------------
LIPPER
STANDARD EUROPE BALANCED
TOTAL DOW JONES & POOR'S AUSTRALIA CONSUMER TARGET
RETURN INDUSTRIAL 500(5) FAR EAST PRICE MATURITY
TABLE AVERAGE(4) INDEX INDEX(6) INDEX(7) FUND(8)
- ------------------ --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Life of Fund(9) 26.9% 25.1% 2.8% 3.5% 14.4%
One Year 29.1 26.0 2.0 3.0 16.1
</TABLE>
<TABLE>
<CAPTION>
AVERAGE
ANNUAL TOTAL DOW JONES STANDARD & POOR'S EUROPE AUSTRALIA CONSUMER
RETURN TABLE FUND INDUSTRIAL AVERAGE(4) 500 INDEX(5) FAR EAST INDEX(6) PRICE INDEX(7)
- ------------------------- ---- ---------------------- ------------------ -------------------- ---------------
<S> <C> <C> <C> <C> <C>
Life of Fund(9) 5.7 % 22.8% 21.3% 2.5% 3.0%
One Year 6.4 29.1 26.0 2.0 3.0
<CAPTION>
AVERAGE LIPPER
ANNUAL TOTAL BALANCED TARGET
RETURN TABLE MATURITY FUND(8)
- ------------------------- ----------------
<S> <C>
Life of Fund(9) 12.3%
One Year 16.1
</TABLE>
- ---------------
(1) The initial investment was adjusted for the maximum sales charge at the
beginning of the period.
(2) Includes short-term capital gain dividends, if any.
(3) The initial investment was not adjusted for the maximum sales charge at the
beginning of the period.
(4) The Dow Jones Industrial Average is an unmanaged weighted average of thirty
blue chip industrial corporations listed on the New York Stock Exchange.
Assumes reinvestment of dividends. Source is Towers Data Systems.
(5) The Standard & Poor's 500 Stock Index is an unmanaged unweighted average of
500 stocks, over 95% of which are listed on the New York Stock Exchange.
Assumes reinvestment of dividends. Source is Towers Data Systems.
(6) The EAFE Index (Morgan Stanley Capital International Europe, Australia, Far
East Index) is a generally accepted benchmark for performance of major
overseas markets. This Index is unmanaged and is U.S. Dollar adjusted.
Assumes reinvestment of dividends. Source is Towers Data Systems.
(7) The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. Source is Towers Data Systems.
(8) Lipper Balanced Target Maturity Fund Average is an unweighted average of
the performance of the mutual funds in that category. Performance is based
on changes in net asset value with all dividends reinvested and with no
adjustment for sales charges. Source is Lipper Analytical Services, Inc.
(9) Since May 3, 1994.
B-12
<PAGE> 14
The following table illustrates an assumed $10,000 investment in shares of the
Fund on May 3, 1994, which includes the current maximum sales charge of 5.0%,
with income and capital gain dividends, if any, reinvested in additional shares.
The table covers the period through June 30, 1995.
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
------------------------- ----------------------------------------------------
CAPITAL REINVESTED
PERIOD INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
6/30 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
- ------ ---------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1994 $ 0 $0 $ 9,525 $ 0 $0 $ 9,525
1995 $126 $0 $ 10,518 $141 $0 $10,659
</TABLE>
- ---------------
* Includes short-term capital gain dividends, if any.
The following table compares the performance of the Fund with that of other
mutual funds within the Balanced Target Maturity Fund category according to data
reported by Lipper Analytical Services, Inc. ("Lipper"), New York, New York,
which is a mutual fund reporting service. Lipper performance figures are based
on changes in net asset value, with all income and capital gain dividends
reinvested. Such calculations do not include the effect of any sales charges.
Future performance cannot be guaranteed. Lipper publishes performance analyses
on a regular basis.
<TABLE>
<CAPTION>
LIPPER BALANCED
TARGET MATURITY
FUND
---------------
<S> <C>
1 Year (Period ended 6/30/95)..................................................... 10 of 13
</TABLE>
The Lipper Balanced Target Maturity Fund category includes funds which invest to
provide a guaranteed return of investment at maturity (target periods).
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Kemper Financial Services, Inc. ("KFS"), 120 South LaSalle
Street, Chicago, Illinois 60603, is the Fund's investment manager. Pursuant to
an investment management agreement, KFS acts as the Fund's investment adviser,
manages its investments, administers its business affairs, furnishes office
facilities and equipment, provides clerical, bookkeeping and administrative
services, and permits any of its officers or employees to serve without
compensation as trustees or officers of the Trust if elected to such positions.
The investment management agreement provides that the Trust shall pay the
charges and expenses of its operations, including the fees and expenses of the
trustees (except those who are officers or employees of KFS), independent
auditors, counsel, custodian and transfer agent and the cost of share
certificates, reports and notices to shareholders, brokerage commissions or
transaction costs, costs of calculating net asset value, taxes and membership
dues. The Fund bears the expenses of registration of its shares with the
Securities and Exchange Commission, while KDI, as principal underwriter, pays
the cost of qualifying and maintaining the qualification of the Fund's shares
for sale under the securities laws of the various states. Kemper Retirement Fund
Series I through VI, each of which is a series of the Trust, are currently
subject to a different investment management agreement. The Trust's expenses are
generally allocated among the series on the basis of relative net assets at the
time of allocation, except that expenses directly attributable to a particular
series are charged to that series.
The Fund pays KFS an investment management fee, payable monthly, at an annual
rate of .60 of 1% of average daily net assets of the Fund. KFS has agreed to
reimburse the Fund to the extent required by applicable state expense
limitations should all operating expenses of the Fund, including the investment
management fees of KFS but excluding taxes, interest, distribution fees,
extraordinary expenses, brokerage commissions or transaction costs and any other
properly excludable expenses, exceed the applicable state expense limitations.
The Fund believes that the most restrictive state expense limitation currently
in effect would require that such operating expenses not exceed 2.5% of the
first $30 million of average daily net assets, 2% of the next $70 million and
1.5% of average daily net
B-13
<PAGE> 15
assets over $100 million. Under such state expense limitation, custodian costs
attributable to foreign securities that are in excess of similar domestic
custodian costs are excluded from operating expenses.
The investment management agreement provides that KFS shall not be liable for
any error of judgment or of law, or for any loss suffered by the Fund in
connection with the matters to which the agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
KFS in the performance of its obligations and duties, or by reason of its
reckless disregard of its obligations and duties under the agreement.
The investment management agreement continues in effect from year to year for
each series subject to the agreement so long as its continuation is approved at
least annually by (a) a majority of the trustees who are not parties to such
agreement or interested persons of any such party except in their capacity as
trustees of the Trust and (b) by the shareholders of each series or the Board of
Trustees. It may be terminated at any time upon 60 days' notice by either party,
or by a majority vote of the outstanding shares of a series with respect to that
series, and will terminate automatically upon assignment. If continuation is not
approved for a series, the investment management agreement nevertheless may
continue in effect for the series for which it is approved and KFS may continue
to serve as investment manager for the series for which it is not approved to
the extent permitted by the Investment Company Act of 1940. The management fee
and the expense limitation are computed based upon the average daily net assets
of all series subject to the agreement and are allocated among such series based
upon the relative net assets of each such series. Additional series may be
subject to the same or a different agreement.
For the services and facilities furnished to the Fund pursuant to the investment
management agreement during the fiscal year ended June 30, 1995 and the period
from May 3, 1994 to June 30, 1994, KFS received management fees aggregating
$129,000 and $3,000, respectively.
PRINCIPAL UNDERWRITER. Kemper Distributors, Inc. ("KDI"), a wholly owned
subsidiary of KFS, is the principal underwriter for shares of the Trust and acts
as agent of the Trust in the continuous offering of its shares. The Trust pays
the cost for the prospectus and shareholder reports to be set in type and
printed for existing shareholders, and KDI 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. Terms of continuation, termination and assignment under the
underwriting agreement are identical to those described above with regard to the
investment management agreement, except that termination other than upon
assignment requires six months' notice and continuation, amendment and
termination need not be on a series by series basis.
As principal underwriter for the Fund during the fiscal year ended June 30, 1995
and the period from May 3, 1994 to June 30, 1994, KDI retained commissions of
$119,000 and $27,000, respectively, after allowing $1,286,000 and $250,000,
respectively, as commissions to retail firms of which $328,000 and $90,000,
respectively, was paid to firms affiliated with KDI.
ADMINISTRATIVE SERVICES. Administrative services are provided to the Trust
under an administrative services agreement ("administrative agreement") with
KDI. KDI bears all its expenses of providing services pursuant to the
administrative agreement between KDI and the Trust, including the payment of any
service fees. The Trust pays KDI an administrative services fee, payable
monthly, at the annual rate of up to .25 of 1% of average daily net assets of
the Trust.
KDI enters into related arrangements with various financial services firms, such
as broker-dealers or banks ("firms"), that provide services and facilities for
their customers or clients who are shareholders of the Trust. The firms shall
provide such office space and equipment, telephone facilities and personnel as
is necessary or appropriate for providing information and services to their
clients. Such services and assistance may include, but are not limited to,
establishing and maintaining shareholder accounts and records, processing
purchase and redemption transactions, answering routine inquiries regarding the
Trust, and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. KDI pays such firms a
service fee, payable quarterly, at an annual rate of up to .25 of 1% of the net
assets in Trust accounts that they maintain and service
B-14
<PAGE> 16
commencing with the month after investment. Firms to which service fees may be
paid include broker-dealers affiliated with KDI.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Trust. Currently, the
administrative services fee payable to KDI is based only upon Trust assets in
accounts for which there is a firm listed on the Trust's records and it is
intended that KDI will pay all the administrative services fees that it receives
from the Trust to firms in the form of service fees. The effective
administrative services fee rate to be charged against all assets of the Trust
while this procedure is in effect would depend upon the proportion of Trust
assets that is in accounts for which there is a firm of record. The Board of
Trustees, in its discretion, may approve basing the fee to KDI on all Trust
assets in the future.
During the fiscal year ended June 30, 1995 and the period from May 3, 1994 to
June 30, 1994, the Fund incurred an administrative services fee of $49,000 and
less than $1,000, respectively, all of which was paid as services fees to firms,
including $14,000 and less than $1,000, respectively, to firms affiliated with
KDI.
Certain trustees or officers of the Trust are also directors or officers of KFS
and/or KDI as indicated under "Officers and Trustees."
CUSTODIAN AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary Trust Company
("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as custodian and
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, as sub-custodian, have custody of all securities and cash of the Trust
maintained in the United States. The Chase Manhattan Bank, N.A., Chase MetroTech
Center, Brooklyn, New York 11245, as custodian, has custody of all securities
and cash of the Trust held outside the United States. They attend to the
collection of principal and income, and payment for and collection of proceeds
of securities bought and sold by the Fund. IFTC is also the Trust's transfer
agent and dividend-paying agent. Pursuant to a services agreement with IFTC,
Kemper Service Company ("KSVC"), an affiliate of KFS, serves as "Shareholder
Service Agent of the Fund and, as such, performs all of IFTC's duties as
transfer agent and dividend paying agent." IFTC receives from the Fund as
transfer agent, and pays to KSVC, annual account fees of $6 per account plus
account set up, transaction and maintenance charges and out-of-pocket expense
reimbursement. IFTC's fee is reduced by certain earnings credits in favor of the
Fund. During the 1995 fiscal year, IFTC remitted shareholder service fees of
$40,000 to KSVC as Shareholder Service Agent.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Trust'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 return, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Trust. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
PORTFOLIO TRANSACTIONS
KFS is the investment manager for the Kemper Funds and KFS and its affiliates
also furnish investment management services to other clients including Kemper
Corporation and the Kemper insurance companies. KFS is the sole shareholder of
Kemper Asset Management Company and Kemper Investment Management Company
Limited. These three entities share some common research and trading facilities.
At times investment decisions may be made to purchase or sell the same
investment securities for the Fund and for one or more of the other clients
advised by KFS. When two or more of such clients are simultaneously engaged in
the purchase or sale of the same security through the same trading facility, the
transactions are allocated as to amount and price in a manner considered
equitable to each.
National securities exchanges have established limitations governing the maximum
number of options in each class which may be written by a single investor or
group of investors acting in concert. An exchange may order the liquidation of
positions found to be in violation of these limits, and it may impose certain
other sanctions. These position limits may restrict the number of options the
Fund will be able to write on a particular security.
B-15
<PAGE> 17
The above mentioned factors may have a detrimental effect on the quantities or
prices of securities and options and futures contracts available to the Fund. On
the other hand, the ability of the Fund to participate in volume transactions
may produce better executions for the Fund in some cases. The Board of Trustees
of the Trust believes that the benefits of KFS's organization outweigh any
limitations that may arise from simultaneous transactions or position
limitations.
KFS, in effecting purchases and sales of portfolio securities for the account of
the Fund, will implement the Fund's policy of seeking best execution of orders,
which includes best net prices, except to the extent that KFS may be permitted
to pay higher brokerage commissions for research services as described below.
Consistent with this policy, orders for portfolio transactions are placed with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services which include execution, clearance procedures,
wire service quotations and statistical and other research information provided
to the Fund and KFS. Any research benefits derived are available for all
clients, including clients of affiliated companies. Since it is only
supplementary to KFS's research efforts and must be analyzed and reviewed by
KFS's staff, the receipt of research information is not expected to materially
reduce expenses. In selecting among firms believed to meet the criteria for
handling a particular transaction, KFS may give consideration to those firms
that have sold or are selling shares of the Fund and other funds managed by KFS
and its affiliates, as well as to those firms that provide market, statistical
and other research information to the Fund and KFS, although KFS is not
authorized to pay higher commissions or, in the case of principal trades, higher
prices to firms that provide such services, except as described below.
KFS may in certain instances be permitted to pay higher brokerage commissions
(not including principal trades) solely for receipt of market, statistical and
other research services. Subject to Section 28(e) of the Securities Exchange Act
of 1934 and procedures adopted by the Board of Trustees of the Trust, the Fund
could pay a firm that provides research services to KFS a commission for
effecting a securities transaction for the Fund in excess of the amount other
firms would have charged for the transaction if KFS determines in good faith
that the greater commission is reasonable in relation to the value of the
research services provided by the executing firm viewed in terms either of a
particular transaction or KFS's overall responsibilities to the Fund or other
clients. Not all of such research services may be useful or of value in advising
the Fund. Research benefits will be available for all clients of KFS and its
subsidiaries. The investment management fee paid by the Fund to KFS is not
reduced because KFS receives these research services.
During the fiscal year ended June 30, 1995, the Fund paid portfolio brokerage
commissions of $179,000; and of this amount 6% was allocated to broker-dealer
firms either on the basis of research information or sales of Kemper Mutual Fund
shares and during the period from May 3, 1994 to June 30, 1994, the Fund paid
portfolio brokerage commissions of $8,000.
PURCHASE AND REDEMPTION OF SHARES
During the Offering Period described in the prospectus (see "Purchase of
Shares"), Fund shares are sold at their public offering price, which is the net
asset value next determined after an order is received in proper form plus a
sales charge as described in the Fund's prospectus. The minimum initial
investment is $1,000 and the minimum subsequent investment is $100, but such
minimum amounts may be changed at any time. See the prospectus for certain
exceptions to these minimums. An order for the purchase of shares that is
accompanied by a check drawn on a foreign bank (other than a check drawn on a
Canadian bank in U.S. Dollars) will not be considered in proper form and will
not be processed unless and until the Fund determines that it has received
payment of the proceeds of the check. The time required for such determination
will vary and cannot be determined in advance. The amount received by a
shareholder upon redemption or repurchase may be more or less than the amount
paid for such shares depending on the market value of the Fund's portfolio
securities at the time; provided, however, shareholders who hold their shares to
the Maturity Date and reinvest their dividends will receive the benefit of the
Fund's Investment Protection.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares will be redeemed by the Fund at the applicable net asset value as
described in the Fund's prospectus. The redemption within one year of shares
B-16
<PAGE> 18
purchased at net asset value under the Large Order NAV Purchase Privilege
described in the prospectus may be subject to a 1% contingent deferred sales
charge (see "Purchase of Shares" in the prospectus). When the Fund is asked to
redeem shares for which it may not yet have received good payment, it may delay
the mailing of a redemption check until it has determined that collected funds
have been received for the purchase of such shares, which will be up to 15 days.
Scheduled variations in or the elimination of the sales charge for purchases by
certain classes of persons or through certain types of transactions as described
in the prospectus is provided because of expected economies in sales and
sales-related efforts.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange (the "Exchange") is
closed other than customary weekend and holiday closings or during any period in
which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of the Fund's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the value of its net assets, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection of
the Fund's shareholders.
Although it is the Fund's present policy to redeem in cash, if the Board of
Trustees determines that a material adverse effect would be experienced by the
remaining shareholders if payment were made wholly in cash, the Fund will
satisfy the redemption request in whole or in part by a distribution of
portfolio securities in lieu of cash, in conformity with the applicable rules of
the Securities and Exchange Commission, taking such securities at the same value
used to determine net asset value, and selecting the securities in such manner
as the Board of Trustees may deem fair and equitable. If such a distribution
occurred, shareholders receiving securities and selling them could receive less
than the redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in cash. The Trust has elected to be governed by Rule 18f-1 under the
Investment Company Act of 1940 pursuant to which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net assets of
the Fund during any 90-day period for any one shareholder of record.
OFFICERS AND TRUSTEES
The officers and trustees of the Trust, their birthdates, their principal
occupations and their affiliations, if any, with KFS, the Fund's investment
adviser and KDI, the Fund's principal underwriter, are as follows (The number
following each person's title is the number of investment companies managed by
KFS or an affiliate for which he or she holds similar positions):
JAMES B. AKINS (10/15/26), Director (11), 2904 Garfield Terrace N.W.,
Washington, D.C.; Consultant on International, Political and Economic Affairs;
formerly a career United States Foreign Service Officer; Energy Adviser for the
White House; United States Ambassador to Saudi Arabia.
ARTHUR R. GOTTSCHALK (2/13/25), Trustee (11), 10642 Brookridge Drive, Frankfort,
Illinois; Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; Member, Board of Governors, Heartland
Institute/Illinois; formerly, Illinois State Senator.
FREDERICK T. KELSEY (4/25/27), Trustee (11), 3133 Laughing Gull Court, John's
Island, South Carolina; Retired; formerly, consultant to Goldman, Sachs & Co.;
formerly, President, Treasurer and Trustee of Institutional Liquid Assets and
its affiliated mutual funds; Trustee of the Benchmark Fund and the Pilot Fund.
DAVID B. MATHIS* (4/13/38), Trustee (33), Kemper Center, Long Grove, Illinois;
Chairman, Chief Executive Officer and Director of Kemper Corporation; Director,
KFS, Kemper Financial Companies, Inc., several other Kemper Corporation
subsidiaries and IMC Global Inc.; Chairman of the Board, Lumbermens Mutual
Casualty Company.
FRED B. RENWICK (2/1/30), Director (11), 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director;
TIFF Industrial Program, Inc.; Director, The Wartberg Home
B-17
<PAGE> 19
Foundation; Chairman Investment Committee of Morehouse College Board of
Trustees; Chairman, American Bible Society Investment Committee; previously
member of the Investment Committee of Atlanta University Board of Trustees;
previously Director of Board of Pensions Evangelical Lutheran Church in America.
STEPHEN B. TIMBERS (8/8/44), President and Trustee* (33), 120 S. LaSalle St.,
Chicago, Illinois; Chairman, Chief Executive Officer, Chief Investment Officer
and Director, KFS; President, Chief Operating Officer and Director, Kemper
Corporation; Director, Kemper Financial Companies, Inc., KDI; Gillett Holdings,
Inc. and LTV Corporation.
JOHN B. TINGLEFF (5/4/35), Trustee (11), 2015 South Lake Shore Drive, Harbor
Springs, Michigan; Retired; formerly President, Tingleff & Associates
(management consulting firm); formerly, Senior Vice President, Continental
Illinois National Bank & Trust Company.
JOHN G. WEITHERS (8/8/33), Trustee (11), 311 Springlake, Hinsdale, Illinois;
Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago
Stock Exchange; Director, Federal Life Insurance Company; President of the
Members of the Corporation and Trustee, DePaul University.
JOHN E. PETERS (11/4/47), Vice President* (33), 120 South LaSalle Street,
Chicago, Illinois; Senior Executive Vice President, KFS; President and Director,
KDI.
TRACY McCORMICK CHESTER (9/27/54), Vice President* (3), 120 South LaSalle
Street, Chicago, Illinois; Senior Vice President and Portfolio Manager, Kemper
Financial Services, Inc.; formerly, Portfolio Manager for Fiduciary Management;
prior thereto, independent consultant managing private accounts.
DENNIS H. FERRO (6/20/45), Vice President* (3), 120 South LaSalle Street,
Chicago, Illinois; Executive Vice President and Director of International Equity
Investments, Kemper Financial Services, Inc.; prior thereto, President, Managing
Director and Chief Investment Officer of an international investment advisory
firm.
CHARLES F. CUSTER (8/19/28), Vice President and Assistant Secretary* (33), 222
North LaSalle Street, Chicago, Illinois; Partner, Vedder, Price, Kaufman &
Kammholz (attorneys), Legal Counsel to the Fund.
JEROME L. DUFFY (6/29/36), Treasurer* (33), 120 South LaSalle Street, Chicago,
Illinois; Senior Vice President, KFS.
PHILIP J. COLLORA (11/15/45), Vice President and Secretary* (33), 120 South
LaSalle Street, Chicago, Illinois; Attorney, Senior Vice President and Assistant
Secretary, KFS.
ELIZABETH C. WERTH (10/1/47), Assistant Secretary* (25), 120 South LaSalle
Street, Chicago, Illinois; Vice President and Director of State Registrations,
KFS and KDI.
* Interested persons as defined in the Investment Company Act of 1940.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Trust, except that Mr. Custer's law firm
receives fees from the Trust as counsel to the Trust. The table below shows
amounts estimated to be paid or accrued to those trustees who are not designated
"interested persons" during the
B-18
<PAGE> 20
Fund's 1995 fiscal year as if the Fund had existed for the entire fiscal year
except that the information in the last column is for calendar year 1994.
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT BENEFITS KEMPER FUNDS
COMPENSATION ACCRUED AS PART OF PAID TO
NAME OF TRUSTEE FROM FUND(3) FUND EXPENSES TRUSTEES(2)
- ------------------------------------------------- ------------ ------------------- ------------
<S> <C> <C> <C>
James B. Akins................................... $2,300 $ 0 $ 66,600
Arthur R. Gottschalk(1).......................... $2,500 $ 0 $ 72,000
Frederick T. Kelsey(1)........................... $2,500 $ 0 $ 73,800
Fred B. Renwick.................................. $2,300 $ 0 $ 66,600
John B. Tingleff................................. $2,500 $ 0 $ 70,500
John G. Weithers................................. $2,500 $ 0 $ 70,100
</TABLE>
- ---------------
(1) Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with the Fund. Deferred amounts accrue interest
monthly at a rate equal to the yield of Kemper Money Market Fund--Money
Market Portfolio. Total deferred amounts and interest accrued through June
30, 1995 are $2,400 and $3,800 for Messrs. Gottschalk and Kelsey,
respectively.
(2) Includes estimated compensation for service for calendar year 1994 on the
boards of 11 Kemper funds with 25 fund portfolios and amounts for new funds
as if the fund had existed at the beginning of the year and, for Kemper
Dreman Fund, Inc. as if it had been affiliated with the Kemper funds in 1994
and the Board Members had been such for all the Kemper funds during the
period.
(3) Estimated compensation that assumes all Board Members served on Board for
all of 1995 fiscal year.
As of September 29, 1995, the trustees and officers as a group owned less than
1% of the outstanding shares of the Fund and no person owned of record 5% or
more of the outstanding shares of the Fund, except that EVEREN Clearing Corp.,
77 W. Wacker Drive, Chicago, Illinois owned of record 8.7% of the outstanding
shares of the Fund.
SHAREHOLDER RIGHTS
The Trust generally is not required to hold meetings of its shareholders. Under
the Agreement and Declaration of Trust of the Trust ("Declaration of Trust"),
however, shareholder meetings will be held in connection with the following
matters: (a) the election or removal of trustees if a meeting is called for such
purpose; (b) the adoption of any contract for which approval by shareholders is
required by the Investment Company Act of 1940 ("1940 Act"); (c) any termination
of the Trust, a series or a class to the extent and as provided in the
Declaration of Trust; (d) any amendment of the Declaration of Trust (other than
amendments changing the name of the Trust, establishing a series, supplying any
omission, curing any ambiguity or curing, correcting or supplementing any
defective or inconsistent provision thereof); (e) as to whether a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of the Trust or the shareholders, to the same
extent as the stockholders of a Massachusetts business corporation; and (f) such
additional matters as may be required by law, the Declaration of Trust, the
By-laws of the Trust, or any registration of the Trust with the Securities and
Exchange Commission or any state, or as the trustees may consider necessary or
desirable. The shareholders also would vote upon changes in fundamental
investment objectives, policies or restrictions.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) the Trust will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
B-19
<PAGE> 21
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of the Trust stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, the
Trust has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
The Declaration of Trust provides that the presence at a shareholder meeting in
person or by proxy of at least 30% of the shares entitled to vote on a matter
shall constitute a quorum. Thus, a meeting of shareholders of the Trust could
take place even if less than a majority of the shareholders were represented on
its scheduled date. Shareholders would in such a case be permitted to take
action which does not require a larger vote than a majority of a quorum, such as
the election of trustees and ratification of the selection of auditors. Some
matters requiring a larger vote under the Declaration of Trust, such as
termination or reorganization of the Trust and certain amendments of the
Declaration of Trust, would not be affected by this provision; nor would matters
which under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act.
The Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Trust (or any series) by notice to the shareholders without
shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of the
Trust. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Trust or the trustees. Moreover, the Declaration of Trust provides for
indemnification out of Trust property for all losses and expenses of any
shareholder held personally liable for the obligations of the Trust and the
Trust will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by KFS and KDI as remote
and not material, since it is limited to circumstances in which a disclaimer is
inoperative and the Trust itself is unable to meet its obligations.
B-20
