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KEMPER CLASSIC GROWTH FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 16, 1998, AS REVISED JUNE 4, 1998
KEMPER CLASSIC GROWTH FUND
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Class A, B and C Shares (the "Shares" or
"Kemper Shares") of Classic Growth Fund (the "Fund"). It should be read in
conjunction with the prospectus of the Shares dated April 16, 1998. The
prospectus may be obtained without charge from the Fund at the address or
telephone number on this cover or the firm from which this Statement of
Additional Information was received.
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TABLE OF CONTENTS
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Investment Restrictions...................................................................... 2
Investment Policies and Techniques........................................................... 3
Dividends, Distributions and Taxes........................................................... 17
Investment Adviser and Underwriter........................................................... 22
Portfolio Transactions....................................................................... 27
Purchase and Redemption of Shares............................................................ 29
Performance.................................................................................. 30
Officers and Trustees........................................................................ 33
Shareholder Rights........................................................................... 37
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Scudder Kemper Investments, Inc. (the "Adviser") serves as the Fund's investment
adviser.
KCGF-13 4/97 [LOGO] printed on recycled paper
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INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions which cannot be
changed without approval of a "majority" of its outstanding voting shares. As
defined in the Investment Company Act of 1940, as amended (the "1940 Act"), this
means the lesser of (1) 67% of the Fund's shares present at a meeting where 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.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after and is caused by an acquisition or
encumbrance of securities or assets of, or borrowings by, the Fund.
The Fund has elected to be classified as a diversified series of an open-end
investment company.
THE FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) borrow money, except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time;
(2) issue senior securities, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as that term is
used in the 1940 Act, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(4) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter in
connection with the disposition of portfolio securities;
(5) 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;
(6) purchase physical commodities or contracts relating to physical
commodities; or
(7) make loans to other persons, except (i) loans of portfolio securities,
and (ii) to the extent that entry into repurchase agreements and the
purchase of debt instruments or interests in indebtedness in accordance
with the Fund's objective and policies may be deemed to be loans.
OTHER INVESTMENT POLICIES
The Trustees of the Trust have voluntarily adopted certain policies and
restrictions which are observed in the conduct of the Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to, or approval
of, shareholders.
As a matter of nonfundamental 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;
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(3) purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage transactions,
(iii) for margin deposits in connection with futures contracts, options
or other permitted investments, (iv) that transactions in futures
contracts and options shall not be deemed to constitute selling
securities short, and (v) that the Fund may obtain such short-term
credits as may be necessary for the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all such options
held by the Fund at any time do not exceed 20% of its total assets; or
sell put options, if as a result, the aggregate value of the obligations
underlying such put options would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial margin
with respect to such futures contracts entered into on behalf of the Fund
and the premiums paid for such options on futures contracts does not
exceed 5% of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in computing the 5%
limit;
(6) purchase warrants if as a result, such securities, taken at the lower of
cost or market value, would represent more than 5% of the value of the
Fund's total assets (for this purpose, warrants acquired in units or
attached to securities will be deemed to have no value); and
(7) lend portfolio securities in an amount greater than 5% of its total
assets.
In addition, other nonfundamental policies may be established from time to time
by the Fund's Trustees and would not require the approval of shareholders.
MASTER/FEEDER FUND STRUCTURE. At special meetings of shareholders, a majority
of the shareholders of the Fund approved a proposal which gives the Trust's
Board of Trustees the discretion to retain the current distribution arrangement
for the Fund while investing in a master fund in a master/feeder fund structure
as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
INVESTMENT POLICIES AND TECHNIQUES
GENERAL. Classic Growth Fund is a diversified series of Investment Trust (the
"Trust"), an open-end management investment company. The Fund's investment
objectives are to seek long-term growth of capital with reduced share price
volatility compared to other growth mutual funds. This diversified equity fund
is designed for investors looking to grow their investment principal over time
for retirement and other long-term needs. While current income is not a stated
objective of the Fund, many of the Fund's securities may provide regular
dividends, which are also expected to grow over time.
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While the Fund is broadly diversified and conservatively managed, with attention
paid to stock valuation and risk, its share price will move up and down with
changes in the general level of financial markets. Accordingly, shareholders
should be comfortable with stock market risk and view the Fund as a long-term
investment.
Except as otherwise indicated, the Fund's investment objectives and policies are
not fundamental and may be changed without a vote of shareholders. If there is a
change in investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objectives will be
met.
Under normal market conditions, the Fund invests primarily in a diversified
portfolio of common stocks which the Fund's investment adviser, Scudder Kemper
Investments, Inc. (the "Adviser"), believes offers above-average appreciation
potential yet, as a portfolio, offers the potential for less share price
volatility than other growth mutual funds.
In seeking such investments, the Adviser focuses its investment in securities of
high quality, medium-to-large sized U.S. companies with leading competitive
positions. Using in-depth fundamental company research along with proprietary
financial quality, stock rating and risk measures, the Adviser looks for
companies with strong and sustainable earnings growth, a proven ability to add
value over time, and reasonable stock market valuations. These companies often
have important business franchises, leading products, services or technologies,
or dominant marketing and distribution systems.
The Fund allocates its investments among different industries and companies, and
adjusts its portfolio securities based on long-term investment considerations as
opposed to short-term trading. While the Fund emphasizes U.S. investments, it
can commit a portion of its assets to the equity securities of foreign growth
companies that meet the criteria applicable to the Fund's domestic investments.
While the Fund invests primarily in common stocks, it can purchase other types
of equity securities including securities convertible into common stocks,
preferred stocks, rights, illiquid securities and warrants. The Fund's policy is
to remain substantially invested in these securities, which may be listed on
national securities exchanges or, less commonly, traded over-the-counter. Also,
the Fund may enter into repurchase agreements, reverse repurchase agreements and
engage in strategic transactions.
For temporary defensive purposes, the Fund may invest without limit in high
quality money market securities, including U.S. Treasury bills, repurchase
agreements, commercial paper, certificates of deposit issued by domestic and
foreign branches of U.S. banks, bankers' acceptances, and other debt securities,
such as U.S. Government obligations and corporate debt instruments when the
Adviser deems such a position advisable in light of economic or market
conditions. It is impossible to predict for how long such alternative strategies
may be utilized. The Fund may invest up to 20% of its net assets in debt
securities when the Adviser anticipates that the capital appreciation on debt
securities is likely to equal or exceed the capital appreciation on common
stocks over a selected time, such as during periods of unusually high interest
rates. As interest rates fall, the prices of debt securities tend to rise. The
Fund may also invest in money market securities in anticipation of meeting
redemptions or paying Fund expenses.
DEBT SECURITIES. When the Adviser believes that it is appropriate to do so in
order to achieve the Fund's objective of long-term capital appreciation, the
Fund may invest in debt securities including bonds of private issuers and
supranational organizations. Portfolio debt investments will be selected on the
basis of, among other things, credit quality, and the fundamental outlooks for
currency, economic and interest rate trends, taking into account the ability to
hedge a degree of currency or local bond price risk. The Fund may purchase
"investment-grade" bonds, rated Aaa, Aa, A or Baa by Moody's Investor Services,
Inc. ("Moody's") or AAA, AA, A or BBB by
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Standard & Poor's Corporation ("S&P") or, if unrated, judged to be of equivalent
quality as determined by the Adviser.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities which are
bonds, notes, debentures, preferred stocks, and other securities which are
convertible into common stocks. Investments in convertible securities can
provide income through interest and dividend payments and/or an opportunity for
capital appreciation by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions, or scheduled changes in the exchange ratio. Convertible
debt securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis and so may not experience market value declines to
the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As fixed income securities, convertible securities are investments which provide
for a stream of income (or in the case of zero coupon securities, accretion of
income) with generally higher yields than common stocks. Of course, like all
fixed income securities, there can be no assurance of income or principal
payments because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes (LYONs). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
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WARRANTS. The Fund may invest in warrants up to 5% of the value of its
respective net assets. The holder of a warrant has the right, until the warrant
expires, to purchase a given number of shares of a particular issuer at a
specified price. Such investments can provide a greater potential for profit or
loss than an equivalent investments in the underlying security. Prices of
warrants do not necessarily move, however, in tandem with the prices of the
underlying securities and are, therefore, considered speculative investments.
Warrants pay no dividends and confer no rights other than a purchase option.
Thus, if a warrant held by the Fund were not exercised by the date of its
expiration, the Fund would lose the entire purchase price of the warrant.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
member banks of the Federal Reserve System, any foreign bank or with any
domestic or foreign broker-dealer which is recognized as a reporting government
securities dealer if the creditworthiness of the bank or broker-dealer has been
determined by the Adviser to be at least as high as that of other obligations
the Fund may purchase.
A repurchase agreement provides a means for the Fund to earn income on funds for
periods as short as overnight. It is an arrangement under which the purchaser
(I.E., the Fund) acquires a security ("Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price.
Securities subject to a repurchase agreement are held in a segregated account
and the value of such securities kept at least equal to the repurchase price on
a daily basis. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund together with the
repurchase price upon repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Obligation itself. Obligations will be
held by the Custodian or in the Federal Reserve Book Entry system.
For purposes of the Investment Company Act of 1940, as amended (the "1940 Act"),
a repurchase agreement is deemed to be a loan from the Fund to the seller of the
Obligation subject to the repurchase agreement and is therefore subject to the
Fund's investment restriction applicable to loans. It is not clear whether a
court would consider the Obligation purchased by the Fund subject to a
repurchase agreement as being owned by the Fund or as being collateral for a
loan by the Fund to the seller. In the event of the commencement of bankruptcy
or insolvency proceedings with respect to the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, the Fund may
encounter delay and incur costs before being able to sell the security. Delays
may involve loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and the Fund has not perfected a
security interest in the Obligation, the Fund may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at risk of losing some or
all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Fund, the Adviser seeks to minimize
the risk of loss through repurchase agreements by analyzing the creditworthiness
of the obligor, in this case the seller of the Obligation. Apart from the risk
of bankruptcy or insolvency proceedings, there is also the risk that the seller
may fail to repurchase the Obligation, in which case the Fund may incur a loss
if the proceeds to the Fund of the sale to a third party are less than the
repurchase price. However, if the market value of the Obligation subject to the
repurchase agreement becomes less than the repurchase price (including
interest), the Fund will direct the seller of the Obligation to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement will equal or exceed the repurchase price. It is possible
that the Fund will be unsuccessful in seeking to enforce the seller's
contractual obligation to deliver additional securities. A repurchase agreement
with foreign banks may be available with respect to government securities of the
particular foreign jurisdiction, and such repurchase agreements involve risks
similar to repurchase agreements with U.S. entities.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the Fund
sells a portfolio instrument to another party, such as a bank or broker-dealer,
in return for cash and agrees to repurchase the instrument at a
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particular price and time. While a reverse repurchase agreement is outstanding,
the Fund will maintain liquid assets in a segregated custodial account to cover
its obligation under the agreement. The Fund will enter into reverse repurchase
agreements only with parties whose creditworthiness has been found satisfactory
by the Adviser. Such transactions may increase fluctuations in the market value
of the Fund's assets and may be viewed as a form of leverage.
INVESTING IN FOREIGN SECURITIES. The Fund may invest up to 25% of the Fund's
assets in listed and unlisted foreign securities. Investors should recognize
that investing in foreign securities involves certain special considerations,
including those set forth below, which are not typically associated with
investing in United States securities and which may favorably or unfavorably
affect the Fund's performance. As foreign companies are not generally subject to
uniform accounting and auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies, there may be
less publicly available information about a foreign company than about a
domestic company. Many foreign stock markets, while growing in volume of trading
activity, have substantially less volume than the New York Stock Exchange (the
"Exchange"), and securities of some foreign companies are less liquid and more
volatile than securities of domestic companies. Similarly, volume and liquidity
in most foreign markets are less than the volume and liquidity in the United
States and at times, volatility of price can be greater than in the United
States. Further, foreign markets have different clearance and settlement
procedures and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems either could result in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Payment
for securities without delivery may be required in certain foreign markets.
Fixed commissions on some foreign stock exchanges are generally higher than
negotiated commissions on U.S. exchanges, although the Fund will endeavor to
achieve the most favorable net results on its portfolio transactions. Further,
the Fund may encounter difficulties or be unable to pursue legal remedies and
obtain judgments in foreign courts. There is generally less government
supervision and regulation of business and industry practices, stock exchanges,
brokers and listed companies than in the United States. It may be more difficult
for the Fund's agents to keep currently informed about corporate actions such as
stock dividends or other matters which may affect the prices of portfolio
securities. Communications between the United States and foreign countries may
be less reliable than within the United States, thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. In addition, with respect to certain foreign countries,
there is the possibility of nationalization, expropriation, the imposition of
withholding or confiscatory taxes, political, social, or economic instability,
or diplomatic developments which could affect United States investments in those
countries. Investments in foreign securities may also entail certain risks, such
as possible currency blockages or transfer restrictions, and the difficulty of
enforcing rights in other countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the United States economy in such respects
as growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
These considerations generally are more of a concern in developing countries.
For example, the possibility of revolution and the dependence on foreign
economic assistance may be greater in these countries than in developed
countries. The management of the Fund seeks to mitigate the risks associated
with these considerations through diversification and active professional
management. Although investments in companies domiciled in developing countries
may be subject to potentially greater risks than investments in developed
countries, the Fund will not
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invest in any securities of issuers located in developing countries if the
securities, in the judgment of the Adviser, are speculative.
FOREIGN CURRENCIES. The Fund may invest in foreign securities. Because
investments in foreign securities usually will involve currencies of foreign
countries, and because the Fund may hold foreign currencies and forward
contracts, futures contracts and options on futures contracts on foreign
currencies, the value of the assets of the Fund as measured in U.S. dollars may
be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. Although the Fund values
its assets daily in terms of U.S. dollars, it does not intend to convert its
holdings of foreign currencies into U.S. dollars on a daily basis. It will do so
from time to time, and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. 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 entering into forward or
futures contracts to purchase or sell foreign currencies.
DEPOSITARY RECEIPTS. The Fund may invest indirectly in securities of emerging
country issuers through sponsored or unsponsored American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs"), International Depositary Receipts
("IDRs") and other types of Depositary Receipts (which, together with ADRs, GDRs
and IDRs are hereinafter referred to as "Depositary Receipts"). Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the issuers
of the stock of unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may not be a
correlation between such information and the market value of the Depositary
Receipts. ADRs are Depositary Receipts typically issued by a U.S. bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. GDRs, IDRs and other types of Depositary Receipts are typically
issued by foreign banks or trust companies, although they also may be issued by
United States banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a United States corporation. Generally,
Depositary Receipts in registered form are designed for use in the United States
securities markets and Depositary Receipts in bearer form are designed for use
in securities markets outside the United States. For purposes of the Fund's
investment policies, the Fund's investments in ADRs, GDRs and other types of
Depositary Receipts will be deemed to be investments in the underlying
securities. Depositary Receipts other than those denominated in U.S. dollars
will be subject to foreign currency exchange rate risk. Certain Depositary
Receipts may not be listed on an exchange and therefore may be illiquid
securities.
BORROWING. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Trustees do not currently intend to borrow for investment leverage purposes,
if such a strategy were implemented in the future it would increase the Fund's
volatility and the risk of loss in a declining market. Borrowing by the Fund
will involve special risk considerations. Although the principal of the Fund's
borrowings will be fixed, the Fund's assets may change in value during the time
a borrowing is outstanding, thus increasing exposure to capital risk.
STRATEGIC TRANSACTIONS AND DERIVATIVES. The Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific equity or fixed-income market movements), to manage the effective
maturity or duration of the
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fixed-income securities in the Fund's portfolio, or to enhance potential gain.
These strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used without limit to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not to create leveraged exposure in the Fund.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use 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
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use of Strategic Transactions would reduce net asset value, and possibly income,
and such losses can be greater than if the Strategic Transactions had not been
utilized.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (I.E., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although they are not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or 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 the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing its assets in illiquid securities. The Fund can invest no more than
15% of its net assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (I.E., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, corporate debt securities,
equity securities (including convertible securities), and on securities indices
and futures contracts other than futures on individual corporate debt and
individual equity securities. The Fund may also purchase and sell put options in
foreign sovereign debt, Eurodollar instruments and currencies. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price above the market price.
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GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or equity market changes, for duration
management and for risk management purposes. In addition, the Fund may enter
into financial futures contracts or purchase or sell put and call options on
such futures as a hedge against anticipated currency market changes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of financial 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 only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, 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.
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CURRENCY TRANSACTIONS. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or (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 will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
RISKS OF CURRENCY TRANSACTIONS. The Fund is subject to currency transactions
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
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economic planning and policy, purchases and sales of currency and related
instruments can be negatively affected by government exchange controls,
blockages, and manipulations or exchange restrictions imposed by governments.
These can result in losses to the Fund if it is unable to deliver or receive
currency or funds in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure as
well as incurring transaction costs. Buyers and sellers of currency futures are
subject to the same risks that apply to the use of futures generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures is relatively new, and the ability to establish and close out positions
on such options is subject to the maintenance of a liquid market which may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where
they do not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, E.G., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, I.E., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, 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
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credit quality by the Adviser. If there is a default by the Counterparty, the
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
EURODOLLAR INSTRUMENTS. The Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
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, State Street Bank and Trust Company (the "Custodian")
to the extent Fund obligations are not otherwise "covered" through ownership of
the underlying security, financial instrument or currency. In general, either
the full amount of any obligation by the Fund to pay or deliver securities or
assets must be covered at all times by the securities, instruments or currency
required to be delivered, or, subject to any regulatory restrictions, an amount
of cash or liquid securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by the Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate cash or liquid securities sufficient to purchase
and deliver the securities if the call is exercised. A call option sold by the
Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate cash or liquid assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by the Fund requires the Fund to segregate cash or liquid assets
equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of 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
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100% of the exercise price in the case of a non cash-settled put, the same as an
OCC guaranteed listed option sold by the Fund, or the in-the-money amount plus
any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, and the Fund will segregate
an amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
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 assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), for qualification as a regulated investment company. (See
"Dividends, Distributions and Taxes.")
ILLIQUID SECURITIES. The Fund may occasionally purchase securities other than
in the open market. While such purchases may often offer attractive
opportunities for investment not otherwise available on the open market, the
securities so purchased are often "restricted securities" or "not readily
marketable," I.E., securities which cannot be sold to the public without
registration under the Securities Act of 1933 or the availability of an
exemption from registration (such as Rules 144 or 144A) or because they are
subject to other legal or contractual delays in or restrictions on resale.
The absence of a trading market can make it difficult to ascertain a market
value for illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for the Fund to sell them promptly at an acceptable price. The Fund
may have to bear the extra expense of registering such securities for resale and
the risk of substantial delay in effecting such registration. Also market
quotations are less readily available. The judgment of the Adviser may at times
play a greater role in valuing these securities than in the case of unrestricted
securities.
Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
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specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the Securities Act of 1933. The Fund may be deemed to be an
"underwriter" for purposes of the Securities Act of 1933 when selling restricted
securities to the public, and in such event the Fund may be liable to purchasers
of such securities if such sale is made in violation of the 1933 Act or if the
registration statement prepared by the issuer, or the prospectus forming a part
of it, is materially inaccurate or misleading.
LENDING OF PORTFOLIO SECURITIES. The Fund may seek to increase its return by
lending portfolio securities. Under present regulatory policies, including those
of the Board of Governors of the Federal Reserve System and the SEC, such loans
may be made to member firms of the Exchange, and would be required to be secured
continuously by collateral in cash, or liquid assets maintained on a current
basis at an amount at least equal to the market value and accrued interest of
the securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned on no more than five days' notice. During the existence of
a loan, the Fund would continue to receive the equivalent of the interest paid
by the issuer on the securities loaned and would also receive compensation based
on investment of the collateral. As with other extensions of credit there are
risks of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. However, the loans would be made
only to firms deemed by the Adviser to be of good standing, and when, in the
judgment of the Adviser, the consideration which can be earned currently from
securities loans of this type justifies the attendant risk. If the Fund
determines to make securities loans, the value of the securities loaned will not
exceed 5% of the value of the Fund's total assets at the time any loan is made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund intends to follow the practice of distributing all of its
investment company taxable income, which includes any excess of net realized
short-term capital gains over net realized long-term capital losses. The Fund
may follow the practice of distributing the entire excess of net realized
long-term capital gains over net realized short-term capital losses. However,
the Fund may retain all or part of such gain for reinvestment after paying the
related federal income taxes for which the shareholders may then be asked to
claim a credit against their federal income tax liability. (See "Taxes"
hereafter.) If the Fund does not distribute an amount of capital gain and/or
ordinary income required to be distributed by an excise tax provision of the
Code, it may be subject to such tax. (See "Taxes" hereafter.) In certain
circumstances, the Fund may determine that it is in the interest of shareholders
to distribute less than such an amount.
Earnings and profits distributed to shareholders on redemptions of Fund shares
may be utilized by the Fund, to the extent permissible, as part of the Fund's
dividend paid deduction on its federal tax return.
The Fund intends to distribute the Fund's investment company taxable income and
any net realized capital gains in December to avoid federal excise tax, although
an additional distribution may be made if necessary. Both types of distributions
will be made in shares of the Fund and confirmations will be mailed to each
shareholder unless a shareholder has elected to receive cash, in which case a
check will be sent. Distributions of investment company taxable income and net
realized capital gains are taxable (See "Taxes" hereafter), whether made in
shares or cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year the Fund issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
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The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C Shares than for Class A Shares primarily
as a result of the distribution services fee applicable to Class B and Class C
Shares. Distributions of capital gains, if any, will be paid in the same amount
for each class.
Dividends will be reinvested in shares of the same class of the Fund unless
shareholders indicate in writing that they wish to receive them in cash or in
shares of other Kemper Funds as provided in the prospectus.
TAXES. The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code, or a predecessor statute and has qualified as
such since its inception. It intends to continue to qualify for such treatment.
Such qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the Code is
required to distribute to its shareholders at least 90% of its investment
company taxable income (including net short-term capital gain) and generally is
not subject to federal income tax to the extent that it distributes annually its
investment company taxable income and net realized capital gains in the manner
required under the Code.
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 98%
of the Fund's ordinary income for the calendar year, at least 98% of the excess
of its capital gains over capital losses (adjusted for certain ordinary losses)
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed.
Investment company taxable income generally is made up of 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 taxable to
individual shareholders at a maximum 20% or 28% capital gains rate (depending on
the Fund's holding period for the assets giving rise to the gain) will be able
to claim a proportionate share of federal income taxes paid by the Fund on such
gains as a credit against the shareholder's federal income tax liability, and
will be entitled to increase the adjusted tax basis of the shareholder's Fund
shares by the difference between the shareholder's pro rata share of such gains
and the shareholder's tax credit. If the Fund makes such an election, it may not
be treated as having met the excise tax distribution requirement.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income.
Dividends from domestic corporations are not expected to comprise a substantial
part of the Fund's gross income. If any such dividends constitute a portion of
the Fund's gross income, a portion of the income distributions of the Fund may
be eligible for the 70% deduction for dividends received by corporations.
Shareholders will be informed of the portion of dividends which so qualify. The
dividends-received deduction is reduced to the extent the shares with respect to
which the dividends are received are treated as debt-financed under federal
income tax law and is eliminated if either those shares or the shares of the
Fund are deemed to have been held by the Fund or the Shareholder as the case may
be for less than 46 days during the 90-day period beginning 45 days before the
shares become ex-dividend.
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Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss are taxable to individual shareholders at a
maximum 20% or 28% capital gains rate (depending on the Fund's holding period
for the assets giving rise to the gain), regardless of the length of time the
shares of the Fund have been held by such shareholders. Such distributions are
not eligible for the dividends-received deduction. Any loss realized upon the
redemption of shares held at the time of redemption for six months or less will
be treated as a long-term capital loss to the extent of any amounts treated as
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 declared in
October, November or December with a record date 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 fund, may result in tax consequences (gain or loss) to the shareholder
and are also subject to these reporting requirements.
An individual may make a deductible IRA contribution of up to $2,000 or, if
less, the amount of the individual's earned income for any taxable year only if
(i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,050 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA ($2,000 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.
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 in respect of investments by foreign
investors.
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The Fund intends to qualify for and may make the election permitted under
Section 853 of the Code so that shareholders may (subject to limitations) be
able to claim a credit or deduction on their federal income tax returns for, and
will be required to treat as part of the amounts distributed to them, their pro
rata portion of qualified taxes paid by the Fund to foreign countries (which
taxes relate primarily to investment income). The Fund may make an election
under Section 853 of the Code, provided that more than 50% of the value of the
total assets of the Fund at the close of the taxable year consists of securities
in foreign corporations. The foreign tax credit available to shareholders is
subject to certain limitations imposed by the Code except in the case of certain
electing individual shareholders who have limited creditable foreign taxes and
no foreign source income other than passive investment-type income. Furthermore,
the foreign tax credit is eliminated with respect to foreign taxes withheld on
dividends if the dividend-paying shares or the shares of the Fund are held by
the Fund or the shareholder, as the case may be, for less than 16 days (46 days
in the case of preferred shares) during the 30-day period (90-day period for
preferred shares) beginning 15 days (45 days for preferred shares) before the
shares become ex-dividend.
Equity options (including covered call options written on portfolio stock) and
over-the-counter options on debt securities written or purchased by the Fund
will be subject to tax under Section 1234 of the Code. In general, no loss will
be recognized by the Fund upon payment of a premium in connection with the
purchase of a put or call option. The character of any gain or loss recognized
(I.E. long-term or short-term) will generally depend, in the case of a lapse or
sale of the option, on the Fund's holding period for the option, and in the case
of the exercise of a put option, on the Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of any property
in the Fund's portfolio similar to the property underlying the put option. If
the Fund writes an 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 short-term
capital gain or loss. If a call option is exercised, the character of the gain
or loss depends on the holding period of the underlying stock.
Positions of the Fund which consist of at least one stock and at least one stock
option or other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stocks
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for certain "qualified
covered call options" on stock written by the Fund.
Many futures and forward contracts entered into by the Fund and listed nonequity
options written or purchased by the Fund (including options on debt securities,
options on futures contracts, options on securities indices and options on
currencies), will be governed by Section 1256 of the Code. Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position generally will be treated as 60% long-term and 40%
short-term capital gain or loss, and on the last trading day of the Fund's
fiscal year, 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 capital gain or loss. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign currency-related forward contracts,
certain futures and options and similar financial instruments entered into or
acquired by the Fund will be treated as ordinary income or loss.
Positions of the Fund which consist of at least one position not governed by
Section 1256 and at least one futures or forward contract or nonequity option or
other position governed by Section 1256 which substantially diminishes the
Fund's risk of loss with respect to such other position will be treated as a
"mixed straddle." Although mixed straddles are subject to the straddle rules of
Section 1092 of the Code, the operation of which
20
<PAGE>
may cause deferral of losses, adjustments in the holding periods of securities
and conversion of short-term capital losses into long-term capital losses,
certain tax elections exist for them which reduce or eliminate the operation of
these rules. The Fund will monitor its transactions in options, foreign currency
futures and forward contracts and may make certain tax elections in connection
with these investments.
Notwithstanding any of the foregoing, recent tax law changes may require the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if the Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
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 options, futures and forward
contracts, gains or losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contract and the
date of disposition are also treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income.
If the Fund invests in stock of certain foreign investment companies, the Fund
may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
The Fund may make an election to market its shares of these foreign investment
companies, in lieu of being subject to U.S. federal income taxation. At the end
of each taxable year to which the election applies, the Fund would report as
ordinary income the amount by which the fair market value of the foreign
company's stock exceeds the Fund's adjusted basis in these shares; any
mark-to-market losses and any loss from an actual disposition of stock would be
deductible as ordinary losses to the extent of any net mark-to-market gains
previously included in income in prior years. The effect of this 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 their
share of the ordinary earnings and net capital gain of certain foreign
investment companies in lieu of being taxed in the manner described above.
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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 event, dividends of investment company taxable income
received from the Fund by its corporate shareholders, to the extent attributable
to such portion of accrued original issue discount, may be eligible for this
deduction for dividends received by corporations if so designated by the Fund in
a written notice to shareholders.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all distributions of investment company 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 investment company 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.
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.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, I.E., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Shareholders should consult their tax advisers about the application of the
provisions of tax law described in this statement of additional information in
light of their particular tax situations.
INVESTMENT ADVISER AND UNDERWRITER
INVESTMENT ADVISER. Scudder Kemper Investments, Inc. (the "Adviser"), an
investment counsel firm, Two International Place, Boston, Massachusetts, is the
Fund's investment adviser. This organization is one of the most experienced
investment firms in the United States. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. The predecessor firm reorganized from a partnership to a
corporation on June 28, 1985. On June 26, 1997, Scudder, Stevens & Clark, Inc.
("Scudder") entered into an agreement with Zurich Insurance Company ("Zurich")
pursuant to which Scudder and Zurich agreed to form an alliance.
On December 31, 1997, Zurich acquired a majority interest in Scudder, and Zurich
Kemper Investments, Inc., a Zurich subsidiary, became part of Scudder. Scudder's
name has been changed to Scudder Kemper Investments, Inc. Founded in 1872,
Zurich is a multinational, public corporation organized under the laws of
Switzerland. Its home office is located at Mythenquai 2, 8002 Zurich,
Switzerland. Historically, Zurich's earnings have resulted from its operations
as an insurer as well as from its ownership of its subsidiaries and affiliated
companies
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(the "Zurich Insurance Group"). Zurich and the Zurich Insurance Group provide an
extensive range of insurance products and services and have branch offices and
subsidiaries in more than 40 countries throughout the world.
The Adviser maintains a large research department, which conducts ongoing
studies of the factors that affect the position of various industries, companies
and individual securities. In this work, the Adviser utilizes certain reports
and statistics from a wide variety of sources, including brokers and dealers who
may execute portfolio transactions for the Fund and for clients of the Adviser,
but conclusions are based primarily on investigations and critical analyses by
its own research specialists.
Certain investments may be appropriate for the Fund and also for other clients
advised by the Adviser. Investment decisions for the Fund and other clients are
made with a view toward achieving their respective investment objectives and
after consideration of such factors as their current holdings, availability of
cash for investment and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same date. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.
Because the transaction between Scudder and Zurich resulted in the assignment of
the Fund's investment management agreement with Scudder, that agreement was
deemed to be automatically terminated at the consummation of the transaction. In
anticipation of the transaction, however, a new investment management agreement
between the Fund and the Adviser was approved by the Trust's Trustees on August
14, 1997. At the special meeting of the Fund's shareholders held on October 24,
1997, the shareholders also approved the new investment management agreement.
The new investment management agreement (the "Agreement") became effective as of
December 31, 1997 and will be in effect for an initial term ending on September
30, 1998. The Agreement is in all material respects on the same terms as the
previous investment management agreement which it supersedes. The Agreement
incorporates conforming changes which promote consistency among all of the funds
advised by the Adviser and which permit ease of administration. The Agreement
will continue in effect from year to year thereafter only if its continuance is
approved annually by the vote of a majority of those Trustees who are not
parties to the 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 on behalf of the Fund or of a majority
of the outstanding voting securities of the Fund. The Agreement may be
terminated at any time without payment of penalty by either party on sixty days'
written notice and automatically terminates in the event of its assignment.
Under the Agreement, the Adviser regularly provides the Fund with continuing
investment management for the Fund's portfolio consistent with the Fund's
investment objective, policies and restrictions and determines what securities
shall be purchased for the portfolio of the Fund, which securities shall be held
or sold by the Fund and what portion of the Fund's assets shall be held
uninvested, subject to the Trust's Declaration of Trust and By-Laws, the 1940
Act and the Code and to the Fund's investment objectives, policies and
restrictions, and subject, further, to such policies and instructions as the
Trustees may from time to time establish. The Adviser also advises and assists
the officers of the Fund in taking such steps as are necessary or appropriate to
carry out the decisions of its Trustees and the appropriate committees of the
Trustees regarding the conduct of the business of the Fund.
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The Adviser also renders significant administrative services (not otherwise
provided by third parties) necessary for the Fund's operations as an open-end
investment company including, but not limited to, preparing reports and notices
to the Trustees and shareholders; supervising, negotiating contractual
arrangements with, and monitoring various third-party service providers to the
Fund (such as the Fund's transfer agent, pricing agents, custodian, accountants
and others); preparing and making filings with the SEC and other regulatory
agencies; assisting in the preparation and filing of the Fund's federal, state
and local tax returns; preparing and filing the Fund's federal excise tax
returns; assisting with investor and public relations matters; monitoring the
valuation of securities and the calculation of net asset value; monitoring the
registration of shares of the Fund under applicable federal and state securities
laws; maintaining the Fund's books and records to the extent not otherwise
maintained by a third party; assisting in establishing accounting policies of
the Fund; assisting in the resolution of accounting and legal issues;
establishing and monitoring the Fund's operating budget; processing the payment
of the Fund's bills; assisting the Fund in, and otherwise arranging for, the
payment of distributions and dividends; and otherwise assisting the Fund in the
conduct of its business, subject to the direction and control of the Trustees.
The Adviser pays the compensation and expenses (except those for attending Board
and Committee meetings outside New York, New York; Boston, Massachusetts and
Chicago, Illinois) of all Trustees, officers and executive employees of the
Trust affiliated with the Adviser and makes available, without expense to the
Trust, the services of the Adviser's directors, officers and employees as may
duly be elected officers subject to their individual consent to serve and to any
limitations imposed by law, and provides the Trust's office space and facilities
and provides investment advisory, research and statistical facilities and all
clerical services relating to research, statistical and investment work.
For these services, the Fund pays the Adviser an annual fee equal to 0.70% of
the Fund's average daily net assets, payable monthly, provided the Fund will
make such interim payments as may be requested by the Adviser not to exceed 75%
of the amount of the fee then accrued on the books of the Fund and unpaid. Until
April 15, 1998, the Adviser maintained the total annualized expenses of the Fund
at no more than 1.25% of the average daily net assets of the Fund. For the
fiscal period September 9, 1996 (commencement of operations) to August 31, 1997,
the Adviser did not impose any portion of its management fee amounting to
$164,645.
Effective April 16, 1998 until December 31, 1998, the Adviser has agreed to
waive 0.25% of its management fee.
Under the Agreement the Fund is responsible for all of its other expenses
including organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; the calculation of Net Asset Value; taxes and
governmental fees; the fees and expenses of the transfer agent; the cost of
preparing stock certificates and any other expenses including clerical expenses
of issue, redemption or repurchase of Shares; the expenses of and the fees for
registering or qualifying securities for sale; the fees and expenses of
Trustees, officers and employees of the Trust who are not affiliated with the
Adviser; the cost of printing and distributing reports and notices to
shareholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of Shares of the Fund. The Fund is also responsible for its
expenses incurred in connection with litigation, proceedings and claims and the
legal obligation it may have to indemnify its officers and Trustees with respect
thereto. The Agreement expressly provides that the Adviser shall not be required
to pay a pricing agent of the Fund for portfolio pricing services, if any.
The Agreement identifies the Adviser as the exclusive licensee of the rights to
use and sublicense the names "Scudder," "Scudder Kemper Investments, Inc." and
"Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks"). Under this
license, the Trust, with respect to the Fund, has the non-exclusive right to use
and sublicense
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<PAGE>
the Scudder name and marks as part of its name, and to use the Scudder Marks in
the Trust's investment products and services.
In reviewing the terms of the Agreement and in discussions with the Adviser
concerning such Agreement, Trustees who are not "interested persons" of the
Trust have been represented by independent counsel at the Fund's expense.
The Agreement provides that the Adviser shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Adviser in
the performance of its duties or from reckless disregard by the Adviser of its
obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have transactions
with various banks, including the Fund's custodian bank. It is the Adviser's
opinion that the terms and conditions of those transactions which have occurred
were not influenced by existing or potential custodial or other Fund
relationships.
The Adviser may serve as adviser to other funds with investment objectives and
policies similar to those of the Fund that may have different distribution
arrangements or expenses, which may affect performance.
None of the officers or Trustees of the Trust may have dealings with the Trust
as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Fund.
PERSONAL INVESTMENTS BY EMPLOYEES OF THE ADVISER. Employees of the Adviser and
certain of its subsidiaries are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Fund. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement"), Kemper Distributors, Inc. ("KDI"), an
affiliate of the Adviser, is the principal underwriter and distributor for the
Class A, B and C Shares of the Fund and acts as agent of the Fund in the
continuous offering of its Shares. KDI bears all of its expenses of providing
services pursuant to the distribution agreement, including the payment of any
commissions. The Fund pays the cost for the prospectus and shareholder reports
to be set in type and printed for existing shareholders, and KDI, as principal
underwriter, pays for the printing and distribution of copies thereof used in
connection with the offering of Shares to prospective investors. KDI also pays
for supplementary sales literature and advertising costs.
The distribution agreement dated April 16, 1998 was initially approved by the
Trustees on February 10, 1998 and by sole shareholder of the Shares on April 16,
1998 and continues in effect from year to year so long as such continuance is
approved for each class at least annually by a vote of the Board of Trustees of
the Trust, including the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the agreement. The
distribution agreement automatically terminates in the event of its assignment
and may be terminated for a class at any time without penalty by the Fund or by
KDI upon 60 days' notice. Termination by the Fund with respect to a class may be
by vote of a majority of the Board of Trustees or a majority of the Trustees
25
<PAGE>
who are not interested persons of the Trust and who have no direct or indirect
financial interest in the distribution agreement or a "majority of the
outstanding voting securities" of such class of the Fund, as defined under the
1940 Act. The distribution agreement may not be amended for a class to increase
the fee to be paid by the Fund with respect to such class without approval by a
majority of the outstanding voting securities of such class of the Fund, and all
material amendments must in any event be approved by the Board of Trustees in
the manner described above with respect to the continuation of the distribution
agreement.
ADMINISTRATIVE SERVICES. Administrative services are provided to the Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all its expenses of providing services pursuant to the administrative
agreement between KDI and the Fund, including the payment of service fees. The
Fund pays KDI an administrative services fee, payable monthly, at an annual rate
of up to 0.25% of average daily net assets of Class A, B and C Shares of the
Fund.
KDI enters into related arrangements with various broker-dealer firms and other
service or administrative firms ("firms") that provide services and facilities
for their customers or clients who are investors in the Fund. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation. With respect to
Class A Shares, KDI pays each firm a service fee, payable quarterly, at an
annual rate of up to 0.25% of the net assets in Fund accounts that it maintains
and services attributable to Class A Shares, commencing with the month after
investment. With respect to Class B and Class C Shares, KDI currently advances
to firms the first-year service fee at a rate of up to 0.25% of the purchase
price of such Shares. For periods after the first year, KDI currently intends to
pay firms a service fee at a rate of up to 0.25% (calculated monthly and paid
quarterly) of the net assets attributable to Class B and Class C Shares
maintained and serviced by the firm. After the first year, a firm becomes
eligible for the quarterly service fee and the fee continues until terminated by
KDI or the Fund. Firms to which service fees may be paid may include affiliates
of KDI.
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 Class A, B and C Shares of the
Fund. Currently, the administrative services fee payable to KDI is based only
upon Fund assets in accounts for which a firm provides administrative services
listed on the Fund's records, and it is intended that KDI will pay all the
administrative services fee that it receives from the Fund to firms in the form
of service fees. The effective administrative services fee rate to be charged
against all assets of the Fund while this procedure is in effect will depend
upon the proportion of Fund assets that is in accounts for which a firm of
record provides administrative services. The Board of Trustees of the Trust, in
its discretion, may approve basing the fee to KDI on all Fund assets in the
future.
Certain trustees or officers of the Fund are also directors or officers of the
Adviser or KDI, as indicated under "OFFICERS AND TRUSTEES."
FUND ACCOUNTING AGENT. Scudder Fund Accounting Corporation, Two International
Place, Boston, Massachusetts 02110-4103, a subsidiary of the Adviser, computes
net asset value for the Fund. The Fund pays Scudder Fund Accounting Corporation
an annual fee equal to 0.065% of the first $150 million of average daily net
assets, 0.04% of such assets in excess of $150 million and 0.02% of such assets
in excess of $1 billion, plus holding and
26
<PAGE>
transaction charges for this service. For the period September 9, 1996
(commencement of operations) to August 31, 1997, SFAC aggregated $39,879, of
which $31,546 was not imposed and $8,333 is unpaid at August 31, 1997.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. State Street Bank and
Trust Company (the "Custodian"), as custodian, has custody of all securities and
cash of the Fund held outside the United States. The Custodian attends to the
collection of principal and income, and payment for and collection of proceeds
of securities bought and sold by the Fund. Kemper Service Company ("KSVC"), an
affiliate of the Adviser, is the transfer agent, shareholder service agent and
dividend-paying agent for the Fund's Class A, B and C Shares. KSVC receives as
transfer agent, annual account fees of $6 per account plus account set up,
transaction and maintenance charges, annual fees associated with the contingent
deferred sales charge (Class B shares only) and out-of-pocket expense
reimbursement.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Fund's independent
auditors, Coopers & Lybrand, L.L.P., 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 Fund. Shareholders will receive
annual audited financial statements and semi-annual unaudited financial
statements.
PORTFOLIO TRANSACTIONS
BROKERAGE COMMISSIONS. Allocation of brokerage may be placed by the Adviser.
The primary objective of the Adviser in placing orders for the purchase and sale
of securities for the Fund's portfolio 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 familiarity with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the Fund to reported commissions paid by others. The Adviser
reviews on a routine basis commission rates, execution and settlement services
performed, making internal and external comparisons.
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 research, market and statistical information to the
Fund. The term "research, market and statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Adviser is not authorized when placing portfolio transactions for the Fund
to pay a brokerage commission in excess of that which another broker might
charge for executing the same transaction solely on account of the receipt of
research, market or statistical information. 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.
27
<PAGE>
In selecting among firms believed to meet the criteria for handling a particular
transaction, the Adviser may give consideration to those firms that have sold or
are selling shares of the Fund or other funds managed by the Adviser.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through Scudder Investor Services, Inc.
("SIS"), 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 its 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 of the Trust 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.
The Fund's average portfolio turnover rate is the ratio of the lesser of sales
or purchases to the monthly average value of the portfolio securities owned
during the year, excluding all securities with maturities or expiration dates at
the time of acquisition of one year or less. A higher rate involves greater
brokerage transaction expenses to the Fund and may result in the realization of
net capital gains, which would be taxable to shareholders when distributed.
Purchases and sales are made for the Fund's portfolio whenever necessary, in
management's opinion, to meet the Fund's objective.
In the fiscal period ended August 31, 1997, the Fund paid brokerage commissions
of $31,968. For the fiscal period ended August 31, 1997, $14,199 (44.4% of the
total brokerage commissions paid) resulted from orders placed, consistent with
the policy of obtaining the most favorable net results, with brokers and dealers
who provided supplementary research information to the Fund or the Adviser. The
amount of such transactions aggregated $65,963,799 (19.3% of all transactions).
PORTFOLIO TURNOVER
The Fund's average annual portfolio turnover rate (defined by the SEC as the
ratio of the lesser of sales or purchases to the monthly average value of such
securities owned during the year, excluding all securities whose remaining
maturities at the time of acquisition were one year or less) for the fiscal
period ended August 31, 1997 was 27.4%. Purchases and sales are made for the
Fund's portfolio whenever necessary, in the Adviser's opinion, to meet the
Fund's objectives. Higher levels of activity by the Fund result in higher
transaction costs and may also result in taxes on realized capital gains to be
borne by the Fund's shareholders.
NET ASSET VALUE
The net asset value of shares of the Fund is computed as of the close of regular
trading on the Exchange on each day the Exchange is open for trading. The
Exchange is scheduled to be closed on the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value per
share of each class of the Fund is computed by dividing the
28
<PAGE>
value of the total assets attributable to shares of a class, less all
liabilities attributable to those shares of that class, by the total number of
outstanding shares of that class.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on the National Association of
Securities Dealers Automated Quotation ("Nasdaq") System is valued at its most
recent sale price. Lacking any sales, the security is valued at the most recent
bid quotation. The value of an equity security not quoted on the Nasdaq System,
but traded in another over-the-counter market, is its most recent sale price.
Lacking any sales, the security is valued at the Calculated Mean. Lacking a
Calculated Mean, the security is valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices supplied
by the Fund's pricing agent(s) which reflect broker/dealer supplied valuations
and electronic data processing techniques. Short-term securities purchased with
remaining maturities of sixty days or less shall be valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Trust's Valuation Committee, the value of a portfolio
asset as determined in accordance with these procedures does not represent the
fair market value of the portfolio asset, the value of the portfolio asset is
taken to be an amount which, in the opinion of the Valuation Committee,
represents fair market value on the basis of all available information. The
value of other portfolio holdings owned by the Fund is determined in a manner
which, in the discretion of the Valuation Committee most fairly reflects fair
market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
PURCHASE AND REDEMPTION OF SHARES
As described in the Shares' prospectus, Fund Shares are sold at their public
offering price, which is the net asset value per such Shares next determined
after an order is received in proper form plus, with respect to Class A
29
<PAGE>
Shares, an initial sales charge. The minimum initial investment for each of
Class A, B and C is $1,000 and the minimum subsequent investment is $100 but
such minimum amounts may be changed at any time. See the Shares' prospectus for
certain exceptions to these minimums. The Fund may waive the minimum for
purchases by trustees, directors, officers or employees of the Fund or the
Adviser and its affiliates. An order for the purchase of Shares that is
accompanied by a check drawn on a foreign bank (other than a check drawn on a
Canadian bank in U.S. Dollars) will not be considered in proper form and will
not be processed unless and until the Fund determines that it has received
payment of the proceeds of the check. The time required for such a determination
will vary and cannot be determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
Shares of the Fund will be redeemed by the Fund at the applicable net asset
value per Share of the Fund as described in the Shares' prospectus.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A Shares or the contingent deferred sales charge for
redemptions of Class B or Class C Shares by certain classes of persons or
through certain types of transactions as described in the prospectus are
provided because of anticipated economies of scale in sales and sales-related
efforts.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange ("Exchange") is
closed other than customary weekend and holiday closings or during any period in
which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of the Fund's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the value of its net assets, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection of
the Fund's shareholders.
Although it is the Fund's present policy to redeem in cash, if the Board of
Trustees determines that a material adverse effect would be experienced by the
remaining shareholders if payment were made wholly in cash, the Fund will
satisfy the redemption request in whole or in part by a distribution of
portfolio securities in lieu of cash, in conformity with the applicable rules of
the SEC, taking such securities at the same value used to determine net asset
value, and selecting the securities in such manner as the Board of Trustees may
deem fair and equitable. If such a distribution occurred, shareholders receiving
securities and selling them could receive less than the redemption value of such
securities and in addition would incur certain transaction costs. Such a
redemption would not be so liquid as a redemption entirely in cash.
The conversion of Class B Shares to Class A Shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B Shares and
not Class A Shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B Shares to Class A Shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B Shares to Class
A Shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B Shares would occur, and Shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the Shares'
prospectus.
PERFORMANCE
As described in the Shares' Prospectus, the Fund's historical performance or
return for a class of Shares may be shown in the form of "average annual total
return" and "total return" figures. These measures of performance are described
below. Performance information will be computed separately for each class. The
Adviser has agreed to a
30
<PAGE>
reduction of its management fee for the Fund to the extent specified in the
prospectus. See "Investment Adviser and Underwriter." This fee reduction will
improve the performance results of the Fund.
Average annual total return and total return measure both the net investment
income generated by, and the effect of any realized or unrealized appreciation
or depreciation of, the underlying investments in the Fund's portfolio. The
Fund's average annual total return quotation is computed in accordance with a
standardized method prescribed by rules of the SEC. The average annual total
return for each class of the Fund for a specific period is found by first taking
a hypothetical $1,000 investment ("initial investment") in the class' Shares on
the first day of the period, adjusting to deduct the maximum sales charge (in
the case of Class A Shares), and computing the "redeemable value" of that
investment at the end of the period. Average annual return quotations will be
determined to the nearest 1/100th of 1%. The redeemable value in the case of
Class B Shares or Class C Shares include the effect of the applicable contingent
deferred sales charge that may be imposed at the end of the period. The
redeemable value is then divided by the initial investment, and this quotient is
taken to the Nth root (N representing the number of years in the period) and 1
is subtracted from the result, which is then expressed as a percentage. Average
annual return calculated in accordance with this formula does not take into
account any required payments for federal of state income taxes. Such quotations
for Class B Shares for periods over six years will reflect conversion of such
Shares to Class A Shares at the end of the sixth year. 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 in a manner not consistent
with the standard formula described above, without deducting the maximum sales
charge or contingent deferred sales charge.
Calculation of the Fund's total return is not subject to a standardized formula,
except when calculated for the Fund's "Financial Highlights" table in the Fund's
financial statements and prospectus. Total return performance for a specific
period is calculated by first taking a hypothetical investment ("initial
investment") in the shares of a class of the Fund 'shares on the first day of
the period, either adjusting or not adjusting to deduct the maximum sales charge
(in the case of Class A Shares), and computing the "ending value" of that
investment at the end of the period. The total return percentage is then
determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. The ending value in the case of Class B Shares or Class C Shares may
or may not include the effect of the applicable contingent deferred sales charge
that may be imposed at the end of the period. The calculation assumes that all
income and capital gains dividends paid by the Fund have been reinvested at net
asset value per share on the reinvestment dates during the period. Total return
may also be shown as the increased dollar value of the hypothetical investment
over the period. Total return calculations that do not include the effect of the
sales charge for Class A Shares or the contingent deferred sales charge for
Class B and Class C Shares would be reduced if such charges were included.
The Fund's performance figures are based upon historical results and are not
necessarily representative of future performance. The Fund's Class A Shares are
sold at net asset value plus a maximum sales charge of 5.75% of the offering
price. Class B and Class C Shares are sold at net asset value. Redemption of
Class B Shares may be subject to a contingent deferred sales charge that is 4%
in the first year following the purchase, declines by a specified percentage
each year thereafter and becomes zero after six years. Redemption of Class C
Shares may be subject to a 1% contingent deferred sales charge in the first year
following the purchase. Returns and net asset value will fluctuate. Factors
affecting the Fund's performance include general market conditions, operating
expenses and investment management. Any additional fees charged by a dealer or
other financial services firm would reduce returns described in this section.
Shares of the Fund are redeemable at the then current net asset value, which may
be more or less than original cost.
31
<PAGE>
There are differences and similarities between the investments which the Fund
may purchase and the investments measured by the indices which are described
herein. The Consumer Price Index is generally considered to be a measure of
inflation. The Dow Jones Industrial Average and the Standard & Poor's
Corporation 500 Stock Index are indices of common stocks which are considered to
be generally representative of the U.S. stock market. The Financial
Times/Standard & Poor's Actuaries World Index-Europe(TM) is a managed index that
is generally representative of the equity securities of European markets. The
foregoing indices are unmanaged. The net asset value and returns of the Fund
will fluctuate.
Investors may want to compare the performance of the Shares to certificates of
deposit issued by banks and other depository institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of the Shares 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 Shares 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.
On April 16, 1998, the Fund was divided into multiple classes of shares,
including the Kemper Class A, B and C Shares described herein. Prior to that
date, the Fund consisted of only one class of shares; the shares of the Fund
outstanding as of April 16, 1998, were redesignated as Scudder Shares of the
Fund, which class has no sales charges or Rule 12b-1 fees. The performance
figures shown below reflect the performance of the Fund prior to the creation of
multiple classes, restated to reflect the sales charges of the Kemper Class A
Shares of the Fund. The performance figures have not been restated to reflect
Rule 12b-1 fees, which are included only from the date of inception of the
Fund's Rule 12b-1 plans on April 16, 1998. The Rule 12b-1 fees applicable to the
Kemper Class A, B and C Shares of the Fund will affect subsequent performance.
For purposes of the performance computations for the Fund, it is assumed that
all dividends and capital gains distributions made by the Fund are reinvested at
net asset value in additional shares of the same class during the designated
period. In calculating the ending redeemable value for Class A Shares and
assuming complete redemption at the end of the applicable period, the maximum
5.75% sales charge is deducted from the initial
32
<PAGE>
$1,000 payment. Standardized Return quotations for the Fund do not take into
account any required payments for federal or state income taxes. Standardized
Return quotations are determined to the nearest 1/100 of 1%.
The following tables summarize the calculation of Standardized Return for the
Kemper Class A shares of the Fund for the periods indicated. Performance figures
for Class B and C Shares of the Fund, which are not shown, will differ due to
differing sales charges, Rule 12b-1 fees, if any, and any applicable CDSC.
<TABLE>
<CAPTION>
STANDARDIZED RETURN(1)
CLASS A
---------
<S> <C>
One year ended March 31, 1998............................................................ 40.09%
Inception(2) to March 31, 1998(3)........................................................ 35.45%
</TABLE>
- ------------------------------
(1) The Standardized Return figures for Class A Shares reflect the deduction of
the maximum initial sales charge of 5.75%.
(2) The inception date for the Fund (and, consequently, of the Scudder Shares
thereof) was September 9, 1996. The Kemper Class A Shares of the Fund
commenced operations on April 16, 1998.
(3) The total return for a period less than a full year is calculated on an
aggregate basis and is not annualized.
OFFICERS AND TRUSTEES
The officers and trustees of the Trust, their ages, their principal occupations
and other affiliations, if any, with the Adviser, and Kemper Distributors, Inc.,
are as follows:
<TABLE>
<CAPTION>
POSITION WITH UNDERWRITER,
NAME, ADDRESS AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATION** KEMPER DISTRIBUTORS, INC.
- --------------------------------- ------------------------ ----------------------------- ---------------------------
<S> <C> <C> <C>
Daniel Pierce (64)+*(=) President and Trustee Managing Director of Scudder --
Kemper Investments, Inc.
Henry P. Becton, Jr. (54) Trustee President and General --
125 Western Avenue Manager, WGBH Educational
Allston, MA 02134 Foundation
Dawn-Marie Driscoll (51) Trustee Executive Fellow, Center for --
4909 SW 9th Place Business Ethics, Bentley
Cape Coral, FL 33914 College; President, Driscoll
Associates
Peter B. Freeman (65) Trustee Director, The A.H. Belo --
100 Alumni Avenue Company; Trustee, Eastern
Providence, RI 02906 Utilities Associates (public
utility holding company);
Director, AMICA Life
Insurance Co.; Director,
AMICA Insurance Co.
George M. Lovejoy, Jr. (68)(=) Trustee President and Director, Fifty --
50 Congress Street Associates (real estate
Suite 543 investment trust)
Boston, MA 02109
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH UNDERWRITER,
NAME, ADDRESS AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATION** KEMPER DISTRIBUTORS, INC.
- --------------------------------- ------------------------ ----------------------------- ---------------------------
<S> <C> <C> <C>
Wesley W. Marple, Jr. (66)(=) Trustee Professor of Business --
413 Hayden Hall Administration, Northeastern
360 Huntington Ave. University, College of
Boston, MA 02115 Business Administration
Kathryn L. Quirk (45)++*(=) Trustee, Vice President Managing Director of Scudder --
and Assistant Secretary Kemper Investments, Inc.
Jean C. Tempel (55) Trustee Managing Partner, Technology --
Ten Post Office Square Equity Partners
Suite 1325
Boston, MA 02109
Bruce F. Beaty (39)++ Vice President Senior Vice President, --
Scudder Kemper Investments,
Inc.
Philip S. Fortuna (40)(@) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
William F. Gadsden (43)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Jerard K. Hartman (65)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Robert T. Hoffman (39)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Thomas W. Joseph (59)+ Vice President Senior Vice President, --
Scudder Kemper Investments,
Inc.
Valerie F. Malter (39)++ Vice President Senior Vice President, --
Scudder Kemper Investments,
Inc.
Thomas F. McDonough (51)+ Vice President, Senior Vice President, --
Secretary and Treasurer Scudder Kemper Investments,
Inc.
John R. Hebble (39)+ Assistant Treasurer Senior Vice President, --
Scudder Kemper Investments,
Inc.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH UNDERWRITER,
NAME, ADDRESS AND AGE POSITION WITH TRUST PRINCIPAL OCCUPATION** KEMPER DISTRIBUTORS, INC.
- --------------------------------- ------------------------ ----------------------------- ---------------------------
<S> <C> <C> <C>
Caroline Pearson (36)+ Assistant Secretary Vice President, Scudder --
Kemper Investments, Inc.;
formerly, associate
attorney, Dechert Price &
Rhoads
</TABLE>
- ------------------------------
* Mr. Pierce and Ms. Quirk are considered by the Trust and counsel to be
persons who are "interested persons" of the Adviser or of the Trust, within
the meaning of the 1940 Act.
** Unless otherwise stated, all the Trustees and officers have been associated
with their respective companies for more than five years, but not
necessarily in the same capacity.
(=) Messrs. Lovejoy, Pierce, Marple and Ms. Quirk are members of the Executive
Committee for Investment Trust, which has the power to declare dividends
from ordinary income and distributions of realized capital gains to the same
extent as the Board is so empowered.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
(@) Address: 101 California Street, Suite 4100, San Francisco, California
The Trustees and officers of the Trust also serve in similar capacities with
respect to other funds advised by the Adviser.
To the knowledge of the Trust, as of March 31, 1998, all Trustees and officers
of the Trust as a group owned beneficially (as that term is defined under
Section 13(d) of the Securities Exchange Act of 1934) 198,707, or 3.95% of the
shares of the Fund outstanding on such date.
As of March 31, 1998, 1,856,107 shares in the aggregate, 36.97% of the
outstanding shares of the Fund were held in the name of State Street Bank and
Trust Company, Custodian for the Scudder Pathway Series Balanced Portfolio, One
Heritage Drive, Quincy, MA 02171, who may be deemed to be the beneficial owner
of certain of these shares, but disclaims any beneficial ownership therein.
To the knowledge of the Trust, as of March 31, 1998, no person owned
beneficially more than 5% of the shares of the Fund outstanding on such date,
except as stated above.
REMUNERATION
RESPONSIBILITIES OF THE BOARD--BOARD AND COMMITTEE MEETINGS
The Board of Trustees is responsible for the general oversight of the Fund's
business. A majority of the Board's members are not affiliated with the Adviser.
These "Independent Trustees" have primary responsibility for assuring that the
Fund is managed in the best interests of its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of each fund of the Trust and other operational matters, including
policies and procedures designed to assure compliance with various regulatory
requirements. At least annually, the Independent Trustees review the fees paid
to the Adviser and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, the quality and efficiency of the various other services provided,
costs incurred by the Adviser and its affiliates, and comparative information
regarding fees and expenses of competitive funds. They are assisted in this
process by the Fund's independent public accountants and by independent legal
counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee of Independent Trustees,
which nominates Independent Trustees and considers other related matters, and
the Audit Committee, which selects the Fund's independent public accountants and
reviews accounting policies and controls. In addition, Independent Trustees from
time to
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time have established and served on task forces and subcommittees focusing on
particular matters such as investment, accounting and shareholder service
issues.
COMPENSATION OF OFFICERS AND TRUSTEES OF THE FUND
The Independent Trustees receive the following compensation from the funds of
the Trust: an annual trustee's fee of $2,400 for a fund in which assets do not
exceed $100 million, $4,800 for assets which exceed $100 million, but not
exceeding $1 billion, and $7,200 if assets exceed $1 billion; a fee of $150 for
attendance at each board meeting, audit committee meeting, or other meeting held
for the purposes of considering arrangements between the Trust for the Fund and
the Adviser or any affiliate of the Adviser; $75 for any other committee meeting
(although in some cases the Independent Trustees have waived committee meeting
fees); and reimbursement of expenses incurred for travel to and from board
meetings. No additional compensation is paid to any Independent Trustee for
travel time to meetings, attendance at directors' educational seminars or
conferences, service on industry or association committees, participation as
speakers at directors' conferences, service on special trustee task forces or
subcommittees or service as lead or liaison trustee. Independent Trustees do not
receive any employee benefits such as pension, retirement or health insurance.
The Independent Trustees also serve in the same capacity for other funds managed
by the Adviser. These funds differ broadly in type and complexity and in some
cases have substantially different trustee fee schedules. The following table
shows the aggregate compensation received by each Independent Trustee during
1997 from the Trust and from all Funds advised by the Adviser as a group.
<TABLE>
<CAPTION>
INVESTMENT
NAME TRUST* FUND COMPLEX
- ----------------------------------------------------------------------------- ---------------- ----------------------
<S> <C> <C>
Henry P. Becton, Jr.
Trustee..................................................................... $ 27,782 $ 113,974 (23 funds)
Dawn-Marie Driscoll**
Trustee..................................................................... $ 3,450 $ 107,142 (23 funds)
Peter B. Freeman**
Trustee..................................................................... $ 3,645 $ 137,011 (42 funds)
George M. Lovejoy, Jr.
Trustee..................................................................... $ 27,757 $ 138,533 (21 funds)
Wesley W. Marple, Jr.
Trustee..................................................................... $ 27,757 $ 120,549 (22 funds)
Jean C. Tempel
Trustee..................................................................... $ 27,982 $ 121,924 (22 funds)
</TABLE>
- ------------------------------
* In 1997, Investment Trust consisted of four funds: Scudder Growth and Income
Fund, Scudder Large Company Growth Fund, Classic Growth Fund and Scudder S&P
500 Index Fund. Scudder S&P 500 Index Fund commenced operations on August
29, 1997. Scudder Real Estate Investment Fund commenced operations on April
6, 1998.
** Elected as trustee on October 24, 1997.
SHAREHOLDER RIGHTS
The Fund is a series of Investment Trust, a Massachusetts business trust
established under a Declaration of Trust dated September 20, 1984, as amended.
The name of the Trust was changed from Scudder Investment Trust to its present
name on May 28, 1998. The name of the Fund was changed, effective April 16,
1998, from Scudder Classic Growth Fund to Classic Growth Fund. The Trust's
authorized capital consists of an unlimited number of shares of beneficial
interest, par value $0.01 per share. The Fund's shares are currently divided
into four classes, the Scudder Shares and Kemper Classic Growth Fund Class A, B
and C Shares.
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The Trustees have the authority to issue additional series of shares and to
designate the relative rights and preferences as between the different series.
Each share of the Fund has equal rights with each other share of the Fund as to
voting, dividends and liquidation. All shares issued and outstanding will be
fully paid and nonassessable by the Trust, and redeemable as described in this
Statement of Additional Information and in the Shares' prospectus.
The assets of the Trust received for the issue or sale of the shares of each
series and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with a proportionate share of the
general liabilities of the Trust. If a series were unable to meet its
obligations, the assets of all other series may in some circumstances be
available to creditors for that purpose, in which case the assets of such other
series could be used to meet liabilities which are not otherwise properly
chargeable to them. Expenses with respect to any two or more series are to be
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Trust, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
are entitled to receive as a class the underlying assets of such shares
available for distribution to shareholders.
Each share of each class of the Fund shall be entitled to one vote (or fraction
thereof in respect of a fractional share) on matters that such shares (or class
of shares) shall be entitled to vote. Shareholders of the Fund shall vote
together on any matter, except to the extent otherwise required by the 1940 Act,
or when the Board of Trustees has determined that the matter affects only the
interest of shareholders of one or more classes of the Fund, in which case only
the shareholders of such class or classes of the Fund shall be entitled to vote
thereon. Any matter shall be deemed to have been effectively acted upon with
respect to the Fund if acted upon as provided in Rule 18f-2 under the 1940 Act,
or any successor rule, and in the Fund's Declaration of Trust. As used in the
Prospectus and in this Statement of Additional Information, the term "majority",
when referring to the approvals to be obtained from shareholders in connection
with general matters affecting the Fund and all additional portfolios (e.g.,
election of directors), means the vote of the lesser of (i) 67% of the Fund's
shares represented at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Fund's outstanding shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single portfolio (e.g., annual approval of investment
management contracts), means the vote of the lesser of (i) 67% of the shares of
the portfolio represented at a meeting if the holders of more than 50% of the
outstanding shares of the portfolio are present in person or by proxy, or (ii)
more than 50% of the outstanding shares of the portfolio. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
The Trustees, in their discretion, may authorize the division of shares of the
Fund (or shares of a series) into different classes, permitting shares of
different classes to be distributed by different methods. Although shareholders
of different classes of a series would have an interest in the same portfolio of
assets, shareholders of different classes may bear different expenses in
connection with different methods of distribution.
The Declaration of Trust provides that obligations of the Fund are not binding
upon the Trustees individually but only upon the property of the Fund, that the
Trustees and officers will not be liable for errors of judgment or mistakes of
fact or law and that the Fund will indemnify its Trustees and officers against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the Fund, except if it is
determined in the manner provided in the Declaration of Trust that they have not
acted in good faith in the
37
<PAGE>
reasonable belief that their actions were in the best interests of the Fund.
Nothing in the Declaration of Trust, however, protects or indemnifies a Trustee
or officer against any liability to which that person would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of that person's office.
ADDITIONAL INFORMATION
OTHER INFORMATION
The CUSIP number of each class of the Fund is Class A, 460965-20-5; Class B,
460965-30-4; and Class C, 460965-40-3.
The Fund has a fiscal year ending August 31.
Many of the investment changes in the Fund will be made at prices different from
those prevailing at the time they may be reflected in a regular report to
shareholders of the Fund. These transactions will reflect investment decisions
made by the Adviser in light of the Fund's investment objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.
Costs of $11,434 incurred by the Fund in conjunction with its organization are
amortized on a straight line basis over a five year period beginning September
9, 1996.
Portfolio securities of the Fund are held separately pursuant to a custodian
agreement, by the Fund's custodian, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110.
The law firm of Dechert Price & Rhoads is counsel to the Fund.
The name "Investment Trust" is the designation of the Trust for the time being
under a Declaration of Trust dated September 20, 1984, as amended from time to
time, and all persons dealing with the Fund must look solely to the property of
the Fund for the enforcement of any claims against the Fund as neither the
Trustees, officers, agents, shareholders nor other series of the Trust assume
any personal liability for obligations entered into on behalf of the Fund. No
other series of the Trust assumes any liabilities for obligations entered into
on behalf of the Fund. Upon the initial purchase of Shares, the shareholder
agrees to be bound by the Fund's Declaration of Trust, as amended from time to
time. The Declaration of Trust is on file at the Massachusetts Secretary of
State's Office in Boston, Massachusetts.
The Shares' prospectus and this Statement of Additional Information omit certain
information contained in the Registration Statement and its amendments which the
Trust has filed with the SEC under the Securities Act of 1933 and reference is
hereby made to the Registration Statement for further information with respect
to the Fund and the securities offered hereby. The Registration Statement and
its amendments, are available for inspection by the public at the SEC in
Washington, D.C.
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FINANCIAL STATEMENTS
The financial statements, including the investment portfolio of the Fund,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of the
Fund dated August 31, 1997, are incorporated herein by reference and are hereby
deemed to be a part of this Statement of Additional Information.
Effective April 16, 1998, the Trust's Board of Trustees has approved a name
change of the Fund from Scudder Classic Growth Fund to Classic Growth Fund. In
addition, the Board of Trustees has subdivided the Fund's shares into classes.
Shares of the Fund outstanding on such date are redesignated as Scudder Shares
of the Fund. The financial statements incorporated herein reflect the investment
performance of the Fund prior to the aforementioned classification of shares.
39
