L O N G - T E R M
I N V E S T I N G
I N A
S H O R T - T E R M
W O R L D(SM)
December 1, 2000
PROSPECTUS
K E M P E R T A R G E T F U N D S
Kemper Target 2011 Fund
[LOGO] KEMPER FUNDS
<PAGE>
[LOGO] KEMPER FUNDS
Kemper Target 2011 Fund*
PROSPECTUS December 1, 2000
KEMPER TARGET 2011 FUND
222 South Riverside Plaza, Chicago, Illinois 60606 (800) 621-1048
Mutual Funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
*Formerly Kemper Retirement Fund Series II
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Contents
3 About The Fund
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3 Investment Objectives
3 Main Investment Strategies
6 Other Investments
6 Risk Management Strategies
6 Main Risks
12 Investment Manager
13 About Your Investment
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13 Transaction Information
16 Special Features
18 Buying Shares
21 Selling And Exchanging Shares
22 Distribution And Taxes
24 Financial Highlights
<PAGE>
KEMPER TARGET 2011 FUND
ABOUT THE FUND
INVESTMENT OBJECTIVES
Kemper Target 2011 Fund (formerly called Kemper Retirement Fund Series II) seeks
to provide a guaranteed return of investment on the Maturity Date (August 15,
2011) to investors who reinvest all dividends and hold their shares to the
Maturity Date, and to provide long-term growth of capital.
Although major changes tend to be infrequent, the fund's Board could change the
fund's investment objectives without seeking shareholder approval.
MAIN INVESTMENT STRATEGIES
The fund seeks to achieve its investment objectives by investing a portion of
its assets in "zero coupon" U.S. Treasury obligations ("Zero Coupon Treasuries")
and the balance of its assets in common stocks.
Investing in Zero Coupon Treasuries
Zero Coupon Treasuries evidence the right to receive a fixed payment at a future
date (i.e., the Maturity Date) from the U.S. Government, and are backed by the
full faith and credit of the U.S. Government. The Zero Coupon Treasuries held by
the fund will consist of U.S. Treasury notes or bonds that have been stripped of
their unmatured interest coupons or will consist of unmatured interest coupons
from U.S. Treasury notes or bonds.
By investing in Zero Coupon Treasuries, eligible shareholders are assured of
receiving on the Maturity Date the amount of their original investment,
including any applicable sales charge. This assurance is further backed by an
agreement entered into by Scudder Kemper Investments, Inc., the fund's
investment manager, and the fund, which is discussed under "Risk Management
Strategies."
In order to be eligible for this assurance, a shareholder must:
o reinvest all dividends, and
o hold his/her shares until the Maturity Date.
3
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Investors who have redeemed all or part of their investment prior to the
Maturity Date or who have not reinvested all dividends will not receive the
benefit of this assurance and may receive more or less than the amount of their
original investment. However, in the event of a partial redemption, this
assurance will continue as to that part of the original investment that remains
invested (with all dividends continuing to be reinvested) until the Maturity
Date.
The Zero Coupon Treasuries that the fund purchases will mature at a stated par
value on or about the Maturity Date. The fund's portfolio management team will
continuously adjust the proportion of the fund's assets that are invested in
Zero Coupon Treasuries in order to maintain an aggregate par value of Zero
Coupon Treasuries sufficient to enable eligible shareholders to receive on the
Maturity Date the principal amount of their original investment, including any
applicable sales charge.
As the percentage of Zero Coupon Treasuries in the fund's portfolio increases,
the percentage of common stocks in the fund's portfolio will necessarily
decrease. In order to help ensure at least a minimum level of exposure to the
equity markets for shareholders, the fund will cease offering its shares if
their continued offering would cause more than 70% of the fund's assets to be
allocated to Zero Coupon Treasuries.
It is currently expected that during the offering period, the proportion of the
fund's portfolio invested in Zero Coupon Treasuries may range from 50% to 65%,
but a greater or lesser percentage is possible.
Investing in common stocks
With respect to fund assets not invested in Zero Coupon Treasuries, the fund
will seek to achieve long-term capital growth through professional management
and diversification of investments primarily in common stocks the fund's
portfolio management team believes to have possibilities for capital growth. The
fund may invest in companies of any size, and emphasizes investment in domestic
companies.
4
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Factors that the fund's portfolio management team may consider in making its
investments are:
o patterns of growth in sales and earnings
o the development of new or improved products or services
o a favorable outlook for growth in the industry
o the possibility of increased operating efficiencies
o emphasis on research and development
o cyclical conditions
o other signs that a company is expected to show greater than average growth \
and earnings potential.
A stock is typically sold when, in the opinion of the portfolio management team,
the stock has reached its target price, the company's fundamentals have
deteriorated or the managers believe other investments offer better
opportunities.
Of course, there can be no guarantee that by following these investment
strategies the fund will achieve its objectives.
5
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OTHER INVESTMENSTS
To a more limited extent, the fund may, but is not required to, utilize other
investments and investment techniques that may impact fund performance
including, but not limited to, options, futures and other derivatives (financial
instruments that derive their value from other securities or commodities, or
that are based on indices).
RISK MANAGEMENT STRATEGIES
The fund may, but is not required to, use derivatives in an attempt to manage
risk. The use of derivatives could magnify losses.
Scudder Kemper has entered into an agreement under which it has agreed to make,
if necessary, sufficient payments on the fund's Maturity Date to enable
shareholders who have reinvested all dividends and held their investments in the
fund to the Maturity Date to receive on that date an aggregate amount of
redemption proceeds and payments equal to the amount of their original
investment, including any applicable sales charge.
For temporary defensive purposes, the fund may vary from its main investment
strategy and may invest, without limit, in high-grade debt securities,
securities of the U.S. Government and its agencies and high-quality money market
instruments, including repurchase agreements, depending upon the portfolio
management team's analysis of business and economic conditions and the outlook
for security prices. In such a case, the fund would not be pursuing, and may not
achieve, its investment objectives.
MAIN RISKS
There are market and investment risks with any security. The value of an
investment in the fund will fluctuate over time and it is possible for investors
to lose money invested in the fund.
The fund is intended for long-term investors who seek investment protection as
well as the opportunity for capital growth. The fund provides investment
protection only on the Maturity Date to investors who reinvest all dividends and
do not redeem their shares before the Maturity Date. In addition, dividends from
the fund will be taxable to shareholders whether received in cash or reinvested
in additional shares. Thus, the fund does not provide a specific return on
investors' capital or protect principal on an after-tax or present value basis.
An investor who reinvested all dividends and who, upon redemption at the
Maturity Date, received only the original amount invested including any sales
charge, would have received less than a zero rate of return on such investment.
6
<PAGE>
Investors subject to tax should be aware that any portion of the amount returned
to them upon redemption of shares that constitutes accretion of interest on the
Zero Coupon Treasuries will have been taxable each year as ordinary income over
the period during which shares were held.
Interest Rates. Interest rate risk is the risk that the value of the fund's Zero
Coupon Treasuries will go down when interest rates rise. Because they are
purchased at a deep discount and do not pay interest periodically, Zero Coupon
Treasuries tend to be subject to greater interim fluctuation of market value in
response to changes in interest rates than interest-paying securities of
comparable quality and similar maturities. The guarantee of the U.S. Government
does not apply to the market value of the Zero Coupon Treasuries owned by the
fund or to the shares of the fund.
Stock Market. Stock market movements will affect the fund's share price on a
daily basis. Declines are possible both in the overall stock market or in the
types of securities held by the fund.
Common Stocks. An investment in the common stock of a company represents a
proportionate ownership interest in that company. Therefore, the fund
participates in the success or failure of any company in which it holds stock.
Compared to other classes of financial assets, such as bonds or cash
equivalents, common stocks have historically offered a greater potential for
gain on investment. However, the market value of common stocks can fluctuate
significantly, reflecting such things as the business performance of the issuing
company, investors' perceptions of the company or the overall stock market and
general economic or financial market movements.
Growth Investing. Because of their perceived return potential, growth stocks are
typically in demand and tend to carry relatively higher prices. Growth stocks
generally experience greater share price fluctuations as the market reacts to
changing perceptions of the underlying companies' growth potential and broader
economic activity.
Portfolio Strategy. The portfolio management team's skill in choosing
appropriate investments for the equity portion of the fund's portfolio will
determine in large part the fund's ability to achieve its investment objective
of long-term growth of capital.
Risk of Termination or Liquidation. Although purchases of fund shares should be
made for long-term investment purposes only, the Board may terminate, liquidate
or merge the fund out of existence before the Maturity Date if it determines
that it is in the best interests of the fund's shareholders to do so. In such a
case, the fund may not achieve its investment objectives, and it may be possible
to lose money invested in the fund. In addition, the agreement with Scudder
Kemper may no longer be in effect.
7
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PAST PERFORMANCE
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year and by
comparing its performance over time to broad measures of market performance. Of
course, past performance is not necessarily an indication of future performance
(See Fund history).
The information provided in the chart does not reflect sales charges, which
reduce returns. The information provided in the table does reflect sales
charges.
Annual total returns (%) as of December 31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE:
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<TABLE>
<S> <C>
41.86 1991
3.06 1992
12.50 1993
-6.79 1994
23.55 1995
10.72 1996
13.81 1997
11.11 1998
14.84 1999
</TABLE>
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For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 14.15% (the first quarter of 1991), and the fund's lowest
return for a calendar quarter was -5.61% (the second quarter of 1992).
The fund's year-to-date total return as of September 30, 2000 was 2.89%.
8
<PAGE>
Average Annual Total Returns
<TABLE>
<S> <C> <C> <C> <C>
Lehman Brothers
Lehman Brothers Government/
For periods ended Kemper Target Government S&P 500 Corporate
December 31, 1999 2011 Fund Bond Index** Index*** Bond Index+
------------------ --------- ------------ -------- -----------
One Year 9.13% -2.23% 21.04% -2.15%
Five Year 13.55% 7.44% 28.56% 7.61%
Since Fund Inception* 12.90% 7.76% 21.35% 7.95%
</TABLE>
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* Inception date for the fund, formerly Kemper Retirement Fund Series II, is
September 10, 1990. Index returns are since September 30, 1990.
** The Lehman Brothers Government Bond Index is a market value weighted index
of U.S. Treasury and Government agency securities (other than mortgage
securities) with maturities of one year or more.
*** The Standard & Poor's (S&P) 500 Composite Stock Price Index is an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
+ The Lehman Brothers Government/Corporate Bond Index is an unmanaged index
comprised of intermediate and long-term government and investment grade
corporate debt securities.
Effective 8/15/2000, the fund adopted the Lehman Brothers Government Bond Index
in place of the Lehman Brothers Government/Corporate Bond Index, as the
Government Bond Index better represents the securities and markets in which the
fund invests.
9
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Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund.
<TABLE>
<S> <C>
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Shareholder Fees: Fees paid directly from your investment
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Maximum Sales Charge (Load) Imposed on Purchases (as % of offering 5.00%
price)
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Maximum Deferred Sales Charge (Load) (as % of redemption proceeds) NONE*
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Annual Operating Expenses: Deducted from fund assets**
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Management Fee 0.50%
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Distribution (12b-1) Fee NONE
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Other Expenses 0.46%
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Total Annual Operating Expenses 0.96%
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</TABLE>
* The redemption of shares purchased at net asset value under the Large Order
NAV Purchase Privilege (see Special Features -- Large Order NAV Purchase
Privilege) may be subject to a contingent deferred sales charge of 1.00% if
redeemed within one year of purchase and 0.50% if redeemed during the
second year following purchase.
** The operating expense ratios shown above are estimated based on the fund's
current fee schedule and expenses incurred by the fund during its most
recent fiscal year. Due to the reallocation of the securities by the fund
and extension of its maturity date which occurred on August 15, 2000,
actual expenses of the fund may be more or less than as indicated in the
table above.
Example
This example helps you compare this fund's expenses to those of other mutual
funds. The example assumes the expenses above remain the same. It also assumes
that you invested $10,000, earned 5% annual returns, reinvested all dividends
and distributions and sold your shares at the end of each period. This is only
an example; your actual expenses will be different.
<TABLE>
<S> <C>
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One Year $ 593
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Three Years $ 791
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Five Years $ 1,004
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Ten Years $ 1,619
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</TABLE>
10
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Fund history
The fund originally commenced operations on September 10, 1990 under the name
Kemper Retirement Fund Series II. Shares of the fund were offered during a
limited offering period that ended March 9, 1992. The fund's objectives were to
provide a guaranteed return of investment on the maturity date, August 15, 2000,
to investors who reinvested all dividends and held their shares to the maturity
date, and to provide long-term growth of capital.
On May 23, 2000, the fund's Board elected to continue operation of the fund
after the August 15, 2000 maturity date with a new maturity date of August 15,
2011. The Board also approved the offering of shares of the fund for a new
limited offering period commencing on August 15, 2000. Effective August 15,
2000, the fund's name was changed to Kemper Target 2011 Fund.
During the period prior to the original maturity date of August 15, 2000, the
fund invested in Zero Coupon Treasuries and common stocks, as it does under its
current policies. However, as a result of the current interest rate environment,
it is currently expected that the portion of the portfolio that must be
allocated to Zero Coupon Treasuries will be higher, and the allocation to equity
securities will be lower, during the new term of the fund. For those investors
who purchased shares in the fund during the original offering period and who
continue in the fund for the new term, the amount of their original investment,
for purposes of the guaranteed return of investment as of the August 15, 2011
maturity date, will be the net asset value of their fund shares on August 15,
2000.
11
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INVESTMENT MANAGER
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, New York. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets under
management.
The fund pays the investment manager a monthly investment management fee. For
the fiscal year ended July 31, 2000, Scudder Kemper received an annual fee of
0.50% of the fund's average daily net assets.
Portfolio management
The fund is managed by a team of investment professionals, who individually
represent different areas of expertise. The fund has a Lead Portfolio Manager
who is ultimately responsible for the management of the fund and its team.
Supporting the fund managers are Scudder Kemper's many economists, research
analysts, traders, and other investment specialists, located in offices across
the United States and around the world.
The following investment professionals are associated with the fund as
indicated:
<TABLE>
<S> <C> <C>
Joined
Name & Title the Fund Background
----------------------------------------------------------------------------------
Tracy McCormick 1994 Joined Scudder Kemper in 1994. She began her
Lead Manager investment career in 1980.
Scott E. Dolan, Jr. 1998 Joined Scudder Kemper in 1989. He began his
Manager investment career in 1993 as a Portfolio
Manager for an affiliated mutual fund.
Gary Langbaum 1999 Joined Scudder Kemper in 1988. He began his
Manager investment career in 1970.
----------------------------------------------------------------------------------
</TABLE>
12
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ABOUT YOUR INVESTMENT
Maturity Date
The Board of Trustees may in its sole discretion elect, without shareholder
approval, to continue the operation of the fund after the Maturity Date with a
new maturity date ("New Maturity Date"). Such a decision may be made to provide
shareholders with the opportunity of continuing their investment in the fund for
a new term without recognizing any taxable capital gains as a result of a
redemption. In that event, shareholders of the fund may either continue as such
or redeem their shares in the fund.
If the Board elects to continue operation of the fund, shareholders will be
given 60 days' prior notice of such election and the New Maturity Date. In that
event, it is anticipated that the offering of the fund's shares would commence
again after the Maturity Date with a new prospectus for such period as the Board
shall determine.
On the Maturity Date, the fund may also be terminated at the election of the
Board of Trustees in its sole discretion and without approval by shareholders,
upon 60 days' prior notice to shareholders.
Subject to shareholder approval, other alternatives may be pursued by the fund
after the Maturity Date. For instance, the Board may consider the possibility of
a tax-free reorganization between the fund and another registered open-end
investment company or any other series of Kemper Target Equity Fund. The Board
has not considered any specific alternative regarding the operation of the fund
after the Maturity Date.
TRANSACTION INFORMATION
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the fund as of the close of regular trading on the New York Stock Exchange,
normally 4:00 p.m. Eastern time, on each day the New York Stock Exchange is open
for trading. Market prices are used to determine the value of the fund's assets.
If market prices are not readily available for a security or if a security's
price is not considered to be market indicative, that security may be valued by
another method that the Board or its delegate believes accurately reflects fair
value. In those circumstances where a security's price is not considered to be
market indicative, the security's valuation may differ from an available market
quotation. The net asset value per share is the value of one share and is
determined by dividing the value of the fund's net assets by the number of
shares outstanding.
To the extent that the fund invests in foreign securities, these securities may
be listed on foreign exchanges that trade on days when the fund does not price
its shares. As a result, the net asset value per share of the fund may change at
a time when shareholders are not able to purchase or redeem their shares.
13
<PAGE>
Processing time
All requests to buy and sell shares that are received in good order by the
fund's transfer agent by the close of regular trading on the New York Stock
Exchange are executed at the net asset value per share calculated at the close
of trading that day (subject to any applicable sales load or contingent deferred
sales charge). Orders received by dealers or other financial services firms
prior to the determination of net asset value and received by the fund's
transfer agent prior to the close of its business day will be confirmed at a
price based on the net asset value effective on that day. If an order is
accompanied by a check drawn on a foreign bank, funds must normally be collected
before shares will be purchased.
Payment for shares you sell will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request.
If you have share certificates, these must accompany your order in proper form
for transfer. When you place an order to sell shares for which the fund may not
yet have received good payment (i.e., purchases by check, EXPRESS-Transfer or
Bank Direct Deposit), the fund may delay transmittal of the proceeds until it
has determined that collected funds have been received for the purchase of such
shares. This may be up to 10 days from receipt by the fund of the purchase
amount. The redemption within certain time periods of shares purchased at net
asset value may be subject to a contingent deferred sales charge.
Signature guarantees
A signature guarantee is required unless you sell $50,000 or less worth of
shares and the proceeds are payable to the shareholder of record at the address
of record. You can obtain a guarantee from most brokerage houses and financial
institutions, although not from a notary public. The fund will normally send you
the proceeds within one business day following your request, but may take up to
seven business days (or longer in the case of shares recently purchased by
check).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
fund and its distributor each reserves the right to reject purchases of fund
shares (including exchanges) for any reason, including when there is evidence of
a pattern of frequent purchases and sales made in response to short-term
fluctuations in the fund's share price. The fund reserves the right to withdraw
all or any part of the offering made by this prospectus and to reject purchase
orders.
The fund's shares are only offered for a limited period of time, and once the
offering period ends, the fund is closed to new and additional purchases (with
the exception of reinvested dividends).
14
<PAGE>
Minimum balances
The minimum initial investment for the fund is $1,000 and the minimum subsequent
investment is $100. The minimum initial investment for an Individual Retirement
Account is $250 and the minimum subsequent investment is $50. These minimum
amounts may be changed at any time at management's discretion.
Because of the high cost of maintaining small accounts, the fund may assess a
quarterly fee of $9 on an account with a balance below $1,000 for the quarter.
The fee will not apply to Individual Retirement Accounts or employer sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent.
Third party transactions
If you buy and sell shares of the fund through a member of the National
Association of Securities Dealers, Inc. (other than the fund's distributor,
Kemper Distributors, Inc.), that member may charge a fee for that service. This
prospectus should be read in connection with such firm's material regarding its
fees and services.
Redemption-in-kind
The fund reserves the right to honor any request for redemption or repurchase
order by "redeeming in kind," that is, by giving you marketable securities
(which typically will involve brokerage costs for you to liquidate) rather than
cash; the fund may make a redemption-in-kind if a shareholder requests over a
90-day period more than $250,000 or 1% of the value of the fund's net assets,
whichever is less.
Householding
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call
1-800-621-1048.
15
<PAGE>
SPECIAL FEATURES
Combined Purchases. The fund's shares may be purchased at the rate applicable to
the discount bracket attained by combining concurrent investments in Class A
shares (or the equivalent) of most Kemper Funds.
Letter of Intent. The same reduced sales charges also apply to the aggregate
amount of purchases made by any purchaser within a 24-month period under a
written Letter of Intent ("Letter") provided by Kemper Distributors, Inc. The
offering period for the purchase of shares of the fund is limited. However,
shares of other Kemper Funds would be available beyond that period. The Letter,
which imposes no obligation to purchase or sell additional shares, provides for
a price adjustment depending upon the actual amount purchased within such
period.
Cumulative Discount. The fund's shares may also be purchased at the rate
applicable to the discount bracket, attained by adding to the cost of shares of
a fund being purchased the value of all shares of most Kemper Funds (computed at
the maximum offering price at the time of the purchase for which the discount is
applicable) already owned by the investor.
Large Order NAV Purchase Privilege. Shares of the fund may be purchased at net
asset value by any purchaser provided that the amount invested in the fund or
other Kemper Funds totals at least $1,000,000, including purchases of shares
pursuant to the "Combined Purchases," "Letter of Intent" or "Cumulative
Discount" features described above.
16
<PAGE>
General. Shares of Kemper Funds and shares of Zurich Money Funds, Zurich
Yieldwise Funds, Cash Equivalent Fund, Tax-Exempt California Money Market Fund,
Cash Account Trust, Investors Municipal Cash Fund or Investors Cash Trust (the
"Money Market Funds") may be exchanged for each other at their relative net
asset values. Shares of a Kemper Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Fund, or from a Money Market Fund, may not be exchanged thereafter until they
have been owned for 15 days (the "15 Day Hold Policy"). In addition, shares of a
Kemper Fund with a value of $1,000,000 or less (except Kemper Cash Reserves
Fund) acquired by exchange from another Kemper Fund, or from a Money Market
Fund, may not be exchanged thereafter until they have been owned for 15 days if,
in the investment manager's judgment, the exchange activity may have an adverse
effect on the fund. In particular, a pattern of exchanges that coincides with a
"market timing" strategy may be disruptive to the fund and therefore may be
subject to the 15-Day Hold Policy. For purposes of determining whether the
15-Day Hold Policy applies to a particular exchange, the value of the shares to
be exchanged shall be computed by aggregating the value of shares being
exchanged for all accounts under common control, direction or advice, including
without limitation, accounts administered by a financial services firm offering
market timing, asset allocation or similar services.
For purposes of determining any contingent deferred sales charge that may be
imposed upon the redemption of the shares received on exchange, amounts
exchanged retain their original cost and purchase date.
17
<PAGE>
BUYING SHARES
Offering Period
Shares will only be offered to the public during the offering period, which
began on August 15, 2000 and is expected to end on or about February 15, 2002.
The fund may at its option extend or shorten the offering period. In addition,
the offering of fund shares may be suspended from time to time during the
offering period at the discretion of Kemper Distributors Inc. During any period
in which the public offering of shares is suspended or terminated, shareholders
will still be permitted to reinvest dividends in shares of the fund.
Public Offering Price, Including Sales Charge
<TABLE>
<S> <C> <C>
Sales Charge as a % Sales Charge as a %
Amount of Purchase of Offering Price of Net Asset Value*
------------------ ----------------- -------------------
Less than $100,000 5.00% 5.26%
$100,000 but less than $250,000 4.00 4.17
$250,000 but less than $500,000 3.00 3.09
$500,000 but less than $1 million 2.00 2.04
$1 million and over 0.00** 0.00**
</TABLE>
----------------
* Rounded to nearest one hundredth percent.
** Redemption of shares may be subject to a contingent
deferred sales charge as discussed below.
NAV Purchases
Fund shares may be purchased at net asset value by:
o shareholders in connection with the investment or reinvestment of
income and capital gain dividends
o a participant-directed qualified retirement plan or a
participant-directed non-qualified deferred compensation plan which is not
sponsored by a K-12 school district, provided in each case that such plan
has not less than 200 eligible employees
o any purchaser with investments in Kemper Funds which total at least
$1,000,000
o unitholders of unit investment trusts sponsored by Ranson & Associates,
Inc. or its predecessors through reinvestment programs described in the
prospectuses of such trusts that have such programs
o officers, trustees, directors, employees (including retirees) and sales
representatives of the fund, its investment manager, its principal
underwriter or certain affiliated companies, for themselves or members of
their families, any trust, pension, profit-sharing or other benefit plan
for only such persons
18
<PAGE>
o persons who purchase shares through bank trust departments that process
such trades through an automated, integrated mutual fund clearing program
provided by a third party clearing firm
o registered representatives and employees of broker-dealers having selling
group agreements with Kemper Distributors or any trust, pension,
profit-sharing or other benefit plan for only such persons
o officers, directors, and employees of service agents of
the funds
o members of the plaintiff class in the proceeding known as
Howard and Audrey Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., Case No. 93 C 5231 (N.D.IL)
o selected employees (including their spouses and dependent children) of
banks and other financial services firms that provide administrative
services related to the funds pursuant to an agreement with Kemper
Distributors or one of its affiliates
o certain professionals who assist in the promotion of Kemper Funds pursuant
to personal services contracts with Kemper Distributors, for themselves or
members of their families
o in connection with the acquisition of the assets of or
merger or consolidation with another investment company
o shareholders who owned shares of Kemper Value Series, Inc. ("KVS") on
September 8, 1995, and have continuously owned shares of KVS (or a Kemper
Fund acquired by exchange of KVS shares) since that date, for themselves or
members of their families or any trust, pension, profit-sharing or other
benefit plan for only such persons
o persons who purchase shares of the fund through Kemper Distributors as part
of an automated billing and wage deduction program administered by
RewardsPlus of America
o through certain investment advisers registered under the Investment
Advisers Act of 1940 and other financial services firms, acting solely as
agent for their clients, that adhere to certain standards established by
Kemper Distributors, including a requirement that such shares be sold for
the benefit of their clients participating in an investment advisory
program under which such clients pay a fee to the investment adviser or
other firm for portfolio management or agency brokerage services.
19
<PAGE>
Contingent Deferred Sales Charge
A contingent deferred sales charge may be imposed upon redemption of shares
purchased under the Large Order NAV Purchase Privilege as follows: 1% if they
are redeemed within one year of purchase and 0.50% if redeemed during the second
year following purchase. The charge will not be imposed upon redemption of
reinvested dividends or share appreciation.
The contingent deferred sales charge will be waived in the
event of:
o redemptions under the fund's Systematic Withdrawal Plan at a maximum of
10% per year of the net asset value of the account
o redemption of shares of a shareholder (including a registered
joint owner) who has died
o redemption of shares of a shareholder (including a registered joint owner)
who after purchase of the shares being redeemed becomes totally disabled
(as evidenced by a determination by the federal Social Security
Administration)
o redemptions by a participant-directed qualified retirement plan or a
participant-directed non-qualified deferred compensation plan or a
participant-directed qualified retirement plan which is not sponsored by a
K-12 school district
o redemptions by employer sponsored employee benefit plans using the
subaccount record keeping system made available through the Shareholder
Service Agent
o redemptions of shares whose dealer of record at the time of the investment
notifies Kemper Distributors that the dealer waives the commission
applicable to such Large Order NAV Purchase.
Rule 12b-1 Fee
None
Exchange Privilege
Shares may be exchanged for each other at their relative net asset values.
Shares of the Money Market Funds and Kemper Cash Reserves Fund acquired by
purchase (not including shares acquired by dividend reinvestment) are subject to
the applicable sales charge on exchange.
Shares purchased under the Large Order NAV Purchase Privilege may be exchanged
for shares of any Kemper Fund or a Money Market Fund without paying any
contingent deferred sales charge. If the shares received on exchange are
redeemed thereafter, a contingent deferred sales charge may be imposed.
Each series of Kemper Target Equity Fund will be available on exchange only
during the offering period for such series as described in the applicable
prospectus.
20
<PAGE>
SELLING AND EXCHANGING SHARES
General
Contact your securities dealer or other financial services firm to arrange for
share redemptions or exchanges.
Any shareholder may require the fund to redeem his or her shares. When shares
are held for the account of a shareholder by the fund's transfer agent, the
shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Service Company, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. Only shareholders who hold their
shares until the Maturity Date and reinvest their dividends in the fund will
necessarily receive on that date an aggregate amount of redemption proceeds and
payments equal to the amount of their original investment, including any sales
charge.
An exchange of shares entails the sale of fund shares and subsequent purchase of
shares of another Kemper Fund.
Share certificates
When certificates for shares have been issued, they must be mailed to or
deposited with Kemper Service Company, along with a duly endorsed stock power
and accompanied by a written request for redemption. Redemption requests and a
stock power must be endorsed by the account holder with signatures guaranteed.
The redemption request and stock power must be signed exactly as the account is
registered, including any special capacity of the registered owner. Additional
documentation may be requested, and a signature guarantee is normally required,
from institutional and fiduciary account holders, such as corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, trustees or guardians.
Reinvestment privilege
Under certain circumstances, a shareholder who has redeemed shares of the fund
or Class A shares of any other Kemper Fund may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment. These reinvested
shares will retain their original cost and purchase date for purposes of the
contingent deferred sales charge. Also, a holder of Class B shares of another
Kemper Fund who has redeemed shares may reinvest up to the full amount redeemed,
less any applicable contingent deferred sales charge that may have been imposed
upon the redemption of such shares, at net asset value in the fund or Class A
shares of another Kemper Fund. The reinvestment privilege may be terminated or
modified at any time.
21
<PAGE>
DISTRIBUTION AND TAXES
Dividends and capital gains distributions
The fund will normally distribute annual dividends of net investment income and
any net realized short-term and long-term capital gains.
Income and capital gains dividends, if any, of the fund will be credited to
shareholder accounts in full and fractional fund shares at net asset value on
the reinvestment date without sales charge, except that, upon written request to
Kemper Service Company, the Shareholder Service Agent, a shareholder may select
one of the following options:
1. To receive income and short-term capital gains dividends
in cash and long-term capital gains dividends in shares of
the same class at net asset value; or
2. To receive income and capital gains dividends in cash.
Any dividends that are reinvested will be reinvested in shares of the fund. The
fund will reinvest dividend checks (and future dividends) in shares of the fund
if checks are returned as undeliverable. Dividends and other distributions in
the aggregate amount of $10 or less are automatically reinvested in shares of
the same fund unless you request that such policy not be applied to your
account.
Distributions are generally taxable, whether received in cash or reinvested.
Shareholders who reinvest all dividends and hold their shares to the Maturity
Date will receive on the Maturity Date an amount at least equal to their
original investment, including any sales charge, whether they continue as
shareholders or redeem their shares.
Taxes
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable to
shareholders as long-term capital gains, regardless of the length of time
shareholders have owned shares. Short-term capital gains and any other taxable
income distributions are taxable to shareholders as ordinary income.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
are taxable to a shareholder as if paid on December 31 of the calendar year in
which they were declared.
A sale or exchange of a shareholder's shares is a taxable event and may result
in a capital gain or loss which may be long-term or short-term, generally
depending on how long the shareholder owned the shares.
Zero Coupon Treasuries are issued and traded at a discount from their face
value. The Fund will treat the difference between the purchase price of a Zero
Coupon Treasury and its face value (i.e., stated redemption price at maturity)
as "original issue discount." Current federal tax law requires the fund to
accrue
22
<PAGE>
a portion of the original issue discount each year and recognize the
accrued amount as interest income, even though the fund does not receive a
current cash payment until the bond matures. Thus, original issue discount is
accrued over the life of the bond so that the discount approaches zero as the
bond nears maturity. In order to qualify as a "regulated investment company"
under the Internal Revenue Code, the fund must distribute its investment company
income, including original issue discount accrued on Zero Coupon Treasuries,
annually. Because the fund does not receive a current cash payment in the amount
of the accrued discount, the fund may have to obtain cash from other sources to
satisfy distribution requirements of the Code.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, is taxable to shareholders. Likewise, dividends derived from
original issue discount accruals will reduce net asset value of the shares when
the dividend is paid out to shareholders.
Fund dividends that are derived from interest on the Zero Coupon Treasuries and
other direct obligations of the U.S. Government and certain of its agencies and
instrumentalities may be exempt from state and local taxes in some states. The
fund currently intends to advise shareholders of the proportion of its dividends
that consists of such interest. Shareholders should consult their tax advisers
regarding the possible exclusion of such portion of their dividends for state
and local income tax purposes.
The fund sends shareholders detailed tax information about the amount and type
of its distributions by January 31 of the following year.
The fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders if shareholders fail to
provide the fund with their correct taxpayer identification number or to make
required certifications, or if shareholders have been notified by the IRS that
they are subject to backup withholding. Any such withheld amounts may be
credited against shareholders' U.S. federal income tax liability.
Shareholders of the fund may be subject to state, local and foreign taxes on
fund distributions and dispositions of fund shares. Shareholders should consult
their tax advisor regarding the particular tax consequences of an investment in
the fund.
23
<PAGE>
FINANCIAL HIGHLIGHTS
The table below is designed to help you understand the fund's financial
performance in recent years. The figures in the first part of each table are for
a single share. The total return figures show what an investor in the fund would
have earned (or lost) assuming reinvestment of all dividends and distributions.
This information has been audited by Ernst & Young LLP, whose report, along with
the fund's financial statements, are included in the fund's annual report, which
is available upon request by calling Kemper at 1-800-621-1048.
KEMPER TARGET 2011 FUND
(FORMERLY KEMPER RETIREMENT FUND SERIES II)
<TABLE>
<S> <C> <C> <C>
Month Year ended
Year ended July 31, ended June 30,
------------------------- July 31, ----------------
2000 1999 1998 1997 1997 1996
-----------------------------------------------------------------------------------
Per share operating performance
-----------------------------------------------------------------------------------
Net asset value, beginning
of period $12.54 12.41 13.38 12.77 13.01 12.94
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .39(a) .45(a) .52 .05 .56 .58
-----------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) on
investment transactions .90 .88 .23 .56 1.29 .77
-----------------------------------------------------------------------------------
Total from investment
operations 1.29 1.33 .75 .61 1.85 1.35
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income (.67) (.50) (.54) -- (.59) (.57)
-----------------------------------------------------------------------------------
Net realized gains on
investment transactions (1.24) (.70) (1.18) -- (1.50) (.71)
-----------------------------------------------------------------------------------
Total distributions (1.91) (1.20) (1.72) -- (2.09) (1.28)
-----------------------------------------------------------------------------------
Net asset value,
end of period $11.92 12.54 12.41 13.38 12.77 13.01
-----------------------------------------------------------------------------------
Total return (%)(b) 10.45 11.42 6.46 4.78** 15.56 10.92
-----------------------------------------------------------------------------------
Ratios to average net assets and supplemental data
-----------------------------------------------------------------------------------
Net assets, end of period
($ in millions) 137 152 158 173 167 168
-----------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) .97 .98 .94 .90* .92 .94
-----------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) .96 .98 .94 .90* .92 .94
-----------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 3.10 3.64 3.80 3.98* 4.08 4.16
-----------------------------------------------------------------------------------
Portfolio turnover rate (%) 69 40 57 67* 70 54
-----------------------------------------------------------------------------------
</TABLE>
Notes:
* Annualized
** Not Annualized
(a) Based on monthly average shares outstanding during the
period.
(b) Total return does not reflect the effect of sales charges.
24
<PAGE>
Additional information about the fund may be found in the Statement of
Additional Information and in shareholder reports. Shareholder inquiries can be
made by calling the toll-free telephone number listed below. The Statement of
Additional Information contains more information on fund investments and
operations. The semiannual and annual shareholder reports, when available, will
contain a discussion of the market conditions and the investment strategies that
significantly affected the fund's performance during the last fiscal year, as
well as a listing of portfolio holdings and financial statements. These and
other fund documents may be obtained without charge from the following sources:
<TABLE>
<S> <C>
-----------------------------------------------------------------------------------
By Phone Call Kemper at: 1-800-621-1048
-----------------------------------------------------------------------------------
Kemper Distributors, Inc.
By Mail 222 South Riverside Plaza
Chicago, IL 60606-5808
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-0102
(a duplication fee is charged)
-----------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-202-942-8090 for more information.)
-----------------------------------------------------------------------------------
By Internet http://www.sec.gov
email:[email protected]
http://www.kemper.com
-----------------------------------------------------------------------------------
</TABLE>
The Statement of Additional Information dated December 1, 2000 is incorporated
by reference into this prospectus (is legally a part of this prospectus).
SEC file number:
Kemper Target 2011 Fund 811-5896
<PAGE>
Investment Manager
Scudder Kemper Investments, Inc.
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza, Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
[LOGO] KEMPER FUNDS
long-term investing in a short-term world (SM)
<PAGE>
KEMPER TARGET 2011 FUND
STATEMENT OF ADDITIONAL INFORMATION
December 1, 2000
222 SOUTH RIVERSIDE PLAZA STREET, CHICAGO, ILLINOIS 60606
1-800-621-1048
This Statement of Additional Information contains information about Kemper
Target 2011 Fund (the "Fund"), a series of Kemper Target Equity Fund (the
"Trust"). The Trust is an open-end diversified management company. This
Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus of the Fund dated December 1, 2000. The
prospectus may be obtained without charge from the Fund at the address or
telephone number on this cover and is also available along with other
related materials on the SEC's Internet web site (http://www.sec.gov). The
Fund's Annual Report, dated July 31, 2000 is incorporated by reference into
and is hereby deemed to be a part of this Statement of Additional
Information.
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS...................................................2
INVESTMENT OBJECTIVES AND POLICIES........................................3
INVESTMENT MANAGER AND SHAREHOLDER SERVICES..............................17
PORTFOLIO TRANSACTIONS...................................................19
PURCHASE AND REDEMPTION OR REPURCHASE OF SHARES..........................20
DIVIDENDS AND TAXES......................................................29
PERFORMANCE..............................................................32
OFFICERS AND TRUSTEES....................................................34
SHAREHOLDER RIGHTS.......................................................36
<PAGE>
INVESTMENT RESTRICTIONS
The Trust has adopted the following fundamental investment restrictions which
cannot be changed with respect to the Fund, without approval of a "majority" of
its outstanding shares. As defined in the Investment Company Act of 1940, as
amended (the "1940 Act"), this 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. Except as otherwise noted, the Fund's other policies may be
changed by the Board of Trustees, without a vote of shareholders.
The Fund may not, as a fundamental policy:
(a) borrow money, except as permitted under the 1940 Act and as
interpreted or modified by regulatory authority having
jurisdiction from time to time;
(b) issue senior securities, except as permitted under the 1940
Act and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
(c) purchase physical commodities or contracts relating to
physical commodities;
(d) engage in the business of underwriting securities issued by
others, except to the extent that a Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(e) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(f) make loans except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having
jurisdiction, from time to time; or
(g) concentrate its investments in a particular industry, as that
term is used in the 1940 Act, and as interpreted or modified
by regulatory authority having jurisdiction, from time to
time.
With regard to Item (e) above, to the extent the Fund holds real estate acquired
as a result of the Fund's ownership of securities such holdings would be subject
to the Fund's non-fundamental investment restriction on illiquid securities.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation.
As a matter of non-fundamental policy, the Fund currently does not intend to:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
2
<PAGE>
(4) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value);
(7) lend portfolio securities in an amount greater than 5% of its
total assets; and
(8) invest more than 15% of net assets in illiquid securities.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond that specified limit resulting from a
change in values or net assets will not be considered a violation.
INVESTMENT OBJECTIVES AND POLICIES
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Fund may engage or a financial
instrument which the Fund may purchase are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. (the "Adviser" or "Scudder
Kemper"), in its discretion, might, but is not required to, use in managing the
Fund's assets. The Adviser may, in its discretion, at any time, employ such
practice, technique or instrument for one or more funds but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of the Fund, but, to the extent employed, could, from time to time,
have a material impact on the Fund's performance.
The Fund seeks to provide a guaranteed return of original investment on the
Maturity Date (August 15, 2011) to investors who reinvest all dividends and hold
their shares to the Maturity Date, and to provide long-term growth of capital.
The assurance that investors who reinvest all dividends and hold their shares
until the Maturity Date will receive on the Maturity Date at least their
original investment is provided by the par value of the portion of the Fund's
assets invested in "zero coupon" U.S. Treasury obligations (the "Zero Coupon
Treasuries") as well as by an agreement from Scudder Kemper. Investors who do
not reinvest all dividends or who redeem part or all of their investment in the
Fund other than on the Maturity Date will not receive the benefit of this
assurance, and upon the redemption may receive more or less than the amount of
their original investment; provided, however, in the event of a partial
redemption, this assurance will continue as to that part of the original
investment that remains invested (with all dividends thereon reinvested) until
the Maturity Date.
General. The Fund may invest in Zero Coupon Treasuries and equity securities (as
described in the prospectus) and engage in futures, options and other
derivatives transactions and other investment techniques in accordance with its
investment objectives and policies. Supplemental information concerning the
Fund's investments and certain investment techniques is set forth below.
The Fund will offer its shares during a limited offering period (the "Offering
Period") at net asset value plus the applicable sales charge. The Zero Coupon
Treasuries that the Fund acquires with the proceeds of the sale of its shares
during the Offering Period will be selected so as to mature at a specific par
value on or about the Maturity Date. The Fund's investment manager will
continuously adjust the proportion of the Fund's assets that are invested in
Zero Coupon Treasuries so that the value of the Zero Coupon Treasuries on the
Maturity Date (i.e., the aggregate par value of the Zero Coupon Treasuries in
the portfolio) will be sufficient to enable investors who reinvest all dividends
and hold their investment in the Fund until the Maturity Date to receive on the
Maturity Date the full amount of such investment, including any sales charge.
Thus, the
3
<PAGE>
minimum par value of Zero Coupon Treasuries per Fund share necessary to provide
for the Fund's investment protection will be continuously determined and
maintained.
In order to provide further assurance that the Fund's investment protection will
be maintained, Scudder Kemper has entered into an Agreement (the "Agreement").
Under the Agreement, Scudder Kemper has agreed to make sufficient payments on
the Maturity Date to enable shareholders who have reinvested all dividends and
held their investment in the Fund until the Maturity Date to receive on the
Maturity Date an aggregate amount of redemption proceeds and payments under the
Agreement equal to the amount of their original investment, including any sales
charge.
The portion of the Fund's assets that will be allocated to the purchase of Zero
Coupon Treasuries will fluctuate during the Offering Period. This is because the
value of the Zero Coupon Treasuries and Equity Securities, and therefore the
offering price of the Fund's shares, will fluctuate with changes in interest
rates and other market value fluctuations. If the offering price of the Fund's
shares increases during the Offering Period, the minimum par value of Zero
Coupon Treasuries per Fund share necessary to provide for the Fund's investment
protection will increase and this amount will be fixed by the highest offering
price during the Offering Period. The Fund may hold Zero Coupon Treasuries in an
amount in excess of the amount necessary to provide for the Fund's investment
protection in the discretion of the Fund's investment manager. During the
Offering Period, under normal market conditions, the proportion of the Fund's
portfolio invested in Zero Coupon Treasuries may be expected to range from 50%
to 65%; but a greater or lesser percentage is possible.
As the percentage of Zero Coupon Treasuries in the Fund's portfolio increases,
the percentage of Equity Securities in the portfolio will necessarily decrease.
This will result in less potential for capital growth from equity securities. In
order to help ensure at least a minimum level of exposure to the equity markets
for shareholders, the Fund will cease offering its shares if their continued
offering would cause more than 70% of its assets to be allocated to Zero Coupon
Treasuries. After the Offering Period is over, no additional assets will be
allocated to the purchase of Zero Coupon Treasuries. However, since the values
of the Zero Coupon Treasuries and Equity Securities are often affected in
different ways by changes in interest rates and other market conditions and will
often fluctuate independently, the percentage of the Fund's net asset value
represented by Zero Coupon Treasuries will continue to fluctuate after the end
of the Offering Period. Zero Coupon Treasuries may be liquidated before the
Maturity Date to meet redemptions and pay cash dividends, provided that the
minimum amount necessary to provide for the Fund's investment protection is
maintained.
Shareholders who elect to receive dividends in cash are in effect withdrawing a
portion of the accreted income on the Zero Coupon Treasuries that are held to
protect their original investment at the Maturity Date. These shareholders will
receive the same net asset value per share for any Fund shares redeemed at the
Maturity Date as shareholders who reinvest dividends, but they will have fewer
shares to redeem than shareholders similarly situated who had reinvested all
dividends. Shareholders who redeem some or all of their shares before the
Maturity Date lose the benefit of investment protection with respect to those
shares redeemed. Thus, investors are encouraged to reinvest all dividends and to
evaluate their need to receive some or all of their investment prior to the
Maturity Date before making an investment in the Fund.
The value of the Zero Coupon Treasuries and the Equity Securities in the Fund's
portfolio will fluctuate prior to the Maturity Date and the value of the Zero
Coupon Treasuries will equal their par value on the Maturity Date. As noted,(see
"Zero Coupon Treasuries"), the value of the Zero Coupon Treasuries may be
expected to experience more volatility than U.S. Government securities that have
similar yields and maturities but that make current distributions of interest.
Thus, the net asset value of the Fund's shares will fluctuate with changes in
interest rates and other market conditions prior to the Maturity Date. As an
open-end investment company, the Fund will redeem its shares at the request of a
shareholder at the net asset value per share next determined after a request is
received in proper form. Thus, shareholders who redeem their shares prior to the
Maturity Date may receive more or less than their acquisition cost, including
any sales charge, whether or not they reinvest their dividends. Such shares,
therefore, would not receive the benefit of the Fund's investment protection.
Any shares not redeemed prior to the Maturity Date by a shareholder would
continue to receive the benefit of the Fund's investment protection provided
that all dividends with respect to such shares are reinvested. Accordingly, the
Fund may not be appropriate for investors who expect to redeem their investment
in the Fund prior to the Maturity Date.
Each year the Fund will be required to accrue an increasing amount of income on
its Zero Coupon Treasuries utilizing the effective interest method. However, to
maintain its tax status as a pass-through entity under Subchapter M of the
Internal Revenue Code and also to avoid imposition of excise taxes, the Fund
will be required to distribute dividends equal to
4
<PAGE>
substantially all of its net investment income, including the accrued income on
its Zero Coupon Treasuries for which it receives no payments in cash prior to
their maturity. Dividends of the Fund's investment income and short-term capital
gains will be taxable to shareholders as ordinary income for federal income tax
purposes, whether received in cash or reinvested in additional shares. See
"Dividends and Taxes." However, shareholders who elect to receive dividends in
cash, instead of reinvesting these amounts in additional shares of the Fund, may
realize an amount upon redemption of their investment on the Maturity Date that
is less or greater than their acquisition cost and, therefore, will not receive
the benefit of the Fund's investment protection. Accordingly, the Fund may not
be appropriate for investors who will require cash distributions from the Fund
in order to meet current tax obligations resulting from their investment or for
other needs.
As noted previously, the Fund will maintain a minimum par value of Zero Coupon
Treasuries per share in order to provide for the Fund's investment protection.
In order to generate sufficient cash to meet dividend requirements and other
operational needs and to redeem Fund shares on request, the Fund may be required
to limit reinvestment of capital on the disposition of Equity Securities and may
be required to liquidate Equity Securities at a time when it is otherwise
disadvantageous to do so, which may result in the realization of losses on the
disposition of such securities, and may also be required to borrow money to
satisfy dividend and redemption requirements. The liquidation of Equity
Securities and the expenses of borrowing money in such circumstances could
impair the ability of the Fund to meet its objective of long-term capital
growth.
The Board of Trustees of the Trust may in its sole discretion elect, without
shareholder approval, to continue the operation of the Fund after the Maturity
Date with a new maturity date ("New Maturity Date"). Such a decision may be made
to provide shareholders with the opportunity of continuing their investment in
the Fund for a new term without recognizing any taxable capital gains as a
result of a redemption. In that event, shareholders of the Fund may either
continue as such or redeem their shares in the Fund. Shareholders who reinvest
all dividends and hold their shares to the Maturity Date will be entitled to the
benefit of the Fund's investment protection on the Maturity Date whether they
continue as shareholders or redeem their shares. If this alternative were to be
elected, the Fund would at the Maturity Date collect the proceeds of the Zero
Coupon Treasuries that mature on such date and, after allowing for any
redemption requests by shareholders, reinvest such proceeds in Zero Coupon
Treasuries and Equity Securities as necessary to provide for the Fund's
investment protection benefit on the New Maturity Date. For such purposes, the
investment of shareholders then in the Fund would be deemed to be the net asset
value of their investment in the Fund at the current Maturity Date. Thus, in
effect, the total value of such shareholders' investment in the Fund on the
current Maturity Date will be treated as an investment for the new term and will
benefit from the Fund's investment protection for the new term if they reinvest
all dividends and maintain their investment in the Fund until the New Maturity
Date. If the Board of Trustees elects to continue the Fund, shareholders will be
given 60 days' prior notice of such election and the New Maturity Date. In that
event, it is anticipated that the offering of the Fund's shares would commence
again after the Maturity Date with a new prospectus for such period as the Board
of Trustees shall determine.
On the Maturity Date, the Fund may also be terminated at the election of the
Board of Trustees of the Trust in its sole discretion and without approval by
shareholders, upon 60 days' prior notice to shareholders. In such event, the
proceeds of the Zero Coupon Treasuries maturing on such date shall be collected
and the Equity Securities and other assets then owned by the Fund shall be sold
or otherwise reduced to cash, the liabilities of the Fund will be discharged or
otherwise provided for, the Fund's outstanding shares will be mandatorily
redeemed at the net asset value per share determined on the Maturity Date and,
within seven days thereafter, the Fund's net assets will be distributed to
shareholders and the Fund shall be thereafter terminated. Termination of the
Fund may require the disposition of the Equity Securities at a time when it is
otherwise disadvantageous to do so and may involve selling securities at a
substantial loss. The estimated expenses of liquidation and termination of the
Fund, however, are not expected to affect materially the ability of the Fund to
provide for its investment protection benefit. In the event of termination of
the Fund as noted above, the redemption of shares effected in connection with
such termination would for current federal income tax purposes constitute a sale
upon which a gain or loss may be realized depending upon whether the value of
the shares being redeemed is more or less than the shareholder's adjusted cost
basis of such shares.
Subject to shareholder approval, other alternatives may be pursued by the Fund
after the Maturity Date. For instance, the Board of Trustees may consider the
possibility of a tax-free reorganization between the Fund and another registered
open-end management investment company or any other series of the Trust. The
Board of Trustees has not considered any possibilities regarding the operation
of the Fund after the Maturity Date.
Interfund Borrowing and Lending Program
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The Fund has received exemptive relief from the SEC, which permits the
Fund to participate in an interfund lending program among certain investment
companies advised by the Adviser. The interfund lending program allows the
participating funds to borrow money from and loan money to each other for
temporary or emergency purposes. The program is subject to a number of
conditions designed to ensure fair and equitable treatment of all participating
funds, including the following: (1) no fund may borrow money through the program
unless it receives a more favorable interest rate than a rate approximating the
lowest interest rate at which bank loans would be available to any of the
participating funds under a loan agreement; and (2) no fund may lend money
through the program unless it receives a more favorable return than that
available from an investment in repurchase agreements and, to the extent
applicable, money market cash sweep arrangements. In addition, a fund may
participate in the program only if and to the extent that such participation is
consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent the Fund is actually engaged in borrowing
through the interfund lending program, the Fund, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes, except
that the Fund may engage in reverse repurchase agreements and dollar rolls for
any purpose.
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
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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.
Investment Company Securities. The Fund may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by such other
investment companies.
For example, the Fund may invest in a variety of investment companies which seek
to track the composition and performance of specific indexes or a specific
portion of an index. These index-based investments hold substantially all of
their assets in securities representing their specific index. Accordingly, the
main risk of investing in index-based investments is the same as investing in a
portfolio of equity securities comprising the index. The market prices of
index-based investments will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their NAVs). Index-based
investments may not replicate exactly the performance of their specified index
because of transaction costs and because of the temporary unavailability of
certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
Investment of Uninvested Cash Balances. The Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the SEC, the Fund may use
Uninvested Cash to purchase shares of affiliated funds including money market
funds, short-term bond funds and Scudder
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Cash Management Investment Trust, or one or more future entities for which
Scudder Kemper Investments acts as trustee or investment advisor that operate as
cash management investment vehicles and that are excluded from the definition of
investment company pursuant to section 3(c)(1) or 3(c)(7) of the Investment
Company Act of 1940 (collectively, the "Central Funds") in excess of the
limitations of Section 12(d)(1) of the Investment Company Act. Investment by the
Fund in shares of the Central Funds will be in accordance with the Fund's
investment policies and restrictions as set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Fund's ability to
manage Uninvested Cash.
The Fund will invest Uninvested Cash in Central Funds only to the extent that
the Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
Foreign Securities. Although the Fund will invest primarily in securities that
are publicly traded in the United States, it has the discretion to invest a
portion of its assets in foreign securities that are traded principally in
securities markets outside the United States. The Fund currently limits
investment in foreign securities not publicly traded in the United States to
less than 10% of its total assets. As discussed below, American Depository
Receipts are publicly traded in the United States and, therefore, are not
subject to the preceding limitation. The Fund intends to invest in foreign
securities that are not publicly traded in the United States only when the
potential benefits to the Fund are deemed to outweigh the risks.
Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement, and restrictions on
capital flows may be imposed.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possible imposition of exchange controls.
The prices of such securities may be more volatile than those of domestic
securities and the markets for foreign securities may be less liquid. In
addition, there may be less publicly available information about foreign issuers
than about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks and listed companies abroad than in the United States.
Settlement of Foreign Securities trades may take longer and present more risk
than for domestic securities. With respect to certain foreign countries, there
is a possibility of expropriation or diplomatic developments that could affect
investment in these countries. Losses and other expenses may be incurred in
converting between various currencies in connection with purchases and sales of
foreign securities.
Privatized Enterprises. Investments in foreign securities may include securities
issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. The Fund's investments in the
securities of privatized enterprises 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.
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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 of management. Such
reorganizations are made in an attempt to better enable these enterprises to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprise's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which the Fund may
invest enjoy the protection of and receive preferential treatment from the
respective sovereigns that own or control them. After making an initial equity
offering these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
effectively operate in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
Depository Receipts. The Fund may invest in securities of foreign issuers in the
form of American Depositary Receipts ("ADRs"). For many foreign securities,
there are U.S. Dollar-denominated ADRs, which are bought and sold in the United
States and are generally issued by domestic banks. ADRs represent the right to
receive securities of foreign issuers deposited in the domestic bank or a
correspondent bank. ADRs do not eliminate all the risk inherent in investing in
the securities of foreign issuers. However, by investing in ADRs rather than
directly in foreign issuers' stock, the Fund will avoid currency risks during
the settlement period for either purchases or sales. In general, there is a
large, liquid market in the United States for most ADRs. The Fund may also
invest in securities of foreign issuers in the form of European Depository
Receipts ("EDRs") and Global Depositary Receipts ("GDRs"), which are receipts
evidencing an arrangement with a European bank similar to that for ADRs and are
designed for use in the European and other foreign securities markets. EDRs and
GDRs are not necessarily denominated in the currency of the underlying security.
Foreign Currency Transactions. As indicated above (see "Foreign Securities"),
the Fund may invest a limited portion of its assets in securities denominated in
foreign currencies. The value of the assets of the Fund invested in such
securities as measured in U.S. Dollars may be affected favorably or unfavorably
by changes in foreign currency exchange rates and exchange control regulations,
and the Fund may incur costs in connection with conversions between various
currencies. The Fund will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract.
By entering into a forward contract in U.S. Dollars for the purchase or sale of
the amount of foreign currency involved in an underlying security transaction,
the Fund is able to protect itself against a possible loss between trade and
settlement dates resulting from an adverse change in the relationship between
the U.S. Dollar and such foreign currency. However, this tends to limit gains
which might result from a positive change in such currency relationships.
When the Adviser believes that the currency of a particular foreign country may
suffer a substantial decline against the U.S. Dollar, it may enter into a
forward contract to sell an amount of foreign currency approximating the value
of some or all of the Fund's portfolio securities denominated in such foreign
currency. It is extremely difficult to forecast short-term currency market
movements, and whether such a short-term hedging strategy would be successful is
highly uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a contract. Accordingly, it may be
necessary for the Fund to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the security is less
than the amount of foreign currency the Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver.
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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 gain
which might result should the value of such currency increase. The Fund may have
to convert its holdings of foreign currencies into U.S. Dollars from time to
time in order to meet such needs as Fund expenses and redemption requests.
The Fund does not enter into forward contracts or maintain a net exposure in
such contracts where 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 the Fund would have
more than 5% of the value of its total assets committed to such contracts. The
Fund segregates eligible securities to the extent required by applicable
regulations in connection with forward foreign currency exchange contracts
entered into for the purchase of a foreign currency. The Fund generally does not
enter into a forward contract with a term longer than one year.
The Fund may also hedge its foreign currency exchange rate risk by engaging in
foreign currency financial futures transactions and by purchasing foreign
currency options. A foreign currency call rises in value if the underlying
currency appreciates. Conversely, a put rises in value if the underlying
currency depreciates. Through the purchase or sale of foreign currency financial
futures contracts, the Fund may be able to achieve many of the same objectives
as through forward foreign currency exchange contracts more effectively and
perhaps 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. Such contracts may provide greater
liquidity and lower cost than forward foreign currency exchange contracts.
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 sold short or securities convertible
into or exchangeable for, without payment of any further consideration,
securities 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.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of the fixed-income securities in the Fund's portfolio or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, a Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts,
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currency futures contracts, currency swaps or options on currencies, or currency
futures and various other currency transactions (collectively, all the above are
called "Strategic Transactions"). In addition, strategic transactions may also
include new techniques, instruments or strategies that are permitted as
regulatory changes occur. Strategic Transactions may be used without limit
(subject to certain limits imposed by the 1940 Act) to attempt to protect
against possible changes in the market value of securities held in or to be
purchased for a Fund's portfolio resulting from securities markets or currency
exchange rate fluctuations, to protect a Fund's unrealized gains in the value of
its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of a Fund's
portfolio, or to establish a position in the derivatives markets as a substitute
for purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of a Fund's
assets will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of a
Fund to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter fundamental investment purposes and
characteristics of the Fund, and the Fund will segregate assets (or as provided
by applicable regulations, enter into certain offsetting positions) to cover its
obligations under options, futures and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of currency transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized
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to purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting a Fund to require the Counterparty to
sell the option back to a Fund at a formula price within seven days. The Fund
expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Adviser. The staff of the
Securities and Exchange Commission (the "SEC") currently takes the position that
OTC options purchased by a Fund, and portfolio securities "covering" the amount
of a Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Fund's limitation on investing no more than 15% of its net assets in
illiquid securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
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The Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the over-the-counter markets, and on
securities indices, currencies and futures contracts. The Fund will not purchase
call options unless the aggregate premiums paid on all options held by the Fund
at any time do not exceed 20% of its total assets. All calls sold by a Fund must
be "covered" (i.e., a Fund must own the securities or futures contract subject
to the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though a Fund will receive the option
premium to help protect it against loss, a call sold by a Fund exposes that Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require that Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. The Fund will not purchase put options unless the aggregate premiums
paid on all options held by the Fund at any time do not exceed 20% of its total
assets. The Fund will not sell put options if, as a result, more than 50% of a
Fund's total assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that a Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management, and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed,
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires a Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of a Fund. If a Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of that Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of
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the underlying instrument, they settle by cash settlement, i.e., an option on an
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option, which also may
be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
making up the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual securities,
as is the case with respect to options on securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of a Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
The Fund generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which that Fund has or in which that Fund
expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of that Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
a Fund holds securities denominated in schillings and the Adviser believes that
the value of schillings will decline against the U.S. dollar, the Adviser may
enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to a Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that a Fund is engaging in proxy hedging. If a Fund
enters into a currency hedging transaction, that Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning
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and policy, purchases and sales of currency and related instruments can be
negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of a Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream a Fund may be
obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Adviser and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The
Funds might
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use Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed-income instruments are
linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent that obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by a Fund to pay
or deliver securities or assets must be covered at all times by the securities,
instruments or currency required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid assets at least equal to the current
amount of the obligation must be segregated with the custodian. The segregated
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a call
option written by a Fund will require that Fund to hold the securities subject
to the call (or securities convertible into the needed securities without
additional consideration) or to segregate cash or liquid assets sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Fund on an index will require that Fund to own portfolio securities which
correlate with the index or to segregate cash or liquid assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by a Fund requires that Fund to segregate cash or liquid assets
equal to the exercise price.
Except when a Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates a Fund to buy or sell currency
will generally require that Fund to hold an amount of that currency or liquid
assets denominated in that currency equal to that Fund's obligations or to
segregate liquid assets equal to the amount of that Fund's obligation.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Fund sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by a Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when a Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, that Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by a Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and that Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, a Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash or
liquid
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assets, equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by that Fund. Moreover, instead of segregating assets if a Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
cash or liquid assets equal to any remaining obligation would need to be
segregated.
INVESTMENT MANAGER AND SHAREHOLDER SERVICES
Investment Manager. Scudder Kemper Investments, Inc., 345 Park Avenue, New York,
New York, is the Fund's investment manager. Scudder Kemper is approximately 70%
owned by Zurich Insurance Company. The balance of the Adviser is owned by its
officers and employees. Pursuant to an investment management agreement, Scudder
Kemper acts as the Fund's investment adviser, manages its investments,
administers its business affairs, furnishes office facilities and equipment,
provides clerical 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
Fund shall pay the charges and expenses of its operations, including the fees
and expenses of the trustees (except those who are affiliated with Scudder
Kemper), independent auditors, counsel, custodian and transfer agent and the
cost of share certificates, reports and notices to shareholders, brokerage
commissions or transaction costs, costs of calculating net asset value and
maintaining all accounting records thereto, taxes and membership dues. The Fund
bears the expenses of registration of its shares with the Securities and
Exchange Commission, and the cost of qualifying and maintaining the
qualification of the Fund's shares for sale under the securities laws of the
various states (Blue Sky expense).. Kemper Retirement Fund Series III, Series
IV, Series V Series VI and Kemper Target 2010 Fund (which are no longer being
offered), Series VII, Kemper Worldwide 2004 Fund and the Fund are each subject
to investment management agreements. 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 Scudder Kemper an investment management fee, payable monthly, at
an annual rate of 0.50% of average daily net assets of the Fund.
The investment management agreement provides that Scudder Kemper 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
Scudder Kemper in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under the agreement.
The Fund's investment management agreement continues in effect from year to year
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. During the fiscal year ended July 31, 2000, the
fiscal year ended July 31, 1999, and the fiscal year ended July 31, 1998 7,
Scudder Kemper received management fees from the Fund aggregating $747,000,
$772,000 and $825,000, respectively.
In certain cases the investments for the Fund are managed by the same
individuals who manage one or more other mutual funds advised by the Adviser
that have similar names, objectives and investment styles as the Fund. You
should be aware that the Fund is likely to differ from these other mutual funds
in size, cash flow pattern and tax matters. Accordingly, the holding and
performance of the Fund can be expected to vary from those of the other mutual
funds.
On December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder"), and Zurich Insurance Company ("Zurich"), formed a new
global investment organization by combining Scudder with Zurich Kemper
Investments, Inc. ("ZKI") and Zurich Kemper Value Advisors, Inc. ("ZKVA"),
former subsidiaries of Zurich. ZKI was the former investment adviser for each
series of the Trust. Upon completion of the transaction, Scudder changed its
name to
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Scudder Kemper Investments, Inc. As a result of the transaction, Zurich owns
approximately 70% of Scudder Kemper, with the balance owned by Scudder Kemper's
officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in the Adviser) and the financial services businesses of B.A.T Industries p.l.c.
("B.A.T") were combined to form a new global insurance and financial services
company known as Zurich Financial Services Group. By way of a dual holding
company structure, former Zurich shareholders initially owned approximately 57%
of Zurich Financial Services Group, with the balance initially owned by former
B.A.T shareholders. On October 17, 2000, the dual-headed holding company
structure of Zurich Financial Services Group, comprised of Allied Zurich p.l.c.
in the United Kingdom and Zurich Allied in Switzerland, was unified into a
single Swiss holding company, Zurich Financial Services.
Upon consummation of this transaction, each Fund's then current investment
management agreement with the Adviser was deemed to have been assigned and,
therefore, terminated. The Board approved a new investment management agreement
(the "Agreement") with the Adviser, which is substantially identical to the
prior investment management agreement, except for the dates of execution and
termination. The Agreement became effective on September 7, 1998, upon the
termination of the then current investment management agreement, and was
approved at a shareholder meeting held on December 17, 1998. The Agreement
continues in effect from year to year only if its continuance is approved
annually by the vote of a majority of those trustees who are not parties to such
Agreement or interested persons of the Adviser or the Trust, cast in person at a
meeting called for the purpose of voting on such approval, and either by a vote
of the Trust's trustees or of a majority of the outstanding voting securities of
the Trust. The Agreement may be terminated at any time without payment of
penalty by either party on sixty days' written notice, and automatically
terminate in the event of its assignment.
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts, 02110, a subsidiary of Scudder
Kemper, is responsible for determining the daily net asset value per share of
the Fund and maintaining all accounting records related thereto. Currently, SFAC
receives no fee for its services to the Fund; however, subject to Board
approval, at some time in the future, SFAC may seek payment for its services
under this agreement.
Principal Underwriter. Kemper Distributors, Inc. ("KDI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, a wholly-owned subsidiary of Scudder Kemper, 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. Shares of the Fund were initially offered during the
period from September 10, 1990 to March 9, 1992. The Fund recommenced offering
its shares on August 15, 2000.
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 0.25% of average daily net assets of the Trust.
KDI may enter into related arrangements with various broker-dealer firms and
other service or administrative firms ("firms"), that provide services and
facilities for their customers or clients who are shareholders of the Fund. 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 accounts and records, processing purchase and
redemption transactions, answering routine inquiries regarding the Fund, and
such other administrative 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 0.25% of the net
assets in Trust accounts that they maintain and service commencing with the
month after investment. Firms to which service fees may be paid include
broker-dealers affiliated with KDI.
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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 payable at the annual rate of
0.25% based upon Trust assets in accounts for which a firm provides
administrative services and at the annual rate of 0.15% based upon Fund assets
in accounts for which there is no firm (other than KDI) listed on the Fund's
records. The effective administrative services fee rate to be charged against
all assets of the Trust while this procedure is in effect would depend upon the
proportion of Trust assets that is in accounts for which a firm of record
provides administrative services. The Board of Trustees of the Trust, in its
discretion, may approve paying the fee to KDI at the 0.25% annual rate on all
Trust assets in the future.
For the fiscal year ended July 31, 2000, the Fund incurred an administrative
services fee of $371,000, of which KDI paid $363,000 to firms and $602.00 to
affiliates of KDI. For the fiscal year ended July 31, 1999, the Fund incurred an
administrative services fee of $386,000, of which KDI paid $375,419 to firms and
$634.99 to affiliates of KDI. For the fiscal year ended July 31, 1998, the Fund
incurred an administrative services fee of $408,000, of which KDI paid $401,472
to firms and $1,368.70 to affiliates of KDI.. Certain trustees or officers of
the Trust are also directors or officers of Scudder Kemper or KDI as indicated
under "Officers and Trustees."
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company ("State Street"), 225 Franklin Street, Boston, Massachusetts
02110, as custodian, has custody of all securities and cash of the Trust. State
Street attends to the collection of principal and income, and payment for and
collection of proceeds of securities bought and sold by the Fund. State Street
Bank and Trust Company ("State Street"), 801 Pennsylvania Avenue, Kansas City,
Missouri 64105, is the Trust's transfer agent and dividend-paying agent.
Pursuant to a services agreement with State Street, Kemper Service Company
("KSvC"), an affiliate of Scudder Kemper, serves as "Shareholder Service Agent"
of the Fund, and, as such, performs all of State Street's duties as transfer
agent and dividend-paying agent. State Street receives from the Fund as transfer
agent, and pays to KSvC, annual account fees as follows: $10.00 per year per
account ($18.00 for retirement accounts) plus an asset-based fee of 0.08% and
out-of-pocket expense reimbursement.
State Street remitted shareholder service fees in the amounts of $201,000,
$158,000 and $106,000 to the Shareholder Service Agent for the fiscal year ended
July 31, 2000, the fiscal year ended July 31, 1999, and the fiscal year ended
July 31, 1998, respectively.
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.
Legal Counsel. Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street,
Chicago, Illinois 60601, serves as legal counsel to the Fund.
PORTFOLIO TRANSACTIONS
Brokerage Commissions.
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase and sale
of securities for the Fund is to obtain the most favorable net results, taking
into account such factors as price, commission where applicable, size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Adviser seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through the familiarity of Scudder Investor
Services, Inc. ("SIS") with commissions charged on comparable transactions, as
well as by comparing commissions paid by the Fund to reported commissions paid
by others. The Adviser routinely reviews commission rates, execution and
settlement services performed and makes internal and external comparisons.
19
<PAGE>
The Fund's purchases and sales of fixed-income securities are generally placed
by the Adviser with primary market makers for these securities on a net basis,
without any brokerage commission being paid by the Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services
to the Adviser or the Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser may place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through SIS, which is a corporation registered
as a broker-dealer and a subsidiary of the Adviser. SIS will place orders on
behalf of the Fund with issuers, underwriters or other brokers and dealers. SIS
will not receive any commission, fee or other remuneration from the Fund for
this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Adviser, it is the opinion
of the Adviser that such information only supplements the Adviser's own research
effort since the information must still be analyzed, weighed, and reviewed by
the Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Fund, and not all such information is used by
the Adviser in connection with the Fund. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Fund.
The Trustees review, from time to time, whether the recapture for the benefit of
the Fund of some portion of the brokerage commissions or similar fees paid by
the Fund on portfolio transactions is legally permissible and advisable.
For the fiscal year ended July 31, 2000, the period from August 1, 1998 to July
31, 1999, the period from August 1, 1997 to July 31, 1998, and the thirteen
month period ended July 31, 1997, the fund paid brokerage commissions of
$99,597, $118,149, 167,696 and $282,728, respectively.
In the fiscal year ended July 31, 2000, the Fund paid $69,657 (69.94% of the
total brokerage commissions), resulting from orders placed, consistent with the
policy of seeking to obtain the most favorable net results, for transactions
placed with brokers and dealers who provided supplementary research services to
the Fund or Adviser. The amount of brokerage transactions during this period
aggregated $280,216,416, of which $85,797,649(30.62% of all brokerage
transactions) were transactions which included research commissions.
PURCHASE AND REDEMPTION OR REPURCHASE OF SHARES
Purchase of Shares
Shares of the Fund may be purchased from investment dealers during the Offering
Period described below at the public offering price, which is the net asset
value next determined plus a sales charge that is a percentage of the public
offering price and varies as shown below. The minimum initial investment is
$1,000 and the minimum subsequent investment is $100. The minimum initial
investment for an Individual Retirement Account or employee benefit plan account
is $250 and the minimum subsequent investment is $50. These minimum amounts may
be changed at any time in management's discretion.
20
<PAGE>
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers as
As a Percentage of As a Percentage of a Percentage of
Amount of Purchase Offering Price Net Asset Value * Offering Price
------------------ -------------- --------------- --------------
<S> <C> <C> <C> <C>
Less than $100,000 5.00% 5.26% 4.50%
$100,000 but less than $250,000 4.00 4.17 3.60
$250,000 but less than $500,000 3.00 3.09 2.70
$500,000 but less than $1 million 2.00 2.04 1.80
$1 million and over 0.00** 0.00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales
charge as discussed below.
*** Commission is payable by KDI as discussed below.
Shares will only be offered to the public during the Offering Period, which is
expected to begin on August 15, 2000 and end on or about February 15, 2002. The
Fund may at its option extend or shorten the Offering Period. The offering of
shares of the Fund shall be subject to suspension or termination. In addition,
the offering of Fund shares may be suspended from time to time during the
Offering Period in the discretion of KDI. During any period in which the public
offering of shares is suspended or terminated, shareholders will still be
permitted to reinvest dividends in shares of the Fund.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
The Fund receives the entire net asset value of all shares sold. KDI, the Fund's
principal underwriter, retains the sales charge from which it allows discounts
from the applicable public offering price to investment dealers, which are
uniform for all dealers in the United States and its territories. The normal
discount allowed to dealers is set forth in the above table. Upon notice to all
dealers with whom it has sales agreements, KDI may reallow up to the full
applicable sales charge, as shown in the above table, during periods and for
transactions specified in such notice and such reallowances may be based upon
attainment of minimum sales levels. During periods when 90% or more of the sales
charge is reallowed, such dealers may be deemed to be underwriters as that term
is defined in the Securities Act of 1933.
Banks and other financial services firms may provide administrative services
related to order placement and payment to facilitate transactions in shares of
the Fund for their clients, and KDI may pay them a transaction fee up to the
level of the discount or other concession allowable to dealers as described
above.. Banks or other financial services firms may be subject to various
federal and state laws regarding the services described above and may be
required to register as dealers pursuant to state law. If banking firms were
prohibited from acting in any capacity or providing any of the described
services, management would consider what action, if any, would be appropriate.
Management does not believe that termination of a relationship with a bank would
result in any material adverse consequences to the Fund.
KDI may from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold under the following conditions: (i) the purchased
shares are held in a Kemper IRA account, (ii) the shares are purchased as a
direct "roll over" of a distribution from a qualified retirement plan account
maintained on a participant subaccount record keeping system provided by Kemper
Service Company, (iii) the registered representative placing the trade is a
member of ProStar, a group of persons designated by KDI in acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
21
<PAGE>
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts or promotional incentives, in the
form of cash, to firms that sell shares of the Fund. In some instances, such
discounts or other incentives will be offered only to certain firms that sell or
are expected to sell during specified time periods certain minimum amounts of
shares of the Fund, or other funds underwritten by KDI.
From October 1, 2000 through December 31, 2000 ("Special Offering Period"), KDI
intends to reallow to PaineWebber the full applicable sales charge with respect
to Class A shares purchased for accounts during the Special Offering Period (not
including Class A shares acquired at net asset value).
Shares of the Fund may be purchased at net asset value by: (a) any purchaser
provided that the amount invested in the Fund or other Kemper Mutual Funds
described under "Special Features -- Combined Purchases" totals at least
$1,000,000 (the "Large Order NAV Purchase Privilege") including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features described under "Special Features"; or (b) a
participant-directed qualified retirement plan described in Code Section 401(a)
or a participant-directed non-qualified deferred compensation plan described in
Code Section 457 or a participant-directed qualified retirement plan described
in Code Section 403(b)(7) which is not sponsored by a K-12 school district,
provided in each case that such plan has not less than 200 eligible employees.
A contingent deferred sales charge may be imposed upon redemption of shares of
the Fund that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year following purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of (a) redemptions by a participant-directed qualified retirement plan
described in Code Section 401(a) or a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares by a
shareholder whose dealer of record at the time of investment notifies KDI that
the dealer waives the discretionary commission applicable to such Large Order
NAV Purchase.
Shares of the Fund purchased under the Large Order NAV Purchase Privilege may be
exchanged for shares of another Kemper Mutual Fund or a Money Market Fund under
the exchange privilege described under "Special Features -- Exchange Privilege"
without paying any contingent deferred sales charge at the time of exchange. If
the shares received on exchange are redeemed thereafter, a contingent deferred
sales charge may be imposed in accordance with the foregoing requirements
provided that the shares redeemed will retain their original cost and purchase
date for purposes of the contingent deferred sales charge.
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of shares of the Fund at net asset
value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount recordkeeping system made available
through the Shareholder Service Agent. For purposes of determining the
appropriate commission percentage to be applied to a particular sale, KDI will
consider the cumulative amount invested by the purchaser in the Fund and other
Kemper Mutual Funds listed under "Special Features -- Combined Purchases,"
including purchases pursuant to the "Combined Purchases," "Letter of Intent" and
"Cumulative Discount" features referred to above. The privilege of purchasing
shares of the Fund at net asset value under the Large Order NAV Purchase
Privilege is not available if another net asset value purchase privilege is also
applicable.
Shares of the Fund may be purchased at net asset value by persons who purchase
such shares through bank trust departments that process such trades through an
automated, integrated mutual fund clearing program provided by a third party
clearing firm.
22
<PAGE>
Shares of the Fund may be purchased at net asset value in any amount by certain
professionals who assist in the promotion of Kemper Funds pursuant to personal
services contracts with KDI, for themselves or members of their families. KDI in
its discretion may compensate financial services firms for sales of shares under
this privilege at a commission rate of 0.50% of the amount of shares purchased.
Shares of the Fund may be purchased at net asset value by persons who purchase
shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by Rewards Plus of America for the benefit of
employees of participating employer groups.
Shares may be sold at net asset value in any amount to: (a) officers, trustees,
directors, employees (including retirees) and sales representatives of the Fund,
its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Fund,
for themselves or their spouses or dependent children; (c) shareholders who
owned shares of Kemper Value Series, Inc. ("KVS") on September 8, 1995, and have
continuously owned shares of KVS (or a Kemper Fund acquired by exchange of KVS
shares) since that date, for themselves or members of their families; and (d)
any trust, pension, profit-sharing or other benefit plan for only such persons.
Shares may be sold at net asset value in any amount to selected employees
(including their spouses and dependent children) of banks and other financial
services firms that provide administrative services related to order placement
and payment to facilitate transactions in shares of the Fund for their clients
pursuant to an agreement with KDI or one of its affiliates. Only those employees
of such banks and other firms who as part of their usual duties provide services
related to transactions in Fund shares may purchase Fund shares at net asset
value hereunder. Shares may be sold at net asset value in any amount to unit
investment trusts sponsored by Ranson & Associates, Inc. In addition,
unitholders of unit investment trusts sponsored by Ranson & Associates, Inc. may
purchase Fund shares at net asset value through reinvestment programs described
in the prospectuses of such trusts which have such programs. Shares of the Fund
may be sold at net asset value by certain investment advisers registered under
the Investment Advisers Act of 1940 and other financial services firms, acting
solely as agent for their clients, that adhere to certain standards established
by KDI, including a requirement that such shares be sold for the benefit of
their clients participating in an investment advisory program or agency
commission program under which such clients pay a fee to the investment adviser
or other firm for portfolio management or agency brokerage services. Such shares
are sold for investment purposes and on the condition that they will not be
resold except through redemption or repurchase by the Fund. The Fund may also
issue shares at net asset value in connection with the acquisition of the assets
of or merger or consolidation with another investment company, or to
shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
Shares of the Fund or any other Kemper Mutual Fund listed under "Special
Features Combined Purchases" may be purchased at net asset value in any amount
by members of the plaintiff class in the proceeding known as Howard and Audrey
Tabankin, et al. v. Kemper Short-Term Global Income Fund, et al., Case No. 93 C
5231 (N.D. IL). This privilege is generally non-transferable and continues for
the lifetime of individual class members and for a ten-year period for
non-individual class members. To make a purchase at net asset value under this
privilege, the investor must, at the time of purchase, submit a written request
that the purchase be processed at net asset value pursuant to this privilege
specifically identifying the purchaser as a member of the "Tabankin Class."
Shares purchased under this privilege will be maintained in a separate account
that includes only shares purchased under this privilege. For more details
concerning this privilege, class members should refer to the Notice of (1)
Proposed Settlement with Defendants; and (2) Hearing to Determine Fairness of
Proposed Settlement, dated August 31, 1995, issued in connection with the
aforementioned court proceeding. For sales of Fund shares at net asset value
pursuant to this privilege, KDI may at its discretion pay investment dealers and
other financial services firms a concession, payable quarterly, at an annual
rate of up to 0.25% of net assets attributable to such shares maintained and
serviced by the firm. A firm becomes eligible for the concession based upon
assets in accounts attributable to shares purchased under this privilege in the
month after the month of purchase and the concession continues until terminated
by KDI. The privilege of purchasing shares of the Fund at net asset value under
this privilege is not available if another net asset value purchase privilege
also applies (including the purchase of Class A shares of the Cash Reserves
Fund).
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other
23
<PAGE>
organized group of persons whether incorporated or not, provided the
organization has been in existence for at least six months and has some purpose
other than the purchase of redeemable securities of a registered investment
company at a discount. In order to qualify for a lower sales charge, all orders
from an organized group will have to be placed through a single investment
dealer or other firm and identified as originating from a qualifying purchaser.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem Fund shares. Some may establish higher minimum
investment requirements than required by the Fund. Firms may arrange with their
clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
Fund shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value next determined after receipt by KDI of the order
accompanied by payment. However, orders received by dealers or other firms prior
to the determination of net asset value and received by KDI prior to the close
of its business day will be confirmed at a price based on the net asset value
effective on that day. The Fund reserves the right to determine the net asset
value more frequently than once a day if deemed desirable. Dealers and other
financial services firms are obligated to transmit orders promptly. Collection
may take significantly longer for a check drawn on a foreign bank than for a
check drawn on a domestic bank. Therefore, if an order is accompanied by a check
drawn on a foreign bank, funds must normally be collected before shares will be
purchased.
The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject or limit purchase orders.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
REDEMPTION OR REPURCHASE OF SHARES
General. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem them by making a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. When certificates for shares have been
issued, they must be mailed to or deposited with the Shareholder Service Agent,
along with a duly endorsed stock power and accompanied by a written request for
redemption. The redemption request and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians,
executors, administrators, trustees or guardians. As noted previously, only
shareholders who hold their shares in the Fund until the Maturity Date and
reinvest their dividends in the Fund will necessarily receive on the Maturity
Date an amount at least equal to their investment, including any sales charge
("Investment Protection").
The redemption price will be the net asset value next determined following
receipt by the Shareholder Service Agent of a properly executed request with any
required documents as described above. Payment for shares redeemed will be made
in cash as promptly as practicable but in no event later than seven days after
receipt of a properly executed request accompanied by any outstanding share
certificates in proper form for transfer. When the Fund is requested to redeem
shares for which it may not have yet received good payment (i.e., purchases by
check, EXPRESS-Transfer or Bank Direct Deposit), it may delay
24
<PAGE>
transmittal of redemption proceeds until it has determined that collected funds
have been received for the purchase of such shares, which will be up to 10 days
from receipt by the Fund of the purchase amount. The redemption within two years
of shares purchased at net asset value under the Large Order NAV Purchase
Privilege may be subject to a contingent deferred sales charge (see "Purchase of
Shares"). Because of the high cost of maintaining small accounts, the Fund may
assess a quarterly fee of $9 on any account with a balance below $1,000 for the
quarter. The fee will not apply to accounts enrolled in individual retirement
accounts, or employer sponsored employee benefit plans using the subaccount
record keeping system made available through the Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agent
reasonably believes, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, as long
as the reasonable verification procedures are followed. The verification
procedures include recording instructions, requiring certain identifying
information before acting upon instructions and sending written confirmations.
Telephone Redemptions. If the proceeds of the redemption are $50,000 or less and
the proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor, guardian and custodian account
holders, provided the trustee, executor, guardian or custodian is named in the
account registration. Other institutional account holders may exercise this
special privilege of redeeming shares by telephone request or written request
without signature guarantee subject to the same conditions as individual account
holders and subject to the limitations on liability described under "General"
above, provided that this privilege has been pre-authorized by the institutional
account holder by written instruction to the Shareholder Service Agent with
signatures guaranteed. Telephone requests may be made by calling 1-800-621-1048.
Shares purchased by check, through EXPRESS-Transfer or Bank Direct Deposit may
not be redeemed under this privilege of redeeming shares by telephone request
until such shares have been owned for at least 10 days. This privilege of
redeeming shares by telephone request or by written request without a signature
guarantee may not be used to redeem shares held in certificated form and may not
be used if the shareholder's account has had an address change within 30 days of
the redemption request. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the telephone
redemption privilege, although investors can still redeem by mail. The Fund
reserves the right to terminate or modify this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value next determined after receipt of a request by KDI.
However, requests for repurchases received by dealers or other firms prior to
the determination of net asset value and received by KDI prior to the close of
KDI's business day will be confirmed at the net asset value effective on that
day. The offer to repurchase may be suspended at any time. Requirements as to
stock powers, certificates, payments and delay of payments are the same as for
redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares can be redeemed and proceeds sent by federal wire transfer
to a single previously designated account. Requests received by the Shareholder
Service Agent prior to the determination of net asset value will result in
shares being redeemed that day at the net asset value effective on that day and
normally the proceeds will be sent to the designated account the following
business day. Delivery of the proceeds of a wire redemption request of $250,000
or more may be delayed by the Fund for up to seven days if Scudder Kemper deems
it appropriate under then current market conditions. Once authorization is on
file, the Shareholder Service Agent will honor requests by telephone at
1-800-621-1048 or in writing, subject to the limitations on liability described
under "General" above. The Fund is not responsible for the efficiency of the
federal wire system or the account holder's financial services firm or bank. The
Fund currently does not charge the account holder for wire transfers. The
account holder is responsible for any charges imposed by the account holder's
firm or bank. There is a $1,000 wire redemption minimum. To change the
designated account to receive
25
<PAGE>
wire redemption proceeds, send a written request to the Shareholder Service
Agent with signatures guaranteed as described above or contact the firm through
which shares of the Fund were purchased. Shares purchased by check, through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed by wire transfer
until such shares have been owned for at least 10 days. Account holders may not
use this procedure to redeem shares held in certificated form. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the expedited wire transfer redemption privilege. The
Fund reserves the right to terminate or modify this privilege at any time.
Reinvestment Privilege. A shareholder who has redeemed shares of the Fund or
Class A shares of any other Kemper Mutual Fund listed under "Special Features --
Combined Purchases" (other than shares of Kemper Cash Reserves Fund purchased
directly at net asset value) may reinvest up to the full amount redeemed at net
asset value at the time of the reinvestment in shares of the Fund or in Class A
shares of the other listed Kemper Mutual Funds. A shareholder of the Fund or any
other Kemper Mutual Fund who redeems shares purchased under the Large Order NAV
Purchase Privilege (see "Purchase of Shares") and incurs a contingent deferred
sales charge may reinvest up to the full amount redeemed at net asset value at
the time of the reinvestment in shares of the Fund or Class A shares of other
Kemper Mutual Funds. The amount of any contingent deferred sales charge also
will be reinvested. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares of another Kemper Mutual Fund who has redeemed shares
of that fund may reinvest up to the full amount redeemed, less any applicable
contingent deferred sales charge that may have been imposed upon the redemption
of such shares, at net asset value in the Fund or in Class A shares of the other
Kemper Mutual Funds listed under "Special Features -- Combined Purchases."
Purchases through the reinvestment privilege are subject to the minimum
investment requirements applicable to the shares being purchased and may only be
made for funds available for sale in the shareholder's state of residence as
listed under "Special Features -- Exchange Privilege." The reinvestment
privilege can be used only once as to any specific shares and reinvestment must
be effected within six months of the redemption. If a loss is realized on the
redemption of Fund shares, the reinvestment in the same Fund may be subject to
the "wash sale" rules if made within 30 days of the redemption, resulting in the
postponement of the recognition of such loss for federal income tax purposes.
The reinvestment privilege may be terminated or modified at any time and is
subject to the limited Offering Period of the Fund.
SPECIAL FEATURES
Combined Purchases. The Fund's shares may be purchased at the rate applicable to
the discount bracket attained by combining concurrent investments in Class A
shares (or the equivalent) of any of the following funds: Kemper Technology
Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper Small Capitalization
Equity Fund, Kemper Income and Capital Preservation Fund, Kemper Municipal Bond
Fund, Kemper Strategic Income Fund, Kemper High Yield Series, Kemper High Yield
Fund II, Kemper U.S. Government Securities Fund, Kemper International Fund,
Kemper State Tax-Free Income Series, Kemper Short-Term U.S. Government Fund,
Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper Target Equity Fund
(series are subject to a limited offering period), Kemper Intermediate Municipal
Bond Fund, Kemper Cash Reserves Fund, Kemper U.S. Mortgage Fund, Kemper Value
Series, Inc., Kemper Value+Growth Fund, Kemper Horizon Fund, Kemper New Europe
Fund, Inc. Kemper Asian Growth Fund, Kemper Aggressive Growth Fund, Kemper
Global/International Series, Inc., Kemper U.S. Growth and Income Fund,
Kemper-Dreman Financial Services Fund, Kemper Value Fund, Kemper Classic Growth
Fund and Kemper Global Discovery Fund ("Kemper Mutual Funds") and certain "Money
Market Funds" (Zurich Money Funds, Zurich YieldWise Funds, Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust). Except as noted below, there is no combined
purchase credit for direct purchases of shares of Zurich Money Funds, Zurich
YieldWise Funds, Cash Equivalent Fund, Tax-Exempt California Money Market Fund,
Cash Account Trust, Investors Municipal Cash Fund or Investors Cash Trust
("Money Market Funds"), which are not considered "Kemper Mutual Funds" for
purposes hereof. For purposes of the Combined Purchases feature described above,
as well as for the Letter of Intent and Cumulative Discount features described
below, employer sponsored employee benefit plans using the subaccount record
keeping system made available through the Shareholder Service Agent may include
(a) Money Market Funds as "Kemper Mutual Funds," (b) all classes of shares of
any Kemper Mutual Fund and (c) the value of any other plan investment, such as
guaranteed investment contracts and employer stock, maintained on such
subaccount record keeping system.
Letter of Intent. The same reduced sales charges, as shown in the applicable
prospectus, also apply to the aggregate amount of purchases of such Kemper
Mutual Funds listed above made by any purchaser within a 24-month period under a
written Letter of Intent ("Letter") provided by KDI. As noted under "Purchase of
Shares," the Offering Period for the purchase of shares of the Fund is limited.
However, shares of other Kemper Mutual Funds noted above would be available
beyond that
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period. The Letter, which imposes no obligation to purchase or sell additional
shares, provides for a price adjustment depending upon the actual amount
purchased within such period. The Letter provides that the first purchase
following execution of the Letter must be at least 5% of the amount of the
intended purchase, and that 5% of the amount of the intended purchase normally
will be held in escrow in the form of shares pending completion of the intended
purchase. If the total investments under the Letter are less than the intended
amount and thereby qualify only for a higher sales charge than actually paid,
the appropriate number of escrowed shares will be redeemed and the proceeds used
toward satisfaction of the obligation to pay the increased sales charge. The
Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation credit" toward the completion of the Letter, but
no price adjustment will be made on such shares.
Cumulative Discount. The Fund's shares also may be purchased at the rate
applicable to the discount bracket attained by adding to the cost of Fund shares
being purchased the value of all shares of the above mentioned Kemper Mutual
Funds (computed at the maximum offering price at the time of the purchase for
which the discount is applicable) already owned by the investor.
Availability of Quantity Discounts. An investor or the investor's dealer or
other financial services firm must notify the Shareholder Service Agent or KDI
whenever a quantity discount or reduced sales charge is applicable to a
purchase. Upon such notification, the investor will receive the lowest
applicable sales charge. Quantity discounts described above may be modified or
terminated at any time.
Exchange Privilege. Subject to the following limitations, shares of the Kemper
Mutual Funds and Money Market Funds listed under "Special Features -- Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Fund, or from a Money Market Fund, may not be exchanged thereafter until they
have been owned for 15 days (the "15 Day Hold Policy"). In addition, shares of a
Kemper Mutual Fund with a value of $1,000,000 or less (except Kemper Cash
Reserves Fund) acquired by exchange from another Kemper Mutual Fund, or from a
Money Market Fund, may not be exchanged thereafter until they have been owned
for 15 days if, in the investment manager's judgement, the exchange activity may
have an adverse effect on the fund. In particular, a pattern of exchanges that
coincides with a "market timing" strategy may be disruptive to the Fund and
therefore may be subject to the 15-Day Hold Policy. For purposes of determining
whether the 15 Day Hold Policy applies to a particular exchange, the value of
the shares to be exchanged shall be computed by aggregating the value of shares
being exchanged for all accounts under common control, direction or advice,
including without limitation accounts administered by a financial services firm
offering market timing, asset allocation or similar services. A series of Kemper
Target Equity Fund will be available on exchange only during the Offering Period
for such series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI. Exchanges may only
be made for funds that are available for sale in the shareholder's state of
residence. Currently, Tax-Exempt California Money Market Fund is available for
sale only in California and the portfolios of Investors Municipal Cash Fund are
available for sale only in certain states.
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Kemper Fund into which they are being exchanged.
Exchanges are made based on relative dollar values of the shares involved in the
exchange. There is no service fee for an exchange; however, dealers or other
firms may charge for their services in effecting exchange transactions.
Exchanges will be effected by redemption of shares of the fund held and purchase
of shares of the other fund. For federal income tax purposes, any such exchange
constitutes a sale upon which a gain or loss may be realized, depending upon
whether the value of the shares being exchanged is more or less than the
shareholder's adjusted cost basis of such shares. Shareholders interested in
exercising the exchange privilege may obtain prospectuses of the other funds
from dealers, other firms or KDI. Exchanges may be accomplished by a written
request to Kemper Service Company, Attention: Exchange Department, P.O. Box
419557, Kansas City, Missouri 64141-6557, or by telephone if the shareholder has
given authorization. Once the authorization is on file, the Shareholder Service
Agent will honor requests by telephone at 1-800-621-1048 or in writing, subject
to the limitations on liability under "Redemption or Repurchase of Shares --
General." Any share certificates must be deposited prior to any exchange of such
shares. During periods when it is difficult to contact the Shareholder Service
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Agent by telephone, it may be difficult to use the telephone exchange privilege.
The exchange privilege is not a right and may be suspended, terminated or
modified at any time. Except as otherwise permitted by applicable regulations,
60 days' prior written notice of any termination or material change will be
provided.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege of redeeming shares by EXPRESS-Transfer until such shares have been
owned for at least 10 days. By enrolling in EXPRESS-Transfer, the shareholder
authorizes the Shareholder Service Agent to rely upon telephone instructions
from any person to transfer the specified amounts between the shareholder's Fund
account and the predesignated bank, savings and loan or credit union account,
subject to the limitations on liability under "Redemption or Repurchase of
Shares -- General." Once enrolled in EXPRESS-Transfer, a shareholder can
initiate a transaction by calling Kemper Shareholder Services toll free at
1-800-621-1048 Monday through Friday, 8:00 a.m. to 3:00 p.m. Chicago time.
Shareholders may terminate this privilege by sending written notice to Kemper
Service Company, P.O. Box 419415, Kansas City, Missouri 64141-6415. Termination
will become effective as soon as the Shareholder Service Agent has had a
reasonable time to act upon the request. EXPRESS-Transfer cannot be used with
passbook savings accounts or for tax-deferred plans such as Individual
Retirement Accounts ("IRAs").
Systematic Withdrawal Plan. The owner of $5,000 or more of the Fund's shares at
the offering price (net asset value plus the sales charge) may provide for the
payment from the owner's account of any requested dollar amount up to $50,000 to
be paid to the owner or a designated payee monthly, quarterly, semiannually or
annually. The $5,000 minimum account size is not applicable to Individual
Retirement Accounts. The minimum periodic payment is $100. Shares are redeemed
so that the payee will receive payment approximately the first of the month. A
sufficient number of full and fractional shares will be redeemed to make the
designated payment. Depending upon the size of the payments requested and
fluctuations in the net asset value of the shares redeemed, redemptions for the
purpose of making such payments may reduce or even exhaust the account.
The purchase of shares while participating in a systematic withdrawal plan
ordinarily will be disadvantageous to the investor because the investor will be
paying a sales charge on the purchase of shares at the same time that the
investor is redeeming shares upon which a sales charge may already have been
paid. Therefore, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. (See "Purchase of Shares" regarding the limited Offering Period for
the Fund's shares.) The right is reserved to amend the systematic withdrawal
plan on 30 days' notice. The plan may be terminated at any time by the investor
or the Fund. As noted previously, only shareholders who hold their shares in the
Fund until the Maturity Date and reinvest all dividends in the Fund will
necessarily receive the benefit of the Fund's Investment Protection.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
Individual Retirement Accounts ("IRAs") with State Street as custodian. This
includes Savings Incentive Match Plan for Employees of Small Employers
("SIMPLE") IRA accounts and Simplified Employee Pension Plan ("SEP") IRA
accounts and prototype documents.
403(b)(7) Custodial Accounts also with State Street as custodian. This type of
plan is available to employees of most non-profit organizations.
Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of 25%
of compensation or $30,000. Brochures describing the above plans as well as
model defined benefit plans, target benefit plans, 457 plans, 401(k) plans,
SIMPLE 401(k) plans and materials for establishing them are available from the
Shareholder Service Agent upon request. The brochures for plans with State
Street as custodian describe the current fees payable to State Street for its
services as custodian. Investors should consult with their own tax advisers
before establishing a retirement plan. In view of the limited Offering Period of
the Fund (see "Purchase of Shares"), the Fund may not be appropriate for
periodic contribution plans.
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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 "Distributions 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, the Fund generally will not
be liable for federal income taxes to the extent its earnings are distributed.
To so qualify, the Fund must satisfy certain income and asset diversification
requirements, and must distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term capital gain and net
tax-exempt income, if any).
If for any taxable year the Fund does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of the Fund's
earnings and profits, and would be eligible for the dividends-received deduction
in the case of corporate shareholders.
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 98%
of the Fund's ordinary income for each calendar year, at least 98% of the excess
of its capital gains over capital losses (adjusted for certain ordinary losses)
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed.
Investment company taxable income includes dividends, interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund.
If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by the Fund for reinvestment, requiring federal
income taxes to be paid thereon by the Fund, the Fund intends to elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim a relative share of federal income taxes paid by the Fund on such
gains as a credit against personal federal income tax liability, and will be
entitled to increase the adjusted tax basis on Fund shares by the difference
between a pro rata share of such gains owned and the individual tax credit.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income.
Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss are taxable to shareholders as long-term
capital gains, regardless of the length of time the shares of the Fund have been
held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long- term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Scudder Kemper
fund, may result in tax consequences (gain or loss) to the shareholder and are
also subject to these reporting requirements.
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A qualifying individual may make a deductible IRA contribution for any taxable
year only if (i) the individual is not an active participant in an employer's
retirement plan, or (ii) if the individual is an active participant in an
employee retirement plan and the individual has an adjusted gross income below a
certain level ($52,000 for married individuals filing a joint return, with a
phase-out of the deduction for adjusted gross income between $52,000 and
$62,000; $32,000 for a single individual, with a phase-out for adjusted gross
income between $32,000 and $42,000). An individual is not considered an active
participant in an employer's retirement plan if the individual's spouse is an
active participant in such a plan. However, in the case of a joint return, the
amount of the deductible contribution by the individual who is not an active
participant (but whose spouse is) is phased out for adjusted gross income
between $150,000 and $160,000. However, an individual not permitted to make a
deductible contribution to an IRA for any such taxable year may nonetheless make
nondeductible contributions up to $2,000 to an IRA (up to $2,250 per individual
for married couples if only one spouse has earned income) for that year. There
are special rules for determining how withdrawals are to be taxed if an IRA
contains both deductible and nondeductible amounts. In general, a proportionate
amount of each withdrawal will be deemed to be made from nondeductible
contributions; amounts treated as a return of nondeductible contributions will
not be taxable. Also, annual contributions may be made to a spousal IRA even if
the spouse has earnings in a given year if the spouse elects to be treated as
having no earnings (for IRA contribution purposes) for the year.
If shares are held in a tax-deferred account, such as a retirement plan, income
and gain will not be taxable each year. Instead, the taxable portion of amounts
held in a tax-deferred account generally will be subject to tax as ordinary
income only when distributed from that account.
Distributions by the Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Dividend and interest income received by the Fund from sources outside the U.S.
may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
The Fund may invest in shares of certain foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). If
the Fund receives a so-called "excess distribution" with respect to PFIC stock,
the Fund itself may be subject to a tax on a portion of the excess distribution.
Certain distributions from a PFIC as well as gains from the sale of the PFIC
shares are treated as "excess distributions." In general, under the PFIC rules,
an excess distribution is treated as having been realized ratably over the
period during which the Fund held the PFIC shares. The Fund will be subject to
tax on the portion, if any, of an excess distribution that is allocated to prior
Fund taxable years and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. Excess distributions allocated
to the current taxable year are characterized as ordinary income even though,
absent application of the PFIC rules, certain excess distributions might have
been classified as capital gain.
The Fund may make an election to mark to market its shares of PFICs in lieu of
being subject to U.S. federal income taxation. At the end of each taxable year
to which the election applies, the Fund would report as ordinary income the
amount by which the fair market value of the PFIC shares exceeds the Fund's
adjusted basis in such shares; any mark to market losses and any loss from an
actual disposition of shares would be deductible as ordinary loss to the extent
of any net mark to market gains included in income in prior years. The effect of
the election would be to treat excess distributions and gain on dispositions as
ordinary income which is not subject to the Fund level tax when distributed to
shareholders as a dividend. Alternatively, the Fund may elect to include as
income and gain its share of the ordinary earnings and net capital gain of PFICs
in lieu of being taxed in the manner described above.
Equity options (including covered call options on portfolio stock) written or
purchased by the Fund will be subject to the tax consequences under Section 1234
of the Code. In general, no loss is recognized by the Fund upon payment of a
premium in connection with the purchase of a put or call option. The character
of any gain or loss recognized (i.e., long-term or short-term) will generally
depend, in the case of a lapse or sale of the option, on the Fund's holding
period for the option and, in the case of an exercise of the option, on the
Fund's holding period for the underlying security. The purchase of a put option
may constitute a short sale for federal income tax purposes, causing an
adjustment in the holding period of the underlying security or substantially
identical security in the Fund's portfolio. If the Fund writes a call option, no
gain is recognized upon its receipt of a premium. If the option lapses or is
closed out, any gain or loss is treated as a short-term capital gain or loss. If
a call option is exercised, any
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resulting gain or loss is short-term or long-term capital gain or loss depending
on the holding period of the underlying security. The exercise of a put option
written by the Fund is not a taxable transaction for the Fund.
Many futures and forward contracts entered into by the Fund and all listed
nonequity options written or purchased by the Fund (including covered call
options written on debt securities and options purchased or written on futures
contracts) will be governed by Section 1256 of the Code. Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position will be treated as 60% long-term and 40% short-term, and on
the last trading day of the Fund's fiscal year (and generally, on October 31 for
purposes of the 4% excise tax), all outstanding Section 1256 positions will be
marked-to-market (i.e., treated as if such positions were closed out at their
closing price on such day), with any resulting gain or loss recognized as 60%
long-term and 40% short-term. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign currency-related forward contracts,
certain futures and options and similar financial instruments entered into or
acquired by the Fund will be treated as ordinary income or loss. Under certain
circumstances, entry into a futures contract to sell a security may constitute a
short sale for federal income tax purposes, causing an adjustment in the holding
period of the underlying security or a substantially identical security in the
Fund's portfolio.
Positions of the Fund consisting of at least one stock and at least one stock
option or other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stock
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for any "qualified covered
call options" on stock written by the Fund.
Positions of the Fund consisting of at least one position not governed by
Section 1256 and at least one future, forward, or nonequity option contract
which is governed by Section 1256 which substantially diminishes the Fund's risk
of loss with respect to such other position will be treated as a "mixed
straddle." Although mixed straddles are subject to the straddle rules of Section
1092 of the Code, certain tax elections exist for them which reduce or eliminate
the operation of these rules. The Fund will monitor its transactions in options
and futures and may make certain tax elections in connection with these
investments under Section 1233(h) of the Code.
Notwithstanding any of the foregoing, Section 1269 of the Code may require the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if the Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, and on disposition of certain futures, forward or options
contracts, gains or losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contracts and the
date of disposition are also treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income.
If the Fund holds zero coupon securities or other securities which are issued at
a discount a portion of the difference between the issue price and the face
value of such securities ("original issue discount") will be treated as income
to the Fund each year, even though the Fund will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the investment company taxable income of the Fund which
must be distributed to shareholders in order to maintain the qualification of
the Fund as a regulated investment company and to avoid federal income tax at
the Fund level. In addition, if the Fund invests in certain high yield original
issue discount obligations issued by corporations, a portion of the original
issue discount accruing on the obligation may be eligible for the deduction for
dividends received by corporations. In such an event, properly designated
dividends of investment company taxable income received from the Fund by its
corporate shareholders, to the extent attributable to such portion of the
accrued original issue discount, may be eligible for the deduction for dividends
received by corporations.
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If The Fund will be required to report to the IRS all distributions of taxable
income and capital gains as well as gross proceeds from the redemption or
exchange of Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code,
distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
A 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 shareholder's 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-Class A Shares-Combined Purchases" (other
than shares of Kemper Cash Reserves Fund not acquired by exchange from another
Kemper Mutual Fund) may reinvest the amount redeemed at net asset value at the
time of the reinvestment in shares of the Fund or in shares of the other Kemper
Mutual Funds within six months of the redemption. If redeemed shares were held
less than 91 days, then the lesser of (a) the sales charge waived on the
reinvested shares, or (b) the sales charge incurred on the redeemed shares, is
included in the basis of the reinvested shares and is not included in the basis
of the redeemed shares. If a shareholder realizes a loss on the redemption or
exchange of the Fund's shares and reinvests in shares of another Fund within 30
days before or after the redemption or exchange, the transactions may be subject
to the wash sale rules resulting in a postponement of the recognition of such
loss for federal income tax purposes. An exchange of the Fund's shares for
shares of another fund is treated as a redemption and reinvestment for federal
income tax purposes upon which gain or loss may be recognized.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Shareholders should consult their tax advisers about the application of the
provisions of tax law in light of their particular tax situations.
PERFORMANCE
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. The information
in the table reflects the performance of the Fund under its former name, Kemper
Retirement Series II. It is currently expected that the portion of the fund's
investment portfolio that must be allocated to Zero Coupon Treasuries will be
higher during the new term of the Fund. In addition, the fund's portfolio after
the original Maturity Date of August 15, 2000 is expected to have a smaller
allocation of equity securities (and, therefore, less growth potential) than the
fund's portfolio prior to that date. The current Fund's performance may vary
significantly from that shown below.
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Average Annual Total Return for period ended July 31, 2000
(Adjusted for the maximum sales charge)
---------------------------------------
Since
1-Year 5-Years Inception(1)
------ ------- ------------
4.93% 10.62% 12.29%
(1) Inception date for the fund is September 10, 1990.
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 and prospectus. Total return performance for a specific
period is calculated by first taking a hypothetical investment ("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 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. The performance results noted for the
fund would be lower to the extent that certain expenses were not capped. Shares
of the Fund are redeemable at the then current net asset value, which may be
more or less than original cost.
Investors may want to compare the performance of the Fund to certificates of
deposit issued by banks and other depository institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of the Fund to that of U.S.
Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Information regarding the performance of Treasury obligations may be
based upon, among other things, the Towers Data Systems U.S. Treasury Bill
index, which is an unmanaged index based on the average monthly yield of
treasury bills maturing in six months. Due to their short maturities, Treasury
bills generally experience very low market value volatility.
Investors may want to compare the performance of the Fund to the performance of
two indexes, such as the Russell 1000(R) Growth Index, the Standard & Poor's 500
Stock Index, the Wilshire 750 Mid-Cap Growth Index, and the Consumer Price
Index. The Russell 1000(R) Growth Index is an unmanaged index of common stocks
of larger U.S. companies with greater than average growth orientation and
represents the universe of stocks from which "earnings/growth" money managers
typically select. The Standard & Poor's 500 Stock Index is an unmanaged index of
common stocks which is considered to be generally representative of the U.S.
stock market. The market prices and yields of those stocks will fluctuate. The
Wilshire 750 Mid-Cap Growth Index is an unmanaged index that generally
represents the performance of mid-size capitalization stocks during various
market conditions. The Consumer Price Index is generally considered to be a
measure of inflation.
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Investors may want to compare the performance of a Fund to that of money market
funds. Money market funds seek to maintain a stable net asset value and yield
fluctuates. Information regarding the performance of money market funds may be
based upon, among other things, IBC/Donoghue's Money Fund Averages(R) (All
Taxable). As reported by IBC/Donoghue's, all investment results represent total
return (annualized results for the period net of management fees and expenses)
and one year investment results are effective annual yields assuming
reinvestment of dividends.
From time to time the Fund may include in its sales communications, ranking and
rating information received from various organizations, to include but not be
limited to, ratings from Morningstar, Inc. and rankings from Lipper Analytical
Services, Inc.
Code of Ethics
The Trust, the Adviser and principal underwriter have each adopted codes of
ethics under rule 17j-1 of the Investment Company Act. Board members, officers
of the Trust and employees of the Adviser and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Trust, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Adviser's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Adviser's Code of Ethics
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Adviser's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
OFFICERS AND TRUSTEES
The officers and trustees of the Trust, their birthdates, their principal
occupations and their affiliations, if any, with the Adviser and KDI are listed
below. All persons named as officers and trustees also serve in similar
capacities for other funds advised by the Adviser.
JAMES E. AKINS (10/15/26), Trustee, 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs; formerly a
career United States Foreign Service Officer, Energy Adviser for the White House
and United States Ambassador to Saudi Arabia, 1973-76.
JAMES R. EDGAR (07/22/46), Trustee, 1927 County Road, 150E, Seymour, Illinois;
Distinguished Fellow, Institute of Government and Public Affairs, University of
Illinois; Director, Kemper Insurance Companies; formerly, Governor of the State
of Illinois, 1991-1999.
ARTHUR R. GOTTSCHALK (02/13/25), Trustee, 10642 Brookridge Drive, Frankfort,
Illinois, Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; Former Member, Illinois state Senate;
Formerly Vice President, The Reuben H. Donnelley Corp., Formerly, Attorney.
FREDERICK T. KELSEY (04/25/27), Trustee, 4010 Arbor Lane, Unit 102, Northfield,
Illinois; Retired; formerly, consultant to Goldman, Sachs & Co.; formerly,
President, Treasurer and Trustee of Institutional Liquid Assets and its
affiliated mutual funds; formerly, President and Trustee of the Northern
Institutional Funds, formerly, President and Trustee of the Pilot Funds.
THOMAS W. LITTAUER* (4/26/55), Chairman, Trustee and Vice President, Two
International Place, Boston, Massachusetts; Managing Director, Scudder Kemper,
formerly, Head of Broker Dealer Division of an unaffiliated investment
management firm during 1997; prior thereto, President of Client Management
Services of an unaffiliated investment management firm from 1991 to 1996.
FRED B. RENWICK (02/01/30), Trustee, 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director,
TIFF Investment Program, Inc., Director, the Wartburg Foundation; Chairman
Finance Committee of Morehouse College Board of Trustees; Chairman, American
Bible Society Investment Committee;
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formerly member of the Investment Committee of Atlanta University Board of
Trustees; formerly Director of Board of Pensions, Evangelical Lutheran Church of
America.
JOHN G. WEITHERS (08/08/33), Trustee, 311 Spring Lake, Hinsdale, Illinois;
Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago
Stock Exchange; Director, Federal Life Insurance Company, President of the
Members of the Corporation and Trustee, DePaul University.
MARK S. CASADY (9/21/60), President*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser; formerly, Institutional Sales Manager
of an unaffiliated mutual fund distributor.
TRACY McCORMICK (9/27/54), Vice President*, 222 South Riverside Plaza, Chicago,
Illinois; Senior Vice President, Adviser; formerly, Senior Vice President and
Portfolio Manager for Fiduciary Management; prior thereto, managed private
accounts.
WILLIAM F. TRUSCOTT* (9/14/60), Vice President, 345 Park Avenue, New York, New
York; Managing Director, Adviser.
IRENE CHENG* (6/6/54), Vice President, 345 Park Avenue, New York, New York;
Managing Director, Adviser.
PHILIP J. COLLORA (11/15/45), Vice President and Secretary*, 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President and Assistant Secretary,
Adviser.
KATHRYN L. QUIRK (12/3/52), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Adviser.
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
JOHN R. HEBBLE (6/27/58), Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
BRENDA LYONS (2/21/63), Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Senior Vice President, Adviser; formerly, Associate,
Dechert Price & Rhoads (law firm) 1989 to 1997.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Adviser; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior thereto,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
* Interested persons as defined in the Investment Company Act of 1940
Unless otherwise stated, all of the Trustees and officers have been associated
with their respective companies for more than five years, but not necessarily in
the same capacity.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Fund. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during the
Fund's 2000 fiscal year, except the information in the last column is for
calendar year 1999.
Total Compensation
Aggregate Compensation Kemper Funds Paid
Name of Board Member from the Fund to Board Members(2)
-------------------- ------------- ----------------
James E. Akins $3500 $168,700
James R. Edgar $3500 $84,600
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Arthur R. Gottschalk (1) $3500 $171,200
Frederick T. Kelsey $3500 $168,700
Fred B. Renwick $3500 $168,700
John G. Weithers $3500 $171,200
(1) Includes deferred fees. Pursuant to deferred compensation agreements
with the Fund, deferred amounts accrue interest monthly at a rate equal
to the yield of Zurich Money Funds -- Zurich Money Market Fund. The
total deferred amount and interest accrued through July 31, 2000
payable from the Trust is $ $21,300 to Mr. Gottschalk.
(2) Includes compensation for service on the Boards of 13 Kemper funds,
with 36 fund portfolios. Each trustee currently serves as a board
member of 15 Kemper Funds with 51 fund portfolios. The Board of
Trustees is responsible for the general oversight of each Fund's
business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have
primary responsibility for assuring that the Fund is managed in the
best interests of its shareholders.
As of October 31, 2000, the trustees and officers as a group owned less than 1%
of the outstanding shares of any series of the Trust and no person owned of
record 5% or more of the shares of the Fund except as noted below:
Name and Address Percentage
---------------- ----------
National Financial Services
200 Liberty Street
New York, NY 12081 7.14%
Donaldson, Lufkin & Jenrette
P.O. Box 2052
Jersey City, NJ 07303 5.85%
SHAREHOLDER RIGHTS
The Trust is an open-end, management investment company, organized as a business
trust under the laws of Massachusetts on August 3, 1988. Effective May 1, 1994,
the Trust changed its name from Kemper Retirement Fund to Kemper Target Equity
Fund. The Trust may issue an unlimited number of shares of beneficial interest
in one or more series, all having no par value. The Trust has established eight
series of shares:, Series III, Series IV, Series V, Series VI and Kemper
Worldwide 2004 Fund, Kemper Retirement Fund Series VII, and Kemper Target 2010
Fund which are no longer offered, and Kemper Target 2011 Fund. Effective
November 15, 1999, the name of Kemper Retirement Fund Series I was changed to
Kemper Target 2010 Fund. Effective August 15, 2000 the name of Kemper Retirement
Fund Series II was changed to Kemper Target 2011 Fund. The Board of Trustees may
authorize the issuance of additional series if deemed desirable, each with its
own investment objective, policies and restrictions. Since the Trust may offer
multiple series, it is known as a "series company." Shares of a series have
equal noncumulative voting rights and equal rights with respect to dividends,
assets and liquidation of such series. Shares are fully paid and nonassessable
when issued, are transferable without restriction and have no preemptive or
conversion 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,
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
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also would vote upon changes in fundamental investment objectives, policies or
restrictions. Subject to the Agreement and Declaration of Trust, shareholders
may remove trustees. Shareholders will vote by series and not in the aggregate
except when voting in the aggregate is required under the 1940 Act, such as for
the election of trustees. Any series of the Trust, including the Fund, may be
divided by the Board of Trustees into classes of shares, subject to compliance
with the Securities and Exchange Commission regulations permitting the creation
of separate classes of shares. The Trust's shares currently are not divided into
classes. Shares of a series would be subject to any preferences, rights or
privileges of any classes of shares of the series. Generally each class of
shares issued by a particular series of the Trust would differ as to the
allocation of certain expenses of the series such as distribution and
administrative expenses permitting, among other things, different levels of
service or methods of distribution among various classes.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) the Trust will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of 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 or class) by notice to the shareholders
without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of 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 Scudder Kemper 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.
37
