<PAGE> 1
As filed with the Securities and Exchange Commission on September 2, 1999
1933 Act File No. 333-74911
1940 Act File No. 811-09269
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 1
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 3
KEMPER FLOATING RATE FUND
Exact Name of Registrant Specified in Charter
222 South Riverside Plaza
Chicago, Illinois 60606
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(312) 537-7000
Registrant's Telephone Number, Including Area Code
Philip J. Collora
Scudder Kemper Investments, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
Name and Address (Number, Street, State, Zip Code) of Agent for Service
Copies to:
Robert W. Helm, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Suite 1100 Washington, D.C. 20006-2401
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. [X]
It is proposed that this filing will become effective (check appropriate box):
[ ] when declared effective pursuant to Section 8(c);
[ ] immediately upon filing pursuant to paragraph (b);
[ ] on pursuant to paragraph (b);
[X] 60 days after filing pursuant to paragraph (a); or
[ ] on , pursuant to paragraph (a) of rule 486.
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED PRICE PER UNIT PRICE REGISTRATION FEE(1)
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<S> <C> <C> <C> <C>
Class A Common Shares of
Beneficial Interest (par value $.01 per share) (2) 20,000 $5.00 $ 1,000,000 $ 278
===================================================================================================================================
Class B Common Shares of
Beneficial Interest (par value $.01 per share) (3) 80,000,000 $5.00 $400,000,000 $111,200
===================================================================================================================================
Class C Common Shares of
Beneficial Interest (par value $.01 per share) (2) 20,000 $5.00 $ 1,000,000 $ 278
===================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(2) Currently being registered.
(3) Previously registered.
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<PAGE> 3
KEMPER FLOATING RATE FUND
CROSS-REFERENCE SHEET
PART A
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN PROSPECTUS
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<S> <C> <C>
1. Outside Front Cover....................................... Front Cover Page
2. Inside Front and Outside
Back Cover Page........................................... Front Cover Page
3. Fee Table and Synopsis.................................... Fund Expenses
4. Financial Highlights...................................... Financial Highlights
5. Plan of Distribution...................................... Front Cover Page; Prospectus Summary;
Purchase of Shares; Dividends and
Distributions
6. Selling Shareholders...................................... Not Applicable
7. Use of Proceeds........................................... Prospectus Summary; Use of Proceeds
8. General Description of the Registrant..................... Front Cover Page; Prospectus Summary;
Investment Objective and Policies; Risk
Factors and Special Considerations;
Description of the Fund
9. Management................................................ Prospectus Summary; Investment Management
and Other Services
10. Capital Stock, Long-Term Debt, and
Other Securities.......................................... Front Cover Page; Description of the Fund;
Tax Matters
11. Defaults and Arrears on Senior Securities................. Not Applicable
12. Legal Proceedings......................................... Not Applicable
13. Table of Contents of the Statement of Additional
Information............................................... Table of Contents of Statement of
Additional Information
</TABLE>
3
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PART B
<TABLE>
<CAPTION>
LOCATION IN STATEMENT OF
ADDITIONAL
ITEM NO. CAPTION INFORMATION
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<S> <C> <C>
14. Cover Page................................................ Cover Page
15. Table of Contents......................................... Table of Contents
16. General Information and History........................... General Information
17. Investment Objective and Policies......................... Investment Restrictions and Fundamental
Policies; Repurchase Offer Fundamental
Policy; Additional Information about
Investments and Investment Techniques
18. Management................................................ Management
19. Control Persons and Principal Holders of Securities....... Control Persons and Principal Holders of
Securities
20. Investment Advisory and Other Services.................... Management; Portfolio Transactions
21. Brokerage Allocation and Other Practices.................. Portfolio Transactions; Liquidity
Requirements
22. Tax Status................................................ Taxation
23. Financial Statements...................................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this Registration Statement.
4
<PAGE> 5
[KEMPER FUNDS LOGO]
KEMPER FLOATING RATE FUND
Kemper Floating Rate Fund (the "Fund") is a non-diversified, closed-end
management investment company that is continuously offered. The Fund's
investment objective is to seek as high a level of current income as is
consistent with the preservation of capital. The Fund seeks to achieve its
objective primarily by investing in interests in adjustable rate loans that have
a senior right to payment ("Senior Loans"). Senior Loans are often secured by
specific assets, although the Fund may also invest in Senior Loans that are
unsecured. The Fund believes that investing in Senior Loans should limit
fluctuations in net asset value caused by changes in interest rates. You should,
however, expect the Fund's net asset value to fluctuate as a result of changes
in borrower credit quality and other factors. To provide liquidity to
shareholders, the Fund will make repurchase offers for 5% to 25% of its
outstanding shares at net asset value, beginning in November 1999, at three
month intervals between repurchase request deadlines. Proceeds will be paid no
later than 24 calendar days after a repurchase request deadline. See "Repurchase
of Shares."
INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS AND SPECIAL CONSIDERATIONS,
INCLUDING THE POSSIBLE LOSS OF SOME OR ALL OF THE PRINCIPAL INVESTMENT, RISKS
ASSOCIATED WITH THE FUND'S USE OF BORROWING, AND RISKS ASSOCIATED WITH
INVESTMENT IN SECURITIES THAT ARE RATED BELOW INVESTMENT GRADE ("HIGH RISK
SECURITIES"), WHICH MAY INCLUDE THE SENIOR LOANS HELD BY THE FUND. THE FUND MAY
INVEST AN UNLIMITED PERCENTAGE OF ITS ASSETS IN SUCH HIGH-RISK SECURITIES. SEE
"RISK FACTORS AND SPECIAL CONSIDERATIONS" BEGINNING ON PAGE [ ]. THE FUND WILL
NOT ENGAGE IN BORROWING TO FINANCE LONG-TERM PORTFOLIO INVESTMENT, BUT MAY
BORROW IF NECESSARY TO SATISFY REPURCHASES, TO FUND COMMITMENTS TO PURCHASE
SENIOR LOANS AND TO MANAGE CASH FLOW.
NO MARKET PRESENTLY EXISTS FOR THE FUND'S SHARES AND IT IS NOT CURRENTLY
ANTICIPATED THAT A SECONDARY MARKET WILL DEVELOP FOR THE FUND'S SHARES. FUND
SHARES MAY NOT BE CONSIDERED TO BE READILY MARKETABLE.
THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE. This Prospectus sets forth concisely the information about the Fund
that a prospective investor ought to know before investing. A Statement of
Additional Information dated , 1999 (the "SAI") containing additional
information about the Fund has been filed with the Commission and is
incorporated by reference in its entirety into this Prospectus. A copy of the
SAI, the table of contents of which appears on page [ ] of this Prospectus, may
be obtained without charge by contacting the Fund toll-free at 1-800-621-1048.
The SAI and other information about the Fund are also available at the
Commission's website (www.sec.gov).
---------------
THE DATE OF THIS PROSPECTUS IS , 1999
5
<PAGE> 6
The Fund's investment adviser is Scudder Kemper Investments, Inc. (the
"Adviser"). The address of the Fund is 222 South Riverside Plaza, Chicago,
Illinois 60606.
This Prospectus applies to the offering of Class A, Class B and Class C shares
of beneficial interest of the Fund, which may be continuously issued and sold
from time to time by the Fund through Kemper Distributors, Inc. (the
"Distributor"), as distributor and principal underwriter, and through
broker-dealers and other financial services firms who have entered into dealer
agreements with the Distributor ("firms"). See "Purchase of Shares." The Fund
began offering its Class B shares on May 25, 1999.
Shares of the Fund are offered at a price equal to the next determined net asset
value per share, plus any applicable sales charge. The Fund's Class A shares
will not be subject to a front-end sales commission, an early withdrawal charge
("EWC") or a distribution fee, but will be subject to other expenses. As
described more fully herein, Class A shares are available only to investors
participating in a fee based investment advisory or agency commission program
and upon conversion from Class B and Class C shares. The Fund's Class B shares
will not be subject to a front-end sales commission, but will be subject to a
declining EWC over a four year period and a distribution fee, as well as other
expenses. The Fund's Class C shares will not be subject to a front-end sales
commission, but will be subject to an EWC over a one year period and a
distribution fee, as well as other expenses. Although the Fund currently offers
only Class A, Class B and Class C shares, the Fund may in the future offer other
classes of shares, which may be subject to a front-end sales commission, an EWC,
or a distribution fee, as well as other expenses. The Fund has registered [ ]
Class A shares and [ ] Class C shares for sale under the Registration Statement
to which this Prospectus relates. The Fund previously registered 80,000,000
Class B shares for sale.
The minimum initial investment is $1,000 ($250 for individual retirement
accounts).
THE FUND HAS RECEIVED AN EXEMPTIVE ORDER FROM THE COMMISSION WITH RESPECT TO THE
FUND'S DISTRIBUTION FEE ARRANGEMENTS, EWC, AND MULTI-CLASS STRUCTURE. AS A
CONDITION OF SUCH ORDER, THE FUND IS REQUIRED TO COMPLY WITH CERTAIN REGULATIONS
THAT WOULD NOT OTHERWISE BE APPLICABLE TO THE FUND.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY.
6
<PAGE> 7
Table of Contents
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Prospectus Summary
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Risk Factors And Special Considerations
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Fund Expenses
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Financial Highlights
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Use Of Proceeds
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Investment Objective And Policies
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General Information On Senior Loans
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Risk Factors And Special Considerations
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Net Asset Value
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Purchase Of Shares
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Repurchase Of Shares
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Special Features
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Description Of The Fund
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Investment Management And Other Services
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Dividends And Distributions
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Tax Matters
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Performance Information
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Legal Matters
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Registration Statement
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Shareholder Reports
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Financial Statements
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Table of Contents of Statement of Additional Information
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this Prospectus.
<TABLE>
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The Fund............................................. The Fund is a continuously-offered, non-diversified, closed-end management
investment company organized as a Massachusetts business trust.
Investment Objective................................. To obtain as high a level of current income as is consistent with the
preservation of capital. There can be no assurance that the Fund will
achieve its investment objective.
Primary Investment
Strategy............................................. The Fund seeks to achieve its investment objective primarily by acquiring
interests in adjustable rate loans that have a senior right to payment
("Senior Loans"). The interest rates of Senior Loans adjust periodically
based on a benchmark indicator of prevailing interest rates, such as the
prime rate offered by one or more major U.S. banks ("Prime Rate"), or the
London Inter-Bank Offered Rate ("LIBOR"). The Senior Loan interests held by
the Fund may include assignments and participations. The Fund believes that
investing in Senior Loans should limit fluctuations in its net asset value
caused by changes in interest rates. The Fund may invest an unlimited
percentage of its assets in Senior Loans that are rated below investment
grade or that are unrated but of comparable quality ("high risk
securities"). The Fund invests in Senior Loans that are generally fully
</TABLE>
7
<PAGE> 8
<TABLE>
<S> <C>
collateralized with assets and/or cash flow that the Adviser believes have
market value at the time of acquisition that equals or exceeds the
principal amount of the Senior Loan. The Fund may also employ techniques
such as borrowing, if necessary to accommodate cash flow, to fund
commitments to purchase Senior Loans, or to finance repurchase offers, but
will not borrow to finance long-term investment. Accordingly, the Fund will
not purchase additional portfolio securities at any time that borrowings,
including the Fund's commitments pursuant to reverse repurchase agreements,
exceed 5% of the Fund's total assets (which includes the amount borrowed).
Continuous Offering.................................. The Fund intends to offer its shares continuously through the Distributor,
as principal underwriter, at a price equal to the net asset value per
share. Class A shares are available only to investors participating in a
fee based investment advisory or agency commission program and upon
conversion from Class B and Class C shares. Minimum initial investment is
$1,000 ($250 for individual retirement accounts) and minimum subsequent
investment is $100 ($50 for individual retirement accounts). The Fund
reserves the right to waive any minimum investment requirements and to
refuse any order for the purchase of shares. The Fund does not intend to
list the shares on any national securities exchange.
General Investment
Guidelines........................................... Under normal circumstances, at least 80% of the Fund's total assets will
be invested in interests in Senior Loans. Up to 20% of the Fund's total
assets may be held in cash and other investments, including fixed-rate debt
obligations, short- to medium-term notes, high-yield securities, equity
securities, hybrid and synthetic loans, collateralized loan obligations,
and asset-backed securities.
A maximum of 25% of the Fund's total assets may be invested in Senior Loans
to borrowers and securities of other issuers in any one industry. However,
selling lenders and other persons positioned between the Fund and the
borrower in the Senior Loan process will likely conduct their activities in
the banking, finance, and financial services industries. Accordingly, the
Fund may be more at risk to any single economic, political or regulatory
occurrence affecting such industries.
The Fund will invest at least 90% of its total assets in Senior Loans to
borrowers and other investments issued by entities that are organized under
U.S. law or domiciled in Canada or U.S. territories or possessions. These
Senior Loans and other investments must be denominated in U.S. dollars. The
Fund may invest up to 10% of its total assets in U.S. dollar denominated
Senior Loans to borrowers and other investments issued by entities that are
organized or domiciled in countries other than the United States or Canada.
</TABLE>
8
<PAGE> 9
<TABLE>
<S> <C>
Repurchase Offers.................................... As a matter of fundamental policy, the Fund will offer to repurchase from
5% to 25% of its common shares at net asset value on a quarterly basis.
These repurchase offers are scheduled to occur in the months of February,
May, August and November. The first repurchase offer is scheduled to occur
in November 1999
Distributions........................................ Income dividends are normally declared daily and paid monthly. Income
dividends may be distributed in cash or reinvested in additional full and
fractional shares through the Fund's dividend reinvestment program.
Distributions of net realized capital gains will normally be made annually.
Investment Adviser................................... Scudder Kemper Investments, Inc.
Distributor and
Administrative Services
Provider............................................. Kemper Distributors, Inc.
</TABLE>
9
<PAGE> 10
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following is a summary of certain matters discussed in the Prospectus. For
additional information, see "Risk Factors and Special Considerations."
<TABLE>
<S> <C>
Credit Risk.......................................... Investment in the Fund involves the risk that borrowers under Senior Loans
may default on obligations to pay principal or interest when due, that
lenders may have difficulty liquidating the collateral, if any, securing
the Senior Loans or enforcing their rights under the terms of the Senior
Loans, and that the Fund's investment objective may not be realized.
Non-diversification.................................. The Fund is not subject to the general limitation under the Investment
Company Act of 1940 that, with respect to 75% of its total assets, it will
not invest more than 5% of its total assets in the securities of a single
issuer. As a result, because the Fund is permitted greater flexibility to
invest its assets in the obligations of a single issuer, it is exposed to
increased risk of loss if such an investment underperforms expectations.
However, the Fund intends to limit its investments so as to comply with the
diversification requirements imposed by the Internal Revenue Code of 1986,
as amended, for qualification as a "regulated investment company."
Borrowing............................................ The Fund is authorized to borrow money in an amount up to 33 1/3% of the
Fund's total assets (after giving effect to the amount borrowed). The Fund
will borrow if necessary only for the purposes of obtaining short-term
credit in connection with repurchase offers, to manage cash flow, or to
fund commitments to purchase Senior Loans. The rights of any lenders to the
Fund to receive payments of interest on and repayments of principal of such
borrowings will be senior to those of the holders of the Fund's common
shares and the terms of any such borrowings may contain provisions which
limit certain activities of the Fund, including the payment of dividends to
holders of common shares in certain circumstances. The terms of such
borrowings also may grant lenders certain voting rights in the event of
default in the payment of interest or the repayment of principal. The
interest expense associated with such borrowings will reduce or eliminate
the amount of net income available for payment to the holders of common
shares. The Fund will not use borrowings for long-term financial leverage
purposes. Accordingly, the Fund will not purchase additional portfolio
securities at any time that borrowings, including the Fund's commitments
pursuant to reverse repurchase agreements, exceed 5% of the Fund's total
assets (which includes the amount borrowed).
Limited Secondary Market
for Senior Loans..................................... Because of a limited secondary market for Senior Loans, the Fund may be
limited in its ability to sell portfolio holdings at the price at which
they are valued by the Fund to generate gains, avoid losses, or to meet
repurchase requests.
Demand for Senior
Loans................................................ An increase in demand for Senior Loans may adversely affect the rate of
interest payable on Senior Loans acquired by the Fund.
High-Yield/High Risk
Securities........................................... The Fund may purchase interests in Senior Loans and other securities that
are rated below investment grade or are unrated but considered by the
</TABLE>
10
<PAGE> 11
<TABLE>
<S> <C>
Adviser to be of comparable quality. The purchase of such securities
exposes the Fund to financial, market and interest-rate risks and greater
credit risks than would the purchase of higher-rated securities. Such
investments are also likely to result in increased fluctuation in the
Fund's net asset value, particularly in response to economic downturns.
No Trading Market for
Shares............................................... The Fund is a closed-end investment company designed primarily for
long-term investors and not as a trading vehicle. The Fund does not intend
to list the shares for trading on any national securities exchange. There
is no secondary trading market for Fund shares. The Fund's shares are
therefore not readily marketable. The Fund, as a fundamental policy, will
make quarterly repurchases for 5% to 25% of its outstanding common shares
at net asset value. See "Repurchase of Shares" below for more information.
However, the Fund's shares are less liquid than shares of funds that trade
on a stock exchange, and shareholders of Class B and Class C shares who
tender Fund shares held for less than four years in the case of Class B or
one year in the case of Class C will pay an EWC. See "Purchase of Shares."
In addition, there is no guarantee that shareholders will be able to sell
all of their Fund shares that they desire to sell.
</TABLE>
11
<PAGE> 12
FUND EXPENSES
The following table is intended to assist the Fund's shareholders in
understanding the various costs and expenses associated with investing in Class
A, Class B and Class C shares of the Fund. This information is based on
estimated fees, expenses and net assets for the fiscal year ending August 31,
2000. Actual expenses may vary.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
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<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES(1)
Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price)............................................................ NONE(2) NONE NONE
Maximum Sales Charge on Reinvested Dividends............................................. NONE NONE NONE
Maximum Early Withdrawal Charge.......................................................... NONE 3.00% 1.00%
Exchange Fee............................................................................. NONE NONE NONE
ANNUAL EXPENSES
(estimated as a percentage of average net assets)
Management Fees(3)....................................................................... .50% .50% .50%
Administrative Services Fee(4)........................................................... .25% .25% .25%
Distribution Fee(5)...................................................................... NONE .60%(6) .60%(7)
Interest Payments on Borrowed Funds(8)................................................... [ ] [ ] [ ]
Other Expenses(9)........................................................................ [ ] [ ] [ ]
Total Annual Expenses (After Fee Reduction)(10)............................................ [ ] [ ] [ ]
</TABLE>
- ----------
(1) The firms and other financial services firms may independently charge
additional fees for shareholder transactions or for advisory services;
please see their materials for details.
(2) Class A shares are available only to investors participating in a fee based
investment advisory or agency commission program and upon conversion from
Class B and Class C shares.
(3) Pursuant to an Investment Management Agreement with the Fund, the Adviser is
entitled to receive an investment management fee of 0.50% of the average
daily net assets of the Fund, with graduated fee reductions based on
increased asset levels. See "Investment Management and Other Services."
(4) Pursuant to an Administrative Services Agreement with the Fund, the
Distributor is entitled to receive an annual fee of up to 0.25% of the
average daily net assets of the Fund.
(5) Class A shares are not subject to any distribution fees. Pursuant to the
Class B share Distribution Plan, the Class B shares pay an annual
distribution fee of 0.60% of average daily net assets. Class B shares will
automatically convert to Class A shares six years after purchase. Pursuant
to the Class C share Distribution Plan, the Class C shares pay an annual
distribution fee of 0.60% of average daily net assets. Class C shares will
automatically convert to Class A shares ten years after purchase.
(6) Long-term Class B shareholders of the Fund may, as a result of the Fund's
distribution fees, pay more than the economic equivalent of the maximum
initial sales charges permitted by the National Association of Securities
Dealers, Inc., although the Fund's distributor believes this is unlikely
because of the automatic conversion feature described under "Purchase of
Shares--Purchase of Class B Shares-Automatic Conversion Feature."
(7) Long-term Class C shareholders of the Fund may, as a result of the Fund's
distribution fees, pay more than the economic equivalent of the maximum
initial sales charges permitted by the National Association of Securities
Dealers, Inc., although the Fund's distributor believes this is unlikely
because of the automatic conversion feature described under "Purchase of
Shares--Purchase of Class C Shares-Automatic Conversion Feature."
(8) Assumes borrowing outstanding for 1/6 of the current fiscal year, an annual
interest rate of 5 1/2%, a borrowing level of 2 1/2% of total assets and a
$100,000,000 total asset level.
12
<PAGE> 13
(9) "Other Expenses" are based on estimated amounts for the current fiscal
year, including the organizational and initial offering expenses borne by
the Fund.
(10) The Adviser has agreed to reduce its investment management fee to 0% of
the average daily net assets of the Fund through November 30, 1999. The
full investment management fee will be gradually reinstated during the one
year period ending November 30, 2000. The effect of this fee reduction is
to reduce operating expenses of the Fund and thereby increase investment
performance. Absent this fee reduction, estimated total annual expenses
would be %, %, and % for Class A, B and C shares,
respectively.
This following hypothetical example assumes that all dividends and
other distributions are reinvested at net asset value and that the percentage
amounts listed under Annual Expenses remain the same in the years shown, and is
shown after giving effect to the fee reduction. The tables and the assumption in
the hypothetical example of a 5% annual return are required by regulation of the
Commission applicable to all investment companies; the assumed 5% annual return
is not a prediction of, and does not represent, the projected or actual
performance of the Fund's shares. For more complete descriptions of certain of
the Fund's costs and expenses, see "Investment Management and Other Services."
THE FOLLOWING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
EXAMPLE
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Based on the estimated level of total
operating expenses listed above, you
would pay the following expenses on a
$1,000 investment, assuming a 5%
annual return and repurchase at the
end of each time period.......................................... [ ] [ ] [ ] [ ]
You would pay the following expenses
on the same investment, assuming no
repurchase....................................................... [ ] [ ] [ ] [ ]
<CAPTION>
CLASS B SHARES(1) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------- ------ -------- -------- --------
<S> <C> <C> <C> <C>
Based on the estimated level of total
operating expenses listed above, you
would pay the following expenses on a
$1,000 investment, assuming a 5%
annual return and repurchase at the
end of each time period.......................................... [ ] [ ] [ ] [ ]
You would pay the following expenses
on the same investment, assuming no
repurchase....................................................... [ ] [ ] [ ] [ ]
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
CLASS C SHARES(2) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------- ------ -------- -------- --------
<S> <C> <C> <C> <C>
Based on the estimated level of total
operating expenses listed above, you
would pay the following expenses on a
$1,000 investment, assuming a 5%
annual return and repurchase at the
end of each time period.......................................... [ ] [ ] [ ] [ ]
You would pay the following expenses
on the same investment, assuming no
repurchase....................................................... [ ] [ ] [ ] [ ]
</TABLE>
(1) Assumes that the shareholder was an owner of the shares on the first
day of the first year and the EWC was applied as follows: 1 year
(3.0%), 3 years (2.0%), and five years (0%). Class B shares convert to
Class A shares six years after issuance.
(2) Assumes that the shareholder purchased shares on the first day of the
first year and the EWC was applied as follows: 1 year (1.0%), and 3
years through 10 years (0%). Class C shares convert to Class A shares
ten years after issuance.
FINANCIAL HIGHLIGHTS
The following table includes selected data for a Class B share
outstanding for the periods indicated. The Financial Highlights are part of the
Fund's financial statements, which are included in its annual report to
shareholders for the fiscal year ended August 31, 1999. As of the date of this
Prospectus, the Fund had not issued any Class A or Class C shares.
[FINANCIAL HIGHLIGHTS TABLE TO BE PROVIDED]
USE OF PROCEEDS
Proceeds of the Fund's continuous offering will be invested in accordance with
the Fund's investment objective and policies over the course of the offering.
Offering expenses of the Fund's initial Class B share offering are being
amortized over the one year period ending May 25, 2000 against the Fund's income
attributable to the Class B shares. Estimated offering expenses of $ and
$ will be amortized over the one year period ending , 2000
against the Fund's income attributable to the Class A and Class C shares.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide as high a level of current income
as is consistent with the preservation of capital. This objective is not
fundamental and may be changed by the Fund's Board of Trustees without
shareholder approval. Similarly, unless otherwise stated in this Prospectus or
the SAI, the Fund's investment policies and restrictions are non-fundamental.
There can be no assurance that the Fund will achieve its investment objective.
The Fund seeks to achieve its objective primarily by investing in interests in
adjustable rate loans that have a senior right to payment ("Senior Loans"),
which, in most circumstances, are fully collateralized by assets of a
corporation, partnership, limited liability company, or other business entity
that is organized or domiciled in the United States, Canada or in U.S.
territories and/or possessions (a "U.S. entity"). The Senior Loans are often
issued in connection with recapitalizations, acquisitions, leveraged buy-outs,
and refinancings. The Fund primarily invests in Senior Loans that have interest
rates that adjust periodically based upon a benchmark indicator of prevailing
interest rates, such as the Prime Rate or LIBOR, and invests only in Senior
Loans and other investments that are U.S. dollar denominated. Under normal
circumstances, at least 80% of the Fund's total assets will be invested in
Senior Loans. The Fund may also purchase other types of instruments in seeking
to achieve its investment objective, including high-yield securities. The Fund
may invest up to 10% of its total assets in Senior Loans and other investments
that are issued by non-U.S. entities, although such investments will be U.S.
dollar denominated. All percentage limitations in this Prospectus and the SAI
are applied as of the time of investment.
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Senior Loans are considered to be loans that hold a senior position in the
capital structure of the borrower. These may include loans that hold the most
senior position, that hold an equal ranking with other senior debt, or loans
that are, in the judgment of the Adviser, in the category of senior debt of the
borrower. This capital structure position generally gives the holders of Senior
Loans a priority claim on some or all of the borrower's assets in the event of
default. The Senior Loans in which the Fund invests are generally fully
collateralized with assets and/or cash flow that the Adviser believes have a
market value at the time of acquisition that equals or exceeds the principal
amount of the Senior Loan. The loan agreement may or may not require the
borrower to pledge additional collateral to secure the Senior Loan if the value
of the initial collateral declines. The Fund may invest up to 20% of its total
assets in Senior Loans that are not secured by collateral. Such unsecured Senior
Loans involve a greater risk of loss. The Fund also only purchases interests in
Senior Loans of borrowers that the Adviser believes can meet debt service
requirements from cash flow or other sources, including the sale of assets.
Because of their protective features, the Adviser believes that Senior Loans of
borrowers that either are experiencing, or are more likely to experience,
financial difficulty may represent attractive investment opportunities. Senior
Loans vary in yield according to their terms and conditions, how often they pay
interest, and when rates are reset. The Fund generally does not invest in Senior
Loans of U.S. entities with interest rates that are tied to non-domestic
interest rates other than LIBOR. The Fund may invest up to 10% of its total
assets in Senior Loans of non-U.S. entities with interest rates tied to other
non-domestic interest rates, including, but not limited to, the Paris Inter-Bank
Offered Rate, the EURO LIBOR, or the EURO Area Inter-Bank Offered Rate.
The Fund may acquire Senior Loans to borrowers engaged in any industry. The Fund
will invest no more than 25% of its total assets in Senior Loans to borrowers
and securities of other issuers in any one industry. Selling lenders and other
persons positioned between the Fund and the borrower will likely conduct their
principal business activities in the banking, finance and financial services
industries. The Fund may be more at risk to any single economic, political or
regulatory occurrence affecting such industries. Persons engaged in such
industries may be more susceptible to, among other things, fluctuations in
interest rates, changes in the Federal Open Market Committee's monetary policy,
governmental regulations concerning such industries and concerning capital
raising activities generally and fluctuations in the financial markets
generally.
Investors should recognize that there can be no assurance that the investment
objective of the Fund will be realized. Moreover, substantial increases in
interest rates may cause an increase in Senior Loan defaults as borrowers may
lack resources to meet higher debt service requirements. The value of the Fund's
assets may also be affected by other uncertainties, such as economic
developments affecting the market for Senior Loans or affecting borrowers
generally. For additional information on Senior Loans, see "General Information
on Senior Loans."
Investment in the Fund's shares is intended to offer several benefits. The Fund
offers investors the opportunity to seek a high level of current income by
investing in a professionally-managed portfolio comprised primarily of Senior
Loans, a type of investment typically not available directly to individual
investors. Other benefits are the professional credit analysis provided to the
Fund by the Adviser and portfolio diversification. Also, the Fund believes that
investing in Senior Loans should limit fluctuations in the Fund's net asset
value caused by changes in interest rates.
The Fund can normally be expected to have a more stable net asset value per
share than investment companies investing primarily in fixed-income securities
(other than money market funds and some short-term bond funds). Generally, the
net asset value of the shares of an investment company which invests primarily
in fixed-income securities changes as interest rates fluctuate. When interest
rates rise, the value of a fixed income portfolio normally can be expected to
decline. When interest rates decline, the value of a fixed-income portfolio
normally can be expected to increase. The Adviser expects the Fund's net asset
value to be relatively stable during normal market conditions, because the
Senior Loans in which the Fund primarily invests adjust periodically in response
to changes in interest rates. However, because the interest rates only reset
periodically, the Fund's net asset value may fluctuate from time to time in the
event of an imperfect correlation between the interest rates on the Fund's
Senior Loans and prevailing interest rates. Also, a default on a Senior Loan in
which the Fund has invested or a sudden and extreme increase in prevailing
interest rates may cause a decline in the Fund's net asset value. Further,
investment in securities other than Senior Loans, including high yield
securities, may contribute to the fluctuation of the Fund's net asset value.
Changes in interest rates can be expected to affect the dividends paid by the
Fund, so that the distribution rate on an investment in the Fund's shares will
likely fluctuate as a result of changes in prevailing interest rates.
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INVESTMENT IN NON-U.S. ISSUERS
The Fund may invest up to 10% of its total assets in U.S. dollar denominated
Senior Loans to borrowers and securities of other issuers that are organized or
located in countries other than the United States, Canada, or in U.S.
territories and/or possessions ("non U.S. entities"). Although such Senior Loans
will require payment of interest and principal in U.S. dollars, these borrowers
and issuers may have significant non-U.S. dollar revenues. Investment in
non-U.S. entities involves special risks, including that non-U.S. entities may
be subject to less rigorous accounting and reporting requirements than U.S.
entities, less rigorous regulatory requirements, differing legal systems and
laws relating to creditors' rights, the potential inability to enforce legal
judgments, fluctuations in currency values and the potential for political,
social and economic adversity. Such Senior Loans may include certain foreign
senior debt that is in the form of notes and note loan agreements.
INTEREST RATES AND PORTFOLIO MATURITY
Interest rates on Senior Loans adjust periodically. The interest rates are
adjusted based on a base rate plus a premium or spread over the base rate. The
base rate usually is LIBOR, the Federal Reserve federal funds rate, the Prime
Rate or the certificate of deposit ("CD") rate or other base lending rates used
by commercial lenders. LIBOR, as provided for in loan agreements, usually is an
average of the interest rates quoted by several designated banks as the rates at
which they pay interest to major depositors in the London interbank market on
U.S. dollar denominated deposits. The Adviser believes that changes in
short-term LIBOR rates are closely related to changes in the Federal Reserve
federal funds rate, although the two are not technically linked. The Prime Rate
quoted by a major U.S. bank is generally the interest rate at which that bank is
willing to lend U.S. dollars to is most creditworthy borrowers, although it may
not be the bank's lowest available rate. The CD rate, as provided for in loan
agreements, usually is the average rate paid on large certificates of deposit
traded in the secondary market.
The Fund is not subject to any restrictions with respect to the maturity of
Senior Loans held in its portfolio. Interest rates on Senior Loans may adjust
periodically, including daily, monthly, quarterly, semi-annually, or annually.
The Fund will not invest more than 5% of its total assets in Senior Loans with
interest rates that adjust less often than semi-annually, provided, however,
that the Fund will not invest in Senior Loans which permit the borrower to
select an interest rate redetermination period in excess of one year. Investment
in Senior Loans with longer interest rate redetermination periods may increase
fluctuations in the Fund's net asset value as a result of changes in interest
rates. The Fund may use interest rate swaps and other investment practices to
shorten the effective interest rate adjustment period of Senior Loans. If the
Fund does so, it will consider the shortened period to be the adjustment period
of the Senior Loan. The Fund's portfolio of Senior Loans will generally have a
dollar-weighted average time until the next interest rate adjustment of 90 days
or less, although the time may exceed 90 days. As short-term interest rates
rise, interest payable to the Fund should increase. As short-term interest rates
decline, interest payable to the Fund should decrease. The amount of time that
will pass before the Fund experiences the effects of changing short-term
interest rates will depend on the dollar-weighted average time until the next
interest rate adjustment on the Fund's portfolio of Senior Loans.
Although the Fund has no restrictions on portfolio maturity, normally at least
80% of the Fund's total assets invested in Senior Loans will be composed of
Senior Loans with maturities of one to ten years with rates of interest which
typically reset either daily, monthly, quarterly or semi-annually. Senior Loans
usually have mandatory and optional prepayment provisions. Because of
prepayments, the actual remaining maturity of Senior Loans may be considerably
less than their stated maturity. If a Senior Loan is prepaid, the Fund will have
to reinvest the proceeds in other Senior Loans or securities which may pay lower
interest rates. However, because the interest rates on Senior Loans adjust
periodically, the Adviser believes that the reinvestment by the Fund in Senior
Loans after prepayment generally should not result in a significant reduction in
the interest payable to the Fund.
In the event of a change in the benchmark interest rate on a Senior Loan, the
rate payable to lenders under the Senior Loan will, in turn, change at the next
scheduled reset date. If the benchmark rate goes up, the Fund as lender would
earn interest at a higher rate, but only on and after the reset date. If the
benchmark rate goes down, the Fund as lender would earn interest at a lower
rate, but only on and after the reset date.
When interest rates rise, the values of fixed income securities generally
decline. When interest rates fall, the values of fixed income securities
generally increase. The Fund believes that investing in Senior Loans should
limit fluctuations in the Fund's net asset value caused by changes in interest
rates. The Fund expects the values of its Senior Loan investments to fluctuate
less than the values of fixed rate, longer-term debt securities in response to
changes in interest rates. Changes in interest rates can, however, cause some
fluctuation in the Fund's net asset value.
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CREDIT ANALYSIS
When evaluating a borrower under a Senior Loan the Adviser considers many
factors, including the borrower's past and future projected financial
performance. The Adviser also considers a borrower's management, collateral,
cash flow, industry and tangible assets. There is no assurance that the
liquidation value of collateral, if any, for a Senior Loan would satisfy the
borrower's obligations. The Fund does not impose any minimum rating or other
independent evaluation of a borrower or its securities.
The capital structure of a borrower may include Senior Loans, senior and junior
subordinated debt, preferred stock and common stock. Senior Loans typically have
the most senior claim on the borrower's assets and common stock the most junior
claim. The proceeds of Senior Loans that the Fund will purchase usually will be
used by borrowers to finance leveraged buyouts, recapitalizations, mergers,
acquisitions, stock repurchases, debt refinancings and, to a lesser extent, for
general operating and other purposes.
The Adviser performs its own independent credit analysis of the borrower. In so
doing, the Adviser may utilize information and credit analyses from the agents
that originate or administer Senior Loans, other lenders investing in a Senior
Loan, and other sources. These analyses will continue on a periodic basis for
any Senior Loan purchased by the Fund. There is less readily available, reliable
information about most Senior Loans than is the case for many other types of
securities. As a result, the Fund is particularly dependent on the analytical
abilities of the Adviser. See "Risk Factors and Special Considerations--Credit
Risks and Realization of Investment Objective."
OTHER INVESTMENTS
Assets not invested in Senior Loans will generally consist of other instruments,
including Hybrid and Synthetic Loans (as defined below), unsecured and
subordinated loans, short-term debt instruments with remaining maturities of 120
days or less (which may have yields tied to the Prime Rate, commercial paper
rates, federal funds rate or LIBOR), longer-term debt securities, equity
securities and warrants acquired in connection with investment in or
restructuring of a Senior Loan or a collateralized loan obligation, and other
instruments as described under "Additional Information About Investments and
Investment Techniques" in the SAI. Short-term debt instruments may include (i)
commercial paper rated A-1 by Standard & Poor's Ratings Services or P-1 by
Moody's Investors Service, Inc., or of comparable quality as determined by the
Adviser, (ii) certificates of deposit, bankers' acceptances, and other bank
deposits and obligations, and (iii) securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. During periods when, in the
judgment of the Adviser, a temporary defensive posture in the market is
appropriate, the Fund may hold up to 100% of its assets in cash, or in the
instruments described above. These "Other Investments" are described below. All
such investments will normally not exceed 20% of the Fund's total assets.
Securities that, in the judgment of the Adviser, are Senior Loans are not
included in the 20% portion of the Fund's portfolio described under this
heading.
Hybrid and Synthetic Loans. The Fund may invest up to 20% of its total assets in
Hybrid and Synthetic Loans. The growth of the syndicated loan market has
produced loan structures with characteristics similar to Senior Loans but which
resemble bonds in some respects, and generally offer less covenant or other
protections than traditional Senior Loans while still being collateralized
("Hybrid Loans"). The Fund may invest in Hybrid Loans that are subordinated or
unsecured debt of the borrower. Hybrid Loans also may not include covenants that
are typical of Senior Loans, such as covenants requiring the maintenance of
minimum interest coverage ratios. As a result, Hybrid Loans present additional
risks besides those associated with traditional Senior Loans, although they may
provide a relatively higher yield. Because the lenders in Hybrid Loans waive or
forego, or the loan agreements for Hybrid Loans do not contain, certain loan
covenants, there may be fewer protections in the event of default and therefore
a higher risk of loss. In addition, because the Fund's security interest in some
of the collateral may be subordinate to other creditors, the risk of nonpayment
of interest or loss of principal may be greater than would be the case with
conventional Senior Loans. The Fund will invest only in Hybrid Loans that meet
credit standards established by the Adviser with respect to Hybrid Loans and
nonetheless provide certain protections to the lender such as collateral
maintenance (if secured) or call protection.
In addition, under certain circumstances, the Fund may wish to attempt to obtain
the economic performance of an investment in a Senior Loan in circumstances
where it is not possible or, in the Adviser's judgment, desirable, to purchase
an interest in the Senior Loan. These circumstances may include instances where
the interest in the Senior Loan is illiquid or is unavailable for direct
investment, or is available only on less attractive terms. In such
circumstances, the Fund may wish to invest in synthetic alternative loans
("Synthetic Loans") that are based upon or otherwise relate to the economic
performance of the Senior Loan upon which the
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Synthetic Loan is based (the "underlying loan"). Synthetic Loans may include
swap transactions, notes or units with variable redemption amounts, and other
similar instruments and contracts. Synthetic Loans typically do not involve
beneficial ownership of the underlying loan, usually are not collateralized or
otherwise secured by the counterparty and may or may not have any credit
enhancements attached to them. Accordingly, Synthetic Loans are generally
unsecured and involve exposure to the creditworthiness and legal standing of the
issuer of the Synthetic Loan, which may be a bank. In addition, Synthetic Loans
are typically illiquid.
Collateralized Loan Obligations. The Fund may invest up to 10% of its total
assets in collateralized loan obligations or other structured products that in
the judgment of the Adviser are substantially similar to collateralized loan
obligations ("CLOs"). CLOs are asset-backed securities issued by a trust or
other entity that are collateralized by a pool of loans, which may include,
among others, domestic and foreign senior secured loans, senior unsecured loans,
and subordinate corporate loans, including loans that may be rated below
investment grade or equivalent unrated loans. Neither the Fund nor the Adviser
selects the borrowers of the loans that comprise the CLO pool (a "CLO borrower")
or the collateral backing those loans. CLOs are subject to credit and prepayment
risk. In addition, the collection of collateral on a defaulted loan, if
achieved, may be subject to significant delays. Further, the Fund may be subject
to the credit risk of the institution that creates the CLO. The Fund may have
limited or no rights to enforce the terms of any loan agreement with a CLO
borrower, right to set-off against the CLO borrower, or right to object to
amendments to the lending agreement with the CLO borrower.
Subordinated and Unsecured Loans. The Fund may invest up to 20% of its total
assets in subordinated and unsecured loans that, in the judgment of the Adviser,
are not Senior Loans. The primary risk arising from a holder's subordination is
the potential loss in the event of default by the issuer of the loans.
Subordinated loans in an insolvency bear an increased share, relative to senior
secured lenders, of the ultimate risk that the borrower's assets are
insufficient to meet its obligations to its creditors. Unsecured loans are not
secured by any collateral of the borrower. They do not enjoy the security
associated with collateralization and may pose a greater risk of nonpayment of
interest or loss of principal than do secured loans.
Equity Securities. The Fund may invest up to 20% of its total assets in equity
securities acquired in connection with investments in or restructuring of a
Senior Loan, CLO, subordinated and unsecured loan, high-yield security, or other
investment of the Fund, including common stocks, preferred stocks, convertible
securities and warrants (which may be converted into the underlying security).
Common stocks and preferred stocks represent shares of ownership in a
corporation or other business organization. Preferred stocks usually have
specific dividends and rank after bonds and before common stock in claims on
assets of the corporation should it be dissolved. Increases and decreases in
earnings are usually reflected in a corporation's stock price. Convertible
securities are debt or preferred equity securities convertible into common
stock. Usually, convertible securities pay dividends or interest at rates higher
than common stock, but lower than other securities. Convertible securities
usually participate to some extent in the appreciation or depreciation of the
underlying stock into which they are convertible. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants.
To the extent the Fund invest in such equity securities, the value of the Fund's
portfolio will be affected by changes in the stock markets, which may be the
result of domestic or international political or economic news, changes in
interest rates or changing investor sentiment. At times, the stock markets can
be volatile and stock prices can change substantially. The equity securities of
smaller companies are more sensitive to these changes than those of larger
companies. This market risk will affect the Fund's net asset value per share,
which will fluctuate as the value of the securities held by the Fund changes.
Not all stock prices change uniformly or at the same time and not all stock
markets move in the same direction at the same time. Other factors affect a
particular stock's prices, such as poor earnings reports by an issuer, loss of
major customers, major litigation against an issuer, or changes in governmental
regulations affecting an industry. Adverse news affecting one company can
sometimes depress the stock prices of all companies in the same industry. Not
all factors can be predicted.
Other Investment Companies. Securities of other investment companies may be
acquired by the Fund to the extent permitted under the Investment Company Act of
1940 ("1940 Act"). The Fund may make indirect investments in Senior Loans
through investments in other investment companies. Under applicable
restrictions, the Fund may not acquire more than 3% of the total outstanding
voting stock of another investment company, may invest no more than 5% of its
total assets in the securities of any one investment company, and may invest
overall no more than 10% of its total assets in other investment companies.
Investment companies, including the Fund, incur certain expenses such as
management, custodian, and transfer agency fees, and, therefore, any investment
by the Fund in shares of other investment companies may be subject to such
duplicate expenses.
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High-Yield/High-Risk Securities. The Fund may invest up to 5% of its total
assets in high-yield securities (which do not include Senior Loans that may be
rated below investment grade or comparable unrated Senior Loans). High-yield
securities are debt securities that are rated lower than Baa by Moody's or BBB
by S&P, or if not rated by Moody's or S&P, of equivalent quality. High-yield
securities often are referred to as "junk bonds" and include certain corporate
debt obligations, higher-yielding preferred stock and mortgage-related
securities, and securities convertible into those types of instruments.
Investments in high-yield securities generally provide greater income and
increased opportunity for capital appreciation than investments in
higher-quality debt securities, but they also typically entail greater potential
price volatility and principal and income risk.
High-yield securities are not considered to be investment grade. They are
regarded as predominantly speculative with respect to the issuing company's
continuing ability to meet principal and interest payments. The prices of
high-yield securities have been found to be less sensitive to interest-rate
changes than higher-rated investments, but more sensitive to adverse economic
downturns or individual corporate developments. A projection of an economic
downturn or of a period of rising interest rates, for example, could cause a
decline in the prices of high-yield securities. In the case of high-yield
securities structured as zero-coupon or pay-in-kind securities, their market
prices are affected to a greater extent by interest-rate changes, and therefore
tend to be more volatile than securities that pay interest periodically and in
cash.
The secondary market in which high-yield securities are traded is generally less
liquid than the market for higher-grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which the Fund could sell a
high-yield security, and could adversely affect the net asset value of the
Fund's shares. At times of less liquidity, it may be more difficult to value
high-yield securities because this valuation may require more research, and
elements of judgment may play a greater role in the valuation since there is
less reliable, objective data available. In pursuing the Fund's objectives, the
Adviser seeks to identify situations in which the rating agencies have not fully
perceived the value of the security.
Investments in high-yield securities by the Fund may result in greater net asset
value fluctuation than if the Fund did not make such investments.
There is no limit on the percentage of the Fund's assets that may be invested in
Senior Loans that are rated below investment grade or that are unrated but of
comparable quality.
USE OF HEDGING TECHNIQUES
The Fund may enter into various interest rate hedging and risk management
transactions, subject to the availability of such instruments and the Adviser's
discretion, which includes the discretion not to pursue a hedging or risk
management strategy, even when doing so might have been advantageous to the
Fund. Certain of these transactions may be considered to involve derivative
instruments. A derivative is a financial instrument whose performance is derived
at least in part from the performance of an underlying index, security or asset.
The values of certain derivatives can be affected dramatically by even small
market movements, sometimes in ways that are difficult to predict. There are
many different types of derivatives, with many different uses. The Fund expects
to enter into these transactions primarily to seek to preserve a return on or
value of a particular investment or portion of its portfolio, and may also enter
into such transactions to seek to protect against decreases in the anticipated
rate of return on adjustable rate financial instruments the Fund owns or
anticipates purchasing at a later date, or for other risk management strategies
such as managing the effective dollar-weighted average duration of the Fund's
portfolio. In addition, the Fund may also engage in hedging transactions to seek
to protect the value of its portfolio against declines in net asset value
resulting from changes in interest rates or other market changes. The Fund does
not intend to engage in such transactions to enhance the yield on its portfolio
to increase income available for distributions. Market conditions will determine
whether and in what circumstances the Fund would employ any hedging or risk
management techniques. The Fund will not engage in any of the transactions for
speculative purposes and will use them only as a means to hedge or manage the
risks associated with assets held in, or anticipated to be purchased for, the
Fund's portfolio or obligations incurred by the Fund. The successful utilization
of hedging and risk management transactions requires skills different from those
needed in the selection of the Fund's portfolio securities. The Fund believes
that the Adviser possesses the skills necessary for the successful utilization
of hedging and risk management transactions. There can be no assurance that an
appropriate hedging or risk management instrument will be available to the Fund
when the Adviser seeks such instrument for use by the Fund, or that the Adviser
will in its discretion utilize a hedging or risk management instrument when it
might have been advantageous for the Fund to do so. The Fund will incur
brokerage and other costs in connection with its hedging and risk management
transactions. See "Interest Rate Hedging Transactions" in the SAI.
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<PAGE> 20
USE OF BORROWING
The Fund may borrow money in amounts up to 33 1/3% of the value of its total
assets if necessary to finance repurchase offers (as described below under
"Repurchase Offers"), to fund commitments to purchase Senior Loans, or for other
temporary, extraordinary or emergency purposes. The Fund may also borrow in
anticipation of cash flows into and out of the Fund and to attempt to
efficiently manage the Fund's investment portfolio. The Fund does not intend to
issue securities representing indebtedness other than short-term borrowings or
to issue preferred shares. The Fund will not use borrowings for long-term
financial leverage purposes. Accordingly, the Fund will not purchase additional
portfolio securities at any time that borrowings, including the Fund's
commitments pursuant to reverse repurchase agreements, exceed 5% of the Fund's
total assets (which includes the amount borrowed).
Capital raised through borrowing will be subject to interest costs. The Fund may
be required to maintain minimum average balances in connection with borrowings
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements will increase the cost of borrowing over the stated interest
rate.
The Fund may enter into an agreement with a financial institution providing for
an unsecured, discretionary credit facility (the "Facility"), the proceeds of
which may be used to finance, in part, share repurchases. The Facility may
provide for the borrowing by the Fund to the extent permitted under the 1940
Act, on an unsecured, uncommitted basis. Loans made under the Facility will bear
interest at an adjustable rate.
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of 300% of the
aggregate outstanding principal balance of indebtedness. Additionally, under the
1940 Act the Fund may not declare any dividend or other distribution upon any
class of its capital stock, or purchase any such capital stock, unless the
aggregate indebtedness of the Fund has at the time of the declaration of any
such dividend or distribution or at the time of any such purchase an asset
coverage of at least 300%, after deducting the amount of such dividend,
distribution, or purchase price, as the case may be. The Fund's inability to
make distributions as a result of these requirements could cause the Fund to
fail to qualify as a regulated investment company and/or subject the Fund to
income or excise taxes. The Fund may be required to dispose of portfolio
investments on unfavorable terms if market fluctuations or other factors reduce
the required asset coverage to less than the prescribed amount.
Any indebtedness issued by the Fund or borrowing by the Fund either (a) will
mature by the next Repurchase Request Deadline (as defined below under
"Repurchase Offers") or (b) will provide for its redemption, call, or repayment
by the Fund by the next Repurchase Request Deadline without penalty or premium,
as necessary to permit the Fund to repurchase shares in the amount set by the
Board of Trustees in compliance with the asset coverage requirements of the 1940
Act.
GENERAL INFORMATION ON SENIOR LOANS
Senior Loans differ from other types of debt in that they generally hold the
most senior position in the capital structure of a borrower. Priority liens are
obtained by the lenders that typically provide the first right to cash flows or
proceeds from the sale of a borrower's collateral, if any, if the borrower
becomes insolvent (subject to the limitations of bankruptcy law, which may
provide higher priority to certain claims such as, for example, employee
salaries, employee pensions and taxes). Thus, Senior Loans are generally repaid
before unsecured bank loans, corporate bonds, subordinated debt, trade
creditors, and preferred or common stockholders.
Senior Loans have contractual terms designed to protect lenders. Loan agreements
often include restrictive covenants that limit the activities of the borrower.
These covenants may include mandatory prepayment out of excess cash flows,
restrictions on dividend payments, the maintenance of minimum financial ratios,
limits on indebtedness and other financial tests. Breach of these covenants
generally is an event of default and, if not waived by the lenders, may give
lenders the right to accelerate principal and interest payments.
Senior Loans are typically secured by pledges of collateral from the borrower in
the form of tangible assets such as cash, accounts receivable, inventory,
property, plant and equipment, common and/or preferred stock of subsidiaries,
and intangible assets including trademarks, copyrights, patent rights and
franchise value. The Fund may also receive guarantees or other credit support as
a form of collateral. In some instances, the Fund may invest in Senior Loans
that are secured only by stock of the borrower or its subsidiaries or
affiliates. Generally, as discussed below, the agent with respect to a Senior
Loan is responsible for monitoring collateral and for
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<PAGE> 21
exercising remedies available to the lenders such as foreclosure upon
collateral. In certain circumstances, the loan agreement may authorize the agent
to liquidate the collateral and to distribute the liquidation proceeds pro rata
among the lenders. The Fund may also invest in Senior Loans that are not secured
by collateral. Such unsecured Senior Loans involve additional risk.
Senior Loans generally are arranged through private negotiations between a
borrower and several financial institutions ("lenders") represented in each case
by an agent ("agent"), which usually is one or more of the lenders. The Fund
generally will acquire Senior Loans from and sell Senior Loans to the following
lenders: money center banks, selected regional banks and selected non-banks,
investment banks, insurance companies, finance companies, other investment
companies, private investment funds, and lending companies. The Fund may also
acquire Senior Loans from and sell Senior Loans to U.S. branches of foreign
banks which are regulated by the Federal Reserve System or appropriate state
regulatory authorities. On behalf of the lenders, the agent generally is
primarily responsible for negotiating the loan agreement ("loan agreement"),
which establishes the terms and conditions of the Senior Loan and the rights of
the borrower and the lenders. The agent is typically paid a fee by the borrower
for its services. The agent and the other original lenders typically have the
right to sell interests ("participations") in their share of the Senior Loan to
other participants. The agent and the other original lenders also may assign all
or a portion of their interests in the Senior Loan to other participants.
The agent generally is required to administer and manage the Senior Loan on
behalf of other lenders. When evaluating Senior Loans, the Adviser may consider,
and may rely in part, on analysis performed by the agent and other lenders. This
analysis may include an evaluation of the value and sufficiency of any
collateral securing Senior Loans. As to collateralized Senior Loans, the agent
usually is required to monitor the collateral. The agent may rely on independent
appraisals of collateral. The agent need not, however, obtain an independent
appraisal of assets pledged as collateral in all cases. The agent generally is
also responsible for determining that the lenders have obtained a perfected
security interest in the collateral (if any) securing a Senior Loan.
The Fund normally relies on the agent to collect principal of and interest on a
Senior Loan. Furthermore, the Fund also relies in part on the agent to monitor
compliance by the borrower with the restrictive covenants in the loan agreement
and to notify the Fund (or the lender from whom the Fund has purchased a
participation) of any adverse change in the borrower's financial condition.
Insolvency of the agent or other persons positioned between the Fund and the
borrower could result in losses for the Fund.
The Fund may be required to pay and may receive various fees and commissions in
connection with purchasing, selling and holding interests in Senior Loans. The
fees normally paid by borrowers include three primary types: facility fees,
commitment fees and prepayment penalties. Facility fees are paid to lenders when
a Senior Loan is originated. Commitment fees are paid to lenders on an ongoing
basis based on the unused portion of a Senior Loan commitment. Lenders may
receive prepayment penalties when a borrower prepays a Senior Loan. The Fund
receives these fees directly from the borrower if the Fund is an original lender
or, in the case of commitment fees and prepayment penalties, if the Fund
acquires an assignment. Whether the Fund receives a facility fee in the case of
an assignment, or any fees in the case of a participation, depends on
negotiations between the Fund and the lender selling such interests. When the
Fund buys an assignment, it may be required to pay a fee, or forgo a portion of
interest and fees payable to it, to the lender selling the assignment.
Occasionally, the assignor pays a fee to the assignee. A person selling a
participation to the Fund may deduct a portion of the interest and any fees
payable to the Fund as an administrative fee. The Fund may be required to pass
along to a person that buys a Senior Loan from the Fund a portion of any fees
that the Fund is entitled to.
The Fund may have obligations under a loan agreement, including the obligation
to make additional loans in certain circumstances. The Fund intends to reserve
against such contingent obligations by segregating cash, liquid securities and
liquid Senior Loans as a reserve. The Fund will not purchase a Senior Loan that
would require the Fund to make additional loans if as a result of such purchase
all of the Fund's additional loan commitments in the aggregate would exceed 20%
of the Fund's total assets or would cause the Fund to fail to meet the asset
composition requirements set forth under the heading "Investment Restrictions
and Fundamental Policies" in the SAI.
The Fund's investment in Senior Loans generally may take one or a combination of
the following forms including: purchase of an assignment ("assignment") or a
portion of a Senior Loan from a third party: or acquiring a participation in a
Senior Loan. The Fund may pay a fee or forego a portion of interest payments to
the lender selling a participation or assignment under the terms of such
participation or assignment.
The agent that arranges a Senior Loan is frequently a commercial or investment
bank or other entity that originates a Senior Loan and the entity that invites
other parties to join the lending syndicate. In larger transactions, it is
common to have several agents;
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<PAGE> 22
however, generally only one such agent has primary responsibility for
documentation and administration of the Senior Loan. Agents are typically paid
fees by the borrower for their services.
When the Fund acquires an assignment, it will have a direct contractual
relationship with the borrower, may enforce compliance by the borrower with the
terms of the loan agreement, and may have rights with respect to any funds
acquired by other lenders through set-off. Lenders also have certain voting and
consent rights under the applicable Senior Loan agreement. Action subject to
lender vote or consent generally requires the vote or consent of the holders of
some specified percentage of the outstanding principal amount of the Senior
Loan. Certain decisions, such as reducing the amount or increasing the time for
payment of interest on or repayment of principal of a Senior Loan, or releasing
collateral therefor, frequently require the unanimous vote or consent of all
lenders affected.
When the Fund is a purchaser of an assignment it typically succeeds to all the
rights and obligations under the loan agreement of the assigning lender and
becomes a lender under the loan agreement with the same rights and obligations
as the assigning lender. Assignments are, however, arranged through private
negotiations between potential assignees and potential assignors, and the rights
and obligations acquired by the purchaser of an assignment may be more limited
than those held by the assigning lender. The Fund will purchase an assignment or
act as lender with respect to a syndicated Senior Loan only where the agent with
respect to such Senior Loan is determined by the Adviser to be creditworthy at
the time of acquisition.
The Fund may also invest in participations in Senior Loans. With respect to any
given Senior Loan, the rights of the Fund when it acquires a participation may
be more limited than the rights of original lenders or of investors who acquire
an assignment. Participations may entail certain risks relating to the
creditworthiness of the parties from which the participations are obtained.
Participation by the Fund in a lender's portion of a Senior Loan typically
results in the Fund having a contractual relationship only with the lender, not
with the borrower. The Fund has the right to receive payments of principal,
interest and any fees to which it is entitled only from the lender selling the
participation and only upon receipt by such lender of such payments from the
borrower. In connection with purchasing participations, the Fund generally will
have no right to enforce compliance by the borrower with the terms of the Senior
Loan agreement, nor any rights with respect to any funds acquired by other
lenders through set-off against the borrower with the result that the Fund may
be subject to delays, expenses and risks that are greater than those that exist
where the Fund is the original lender, and the Fund may not directly benefit
from the collateral supporting the Senior Loan because it may be treated as a
creditor of the lender instead of the borrower. As a result, the Fund may assume
the credit risk of both the borrower and the lender selling the participation.
In the event of insolvency of the lender selling a participation, the Fund may
be treated as a general creditor of such lender, and may not benefit from any
set-off between such lender and the borrower. In the event of bankruptcy or
insolvency of the borrower, the obligation of the borrower to repay the Senior
Loan may be subject to certain defenses that can be asserted by such borrower as
a result of improper conduct of the lender selling the participation The Fund
will only acquire participations if the lender selling the participations and
any other persons interpositioned between the Fund and the lender are determined
by the Adviser to be creditworthy.
When the Fund purchases an assignment, the Fund typically succeeds to the rights
of the assigning lender under the Senior Loan agreement, and becomes a lender
under the Senior Loan agreement. When the Fund purchases a participation in a
Senior Loan, the Fund typically enters into a contractual arrangement with the
lender selling the participation, and not with the borrower.
Should an agent become insolvent, or enter Federal Deposit Insurance Corporation
("FDIC") receivership or bankruptcy, any interest in the Senior Loan transferred
by such person and any Senior Loan repayment held by the agent for the benefit
of participants may be included in the agent's estate where the Fund acquires a
participation interest from an original lender. Should that original lender
become insolvent, or enter FDIC receivership or bankruptcy, any interest in the
Senior Loan transferred by the original lender may be included in its estate. In
either such event, the Fund might incur certain costs and delays in realizing
payment or may suffer a loss of principal and interest.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following discussion summarizes some of the risks that should be taken into
account when considering an investment in the Fund. For additional information
about the risks associated with the instruments or investment techniques that
may be used by the Fund, see "Additional Information About Investments and
Investment Techniques" in the SAI.
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<PAGE> 23
CREDIT RISKS AND REALIZATION OF INVESTMENT OBJECTIVE
Senior Loans, like most other debt obligations, are subject to the risk of
default. While all investments involve some amount of risk, Senior Loans
generally involve less risk than equity instruments of the same issuer because
the payment of principal of and interest on debt instruments is a contractual
obligation of the issuer that, in most instances, takes precedence over the
payment of dividends, or the return of capital, to the issuer's shareholders.
Although the Fund will generally invest in Senior Loans that will be fully
collateralized with assets with a market value that, at the time of acquisition,
equals or exceeds the principal amount of the Senior Loan, the value of the
collateral may decline below the principal amount of the Senior Loan subsequent
to the Fund's investment in such Senior Loan. In addition, to the extent that
collateral consists of stock of the borrower or its subsidiaries or affiliates,
the Fund will be subject to the risk that this stock may decline in value, be
relatively illiquid, or may lose all or substantially all of its value, causing
the Senior Loan to be undercollateralized. Senior Loans are also subject to the
risk of default of scheduled interest or principal payments. In the event of a
failure to pay scheduled interest or principal payments on Senior Loans held by
the Fund, the Fund could experience a reduction in its income, and would
experience a decline in the market value of the particular Senior Loan so
affected, and may experience a decline in the net asset value of Fund shares or
the amount of its dividends. The risk of default will increase in the event of
an economic downturn or a substantial increase in interest rates. To the extent
that the Fund's investment is in a Senior Loan acquired from another lender, the
Fund may be subject to certain credit risks with respect to that lender. See
"About Senior Loans." Further, there is no assurance that the liquidation of the
collateral (if any) underlying a Senior Loan would satisfy the issuer's
obligation to the Fund in the event of non-payment of scheduled interest or
principal, or that collateral could be readily liquidated. The risk of
non-payment of interest and principal also applies to other debt instruments in
which the Fund may invest. Because of the protective terms of Senior Loans, the
Adviser believes that the Fund is more likely to recover more of its investment
in a defaulted Senior Loan than would be the case for most other types of
defaulted debt securities. Nevertheless, even in the case of collateralized
Senior Loans, there is no assurance that the sale of collateral would raise
enough cash to satisfy the borrower's payment obligation or that the collateral
can or will be liquidated. The Fund may invest up to 20% of its total assets in
Senior Loans that are not secured by any collateral, and such Senior Loans
entail greater risk than secured Senior Loans.
The Fund may acquire Senior Loans of borrowers that are experiencing, or are
more likely to experience, financial difficulty, including Senior Loans issued
in highly leveraged transactions. The Fund may even acquire and retain in its
portfolio Senior Loans of borrowers that have filed for bankruptcy protection or
that have had involuntary bankruptcy petitions filed against them by creditors.
In the case of bankruptcy, liquidation of collateral may not occur and the court
may not give lenders the full benefit of their senior position.
If the terms of a collateralized Senior Loan do not require the borrower to
pledge additional collateral in the event of a decline in the value of the
original collateral, the Fund will be exposed to the risk that the value of the
collateral will not at all times equal or exceed the amount of the borrower's
obligations under a Senior Loan. To the extent that a Senior Loan is
collateralized by stock in the borrower or its subsidiaries, such stock may lose
all of its value in the event of bankruptcy of the borrower. Uncollateralized
Senior Loans involve a greater risk of loss.
In the event of the bankruptcy, receivership, or other insolvency proceeding of
a borrower, the Fund could experience delays or limitations with respect to its
ability to collect the principal of and interest on the Senior Loan and with
respect to its ability to realize the benefits of the collateral securing the
Senior Loan, if any. Among the credit risks involved in such a proceeding are
the avoidance of the Senior Loan as a fraudulent conveyance, the restructuring
of the payment obligations under the Senior Loan (including, without limitation,
the reduction of the principal amount, the extension of the maturity, and the
reduction of the interest rate thereof), the avoidance of the pledge of
collateral securing the Senior Loan as a fraudulent conveyance or preferential
transfer, the discharge of the obligation to repay that portion of the Senior
Loan that exceeds the value of the collateral, and the subordination of the
Fund's rights to the rights of other creditors of the borrower under applicable
law. Similar delays or limitations of the Fund's ability to collect the
principal of and interest on the Senior Loan and with respect to its ability to
realize the benefits of the collateral securing the Senior Loan may arise in the
event of the bankruptcy, receivership, or other insolvency proceeding of an
original lender or an agent.
Investment decisions will be based largely on the credit analysis performed by
the Adviser's investment personnel and not on analyses prepared by rating
agencies or other independent parties, and such analysis may be difficult to
perform for many borrowers and issuers. The Adviser may also utilize information
prepared and supplied by the agent or other lenders. Information about interests
in Senior Loans generally will not be in the public domain, and interests are
often not currently rated by any nationally recognized rating service. Many
borrowers have not issued securities to the public and are not subject to
reporting requirements
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<PAGE> 24
under federal securities laws. Generally, borrowers are required to provide
financial information to lenders, including the Fund, and information may be
available from other Senior Loan participants or agents that originate or
administer Senior Loans. There can be no assurance that the Adviser's analysis
will disclose factors that may impair the value of a Senior Loan. A serious
deterioration in the credit quality of a borrower could cause a permanent
decrease in the Fund's net asset value.
There is no minimum rating or other independent evaluation of a borrower or its
securities limiting the Fund's investments. Although a Senior Loan often is not
rated by any rating agency at the time the Fund purchases the Senior Loan,
rating agencies have become more active in rating an increasing number of Senior
Loans and at any given time a substantial portion of the Senior Loans in the
Fund's portfolio may be rated. Although the Adviser may consider such ratings
when evaluating a Senior Loan, it does not view such ratings as a determinative
factor in its investments decisions. The lack of a rating does not necessarily
imply that a Senior Loan is of lesser investment quality. There is no limit on
the percentage of the Fund's assets that may be invested in Senior Loans that
are rated below investment grade or that are unrated but of comparable quality,
and the Fund may invest a substantial portion of its assets in such Senior
Loans. Debt securities rated below investment grade and comparable unrated
securities are viewed by the ratings agencies as speculative and are commonly
known as "junk bonds."
While debt instruments generally are subject to the risk of changes in interest
rates, the interest rates of the Senior Loans in which the Fund will invest will
adjust with a specified interest rate. Thus the risk that changes in interest
rates will affect the market value of such Senior Loans is significantly
decreased, but is not eliminated.
NON-DIVERSIFICATION
The Fund may invest a greater proportion of its assets in the securities of a
small number of issuers than would be required if the Fund were a diversified
investment company. In this regard, the Fund is not subject to the general
limitation that, with respect to 75% of its total assets, it may not invest more
than 5% of its total assets in the securities of a single issuer. As a result,
because the Fund is permitted greater flexibility to invest its assets in the
obligations of a single issuer it is exposed to increased risk of loss if such
an investment underperforms expectations. However, the Fund intends to limit its
investments so as to comply with diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
"regulated investment company."
LIMITED SECONDARY MARKET FOR SENIOR LOANS
Although it is growing, the secondary market for Senior Loans is currently
limited. There is no organized exchange or board of trade on which Senior Loans
may be traded; instead, the secondary market for Senior Loans is an unregulated
inter-dealer or inter-bank market. Accordingly, some or many of the Senior Loans
in which the Fund invests will be relatively illiquid. This means that the Fund
may not be able to sell its Senior Loans quickly at a fair price. The market for
illiquid securities is more volatile than the market for liquid securities. The
market could be disrupted in the event of an economic downturn or a substantial
increase or decrease in interest rates. In addition, Senior Loans in which the
Fund invests generally require the consent of the borrower prior to sale or
assignment. This consent requirement may delay or impede the Fund's ability to
sell Senior Loans. The Fund may have difficulty disposing of its Senior Loans if
it needs cash to repay debt, to pay dividends, to pay expenses or to take
advantage of new investment opportunities. Limitations of a secondary market may
result in difficulty raising cash to purchase shares tendered pursuant to a
repurchase offer. These events may cause the Fund to sell securities at lower
prices than it would otherwise consider to meet cash needs and may cause the
Fund to maintain a greater portion of its assets in cash or cash equivalents
than it would otherwise, which could negatively impact performance. If the Fund
purchases a relatively large Senior Loan to generate income, the limitations of
the secondary market may inhibit the Fund from selling a portion of the Senior
Loan and reducing its exposure to the borrower when the Adviser deems it
advisable to do so.
In addition, because the secondary market for Senior Loans may be limited, it
may be difficult to value Senior Loans. Market quotations may not be available
and valuation may require more research than for liquid securities. In addition,
elements of judgment may play a greater role in the valuation, because there is
less reliable, objective data available. To the extent that a secondary market
does exist for Senior Loans, the market may be subject to irregular trading
activity, wide bid/ask spreads, and extended trade settlement periods.
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<PAGE> 25
The Fund must maintain liquid assets in accordance with the regulatory
requirements under the 1940 Act for operation as an interval fund. These
requirements are set forth under "Repurchase of Shares--Liquidity Requirements."
DEMAND FOR SENIOR LOANS
Although the volume of Senior Loans has increased in recent years, demand for
Senior Loans has also grown. An increase in demand may benefit the Fund by
providing increased liquidity for Senior Loans, but may also adversely affect
the rate of interest payable on Senior Loans acquired by the Fund and the rights
provided to the Fund under the terms of the Senior Loan. Senior Loans are not
listed on any national securities exchange or automated quotation system and no
active trading market exists for many Senior Loans. As a result, many Senior
Loans are illiquid, meaning that the Fund may not be able to sell them quickly
at a fair price. The market for illiquid securities is more volatile than the
market for liquid securities. However, many Senior Loans are of a large
principal amount and are held by a large number of owners. In the Adviser's
judgment, this should enhance their liquidity.
NO TRADING MARKET FOR SHARES
The Fund is a closed-end investment company designed primarily for long-term
investors and not as a trading vehicle. The Fund does not intend to list the
shares for trading on any national securities exchange. There is no secondary
trading market for Fund shares. The Fund's shares are therefore not readily
marketable. The Fund, as a fundamental policy, will make quarterly repurchases
for 5% to 25% of its outstanding common shares at net asset value. See
"Repurchase of Shares" below for more information. However, the Fund's shares
are less liquid than shares of funds that trade on a stock exchange, and Class B
shareholders who tender Fund shares held for less than four years and Class C
shareholders who tender Fund shares held for less than one year will pay an EWC.
See "Purchase of Shares." In addition, there is no guarantee that shareholders
will be able to liquidate all of their Fund shares that they tender.
NET ASSET VALUE
The net asset value per share of the Fund is the value of one share and is
determined separately for each class by dividing the value of the Fund's net
assets attributable to that class by the number of shares of that class
outstanding. The net asset value of shares of the Fund is computed as of the
close of regular trading on the New York Stock Exchange (the "Exchange") on each
day the Exchange is open for trading. The Exchange is scheduled to be closed on
the following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas. Portfolio securities for which market quotations are readily
available are generally valued at market value. All other securities may be
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees.
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of the Fund may be purchased
at net asset value through certain investment advisers registered under the
Investment Advisers Act and other financial service firms, acting solely as
agents for their clients, that adhere to certain standards established by the
Distributor, including a requirement that such shares be purchased for the
benefit of their clients participating in a fee based investment advisory
program or agency commission program under which such clients pay a fee to the
investment adviser or other firm for portfolio management or agency brokerage
services. Class B shares are sold without an initial sales charge but are
subject to higher ongoing expenses than Class A shares and an EWC payable upon
certain repurchases. Class B shares automatically convert to Class A shares six
years after issuance. Class C shares are sold without an initial sales charge
but are subject to higher ongoing expenses than Class A shares and are subject
to an EWC payable upon certain repurchases within the first year following
purchase. Class C shares automatically convert to Class C shares ten years after
issuance. When placing purchase orders, investors must specify whether the order
is for Class A, Class B or Class C shares.
The primary distinctions among the classes of the Fund's shares lie in their
initial sales charge and EWC structures and in their ongoing expenses, including
asset-based sales charges in the form of distribution fees. These differences
are summarized in the table below. See also, "Fund Expenses." Each class has
distinct advantages and disadvantages for different investors, and investors may
choose the class that best suits their circumstances and objectives.
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<PAGE> 26
<TABLE>
<CAPTION>
Annual Distribution Fees (as a
Sales Charge % of average daily net assets) Other Information
------------ ------------------------------ -----------------
<S> <C> <C> <C>
Class A None None Sold in connection with an investment
advisory program or agency commission
program under which clients pay a fee
to the investment adviser or other firm
for portfolio management or agency
brokerage services.
Class B Maximum EWC of 3% of repurchase 0.60% Shares convert to Class A shares six
proceeds; declines to zero after years after issuance.
four years.
Class C EWC of 1% of repurchase proceeds for 0.60% Shares convert to Class A shares ten
repurchases made during first year years after issuance.
after purchase.
</TABLE>
The minimum initial investment for each Class of shares of the Fund is $1,000
and the minimum subsequent investment is $100. The minimum initial investment
for an Individual Retirement Account is $250 and the minimum subsequent
investment is $50. Under an automatic investment plan, such as Bank Direct
Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion.
PURCHASE OF CLASS A SHARES. Class A shares of the Fund may be purchased at net
asset value through certain investment advisers registered under the Investment
Advisers Act and other financial services firms, acting solely as agents for
their clients, that adhere to certain standards established by the Distributor,
including a requirement that such shares be purchased for the benefit of their
clients participating in an investment advisory program or agency commission
program under which such clients pay a fee to the investment adviser or other
firm for portfolio management or agency brokerage services. Such shares are sold
for investment purposes and on the condition that they will not be resold except
through repurchase by the Fund.
The Fund may also issue Class A shares at net asset value in connection with the
acquisition of the assets of or merger or consolidation with another investment
company, or to Class A shareholders in connection with the investment or
reinvestment of income and capital gain dividends or upon conversion from Class
B shares or Class C shares as provided below.
PURCHASE OF CLASS B SHARES. Investors choosing the EWC alternative may purchase
Class B shares at net asset value per share without any sales charge at the time
of purchase. Since Class B shares are being sold without an initial sales
charge, the full amount of the investor's purchase payment will be invested in
Class B shares for his or her account. An EWC may be imposed upon repurchase of
Class B shares. See "Repurchase of Shares--Early Withdrawal Charges-Class B
Shares."
The Distributor compensates firms for sales of Class B shares at the time of
sale at a commission rate of up to 3.00% of the amount of Class B shares
purchased. The Distributor is compensated by the Fund for services as
distributor and principal underwriter for Class B shares. See "Distribution
Arrangements" and "Distribution Expenses."
AUTOMATIC CONVERSION FEATURE
Class B shares will automatically convert to Class A shares six years after the
end of the calendar month in which the shareholder's order to purchase was
accepted and after that date will no longer be subject to the distribution fees
applicable to Class B shares. Conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales charge, fee or
other charge. The purpose of the conversion feature is to relieve the holders of
Class B shares from the asset based distribution expenses
26
<PAGE> 27
applicable to such shares at such time as the Class B shares have been
outstanding for a duration sufficient for the Distributor to have been
substantially compensated for distribution-related expenses incurred in
connection with those shares.
For purposes of the conversion of Class B shares to Class A shares, shares
purchased through the reinvestment of dividends and distributions paid on Class
B shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B shares in the shareholder's account (other
than those in the sub-account) convert to Class A shares, a pro rata portion of
the Class B shares in the sub-account will also convert to Class A shares.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. An EWC may be imposed upon the repurchase of Class C shares
if they are repurchased within one year of purchase. See "Repurchase of
Shares--Early Withdrawal-Class C Shares."
The Distributor compensates firms for sales of Class C shares at the time of
sale at a commission rate of up to 1.00% of the amount of Class C shares
purchased. The Distributor is compensated by the Fund for services as
distributor and principal underwriter for Class C shares. See "Distribution
Arrangements" and "Distribution Expenses."
AUTOMATIC CONVERSION FEATURE
Class C shares will automatically convert to Class A shares ten years after the
end of the calendar month in which the shareholder's order to purchase was
accepted and after that date will no longer be subject to the distribution fees
applicable to Class C shares. Conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales charge, fee or
other charge. The purpose of the conversion feature is to relieve the holders of
Class C shares from the asset based distribution expenses applicable to such
shares at such time as the Class C shares have been outstanding for a duration
sufficient for the Distributor to have been substantially compensated for
distribution-related expenses incurred in connection with those shares.
For purposes of the conversion of Class C shares to Class A shares, shares
purchased through the reinvestment of dividends and distributions paid on Class
C shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class C shares in the shareholder's account (other
than those in the sub-account) convert to Class A shares, a pro rata portion of
the Class C shares in the sub-account will also convert to Class A shares.
WHICH ARRANGEMENT IS BEST FOR YOU? The decision as to which class of shares
provides the most suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
who prefer not to pay an initial sales charge and who plan to hold their
investment for a longer period might consider Class B shares. Investors who
prefer not to pay an initial sales charge but who plan to redeem their shares
within a relatively short period might consider Class C shares. For more
information about the three sales arrangements, consult your financial
representative or the Distributor. Firms may receive different compensation
depending upon which class of shares they sell.
DISTRIBUTION ARRANGEMENTS
The Fund has entered into an Underwriting and Distribution Services Agreement
with the Distributor (the "Distribution Agreement"), which has been filed as an
exhibit to the Fund's Registration Statement with the Commission. The summary of
the Distribution Agreement contained herein is qualified by reference to the
Distribution Agreement. Subject to the terms and conditions of the Distribution
Agreement, the Fund may issue and sell shares of the Fund from time to time
through the Distributor, which is the principal underwriter of the shares, and
through firms. The Class A, Class B and Class C shares will be offered on a
continuous basis as described above, at net asset value per share. Shareholders
will have the option of submitting shares for repurchase quarterly, subject to
the terms and conditions described below under "Repurchase of Shares."
The Distributor is the principal underwriter and distributor of the Fund's
shares and acts as agent of the Fund in the continuous offering of the Fund's
shares. The Fund and the Distributor reserve the right to withdraw, cancel or
modify the offering of shares and the Fund reserves the right to refuse any
order for shares in whole or in part.
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<PAGE> 28
Firms that submit orders for Class B shares will be compensated at a rate of
3.0% of the aggregate sales price of the Class B shares purchased from the Fund
by or through such firms. Firms that submit orders for Class C shares will be
compensated at a rate of 1.0% of the aggregate sales price of the Class C shares
purchased from the Fund by or through such firms.
In addition, the Distributor may, from time to time, pay or allow additional
discounts, commissions or promotional incentives, in the form of cash
compensation, to firms that sell shares of the Fund. In some instances, such
discounts, commissions or other incentives will be offered only to certain firms
that sell or are expected to sell during specified time periods certain minimum
amounts of shares of the Fund, or other funds underwritten by the Distributor.
Settlements of sales of shares will normally occur on the third business day
following the date on which any such sales are made.
The Fund anticipates that from time to time certain of the firms may act as
brokers or dealers in connection with the execution of its portfolio
transactions.
In connection with the sale of the shares on behalf of the Fund, the Distributor
may be deemed to be an underwriter within the meaning of the Securities Act of
1933.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
Delays may be experienced in the share repurchase procedure, described below, if
share certificates have been issued. A lost or destroyed certificate is
difficult to replace and can be expensive to the shareholder (a bond value of 2%
or more of the certificate value is normally required).
Brokers, banks and other financial service providers may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and the Distributor may pay them a
transaction fee up to the level of the discount or commission allowable or
payable to the firms, as described above. Banks are currently prohibited under
the Glass-Steagall Act from providing certain underwriting or distribution
services. Brokers, banks or other financial service providers may be subject to
various state laws regarding the services described above and may be required to
register as dealers pursuant to state law. If banking firms were prohibited from
acting in any capacity or providing any of the described services, management
would consider what action, if any, would be appropriate. The Distributor does
not believe that termination of a relationship with a bank would result in any
material adverse consequences to the Fund.
Orders for the purchase of shares in a continuous offering will be confirmed at
a price based on the net asset value per share of the Fund next determined after
receipt in good order by the Distributor of the order accompanied by payment.
However, orders received by firms prior to the determination of net asset value
and received in good order by the Distributor prior to the close of its business
day will be confirmed at a price based on the net asset value per share
effective on that day. The Fund reserves the right to determine its net asset
value more frequently than once a day if deemed desirable. Firms are obligated
to transmit orders promptly. Collection may take significantly longer for a
check drawn on a foreign bank than for a check drawn on a domestic bank.
Therefore, if an order is accompanied by a check drawn on a foreign bank, funds
must normally be collected before shares will be purchased.
Firms provide varying arrangements for their clients to purchase and submit to
the Fund for repurchase the Fund's shares. Some may establish higher minimum
investment requirements than set forth above. Firms may arrange with their
clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Distributor or Shareholder Service Agent for
recordkeeping and other expenses relating to these nominee accounts. In
addition, certain privileges with respect to the purchase and repurchase of
shares or the reinvestment of dividends may not be available through such firms.
Some firms may participate in a program allowing them access to their clients'
accounts for servicing, including, without limitation, transfers or registration
and dividend payee changes; and may perform functions such as generation of
confirmation statements and disbursement of cash dividends. Such firms,
including affiliates of the Distributor, may receive compensation from the Fund
through the Shareholder Service Agent for these services. This Prospectus should
be read in connection with such firms' materials regarding their fees and
services.
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The Fund reserves the right to withdraw all or any part of the offering made by
this Prospectus and to reject purchase orders for any reason. Also, from time to
time, the Fund may temporarily suspend the offering of any class of its shares.
During the period of such suspension, persons who are already shareholders of
the Fund normally will be permitted to continue to purchase additional shares of
the Fund and to have dividends reinvested.
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.
The Distributor is headquartered at 222 South Riverside Plaza, Chicago, Illinois
60606.
DISTRIBUTION EXPENSES
Pursuant to the Distribution Agreement, the Distributor bears all of its
expenses of providing services pursuant to the Distribution Agreement, including
the payment of any commissions. The Distributor provides for the preparation of
advertising or sales literature and bears the cost of printing and mailing
prospectuses to persons other than existing shareholders. The Fund bears the
cost of printing and mailing prospectuses and reports to existing shareholders.
The Distributor bears the cost of qualifying and maintaining the qualification
of Fund shares for sale under the securities laws of the various states and the
Fund bears the expense of registering its shares with the Commission. The
Distributor may enter into related selling group agreements with various
broker-dealers, including affiliates of the Distributor, that provide
distribution services to investors. The Distributor also may provide some of the
distribution services.
Distribution plans have been adopted by the Fund with respect to the Class B
(the "Class B Plan") and Class C (the "Class C Plan") shares that comply with
the terms of Rule 12b-1 under the 1940 Act (collectively, the "Plans"). The
Plans provides for fees payable as an expense of the Class B and Class C shares,
that are used by the Distributor to pay for distribution services for that
class. The Plans are approved and reviewed in accordance with Rule 12b-1 under
the 1940 Act, which regulates the manner in which an open-end investment company
may, directly or indirectly, bear the expenses of distributing its shares.
Although the Fund is not an open-end investment company, it has undertaken to
comply with the terms of Rule 12b-1 as a condition of an exemptive order under
the 1940 Act.
For its services under the Class B Plan, the Distributor receives a fee from the
Fund, payable monthly, at the annual rate of 0.60% of average daily net assets
of the Fund attributable to the Class B shares. For its services under the Class
C Plan, the Distributor receives a fee from the Fund, payable monthly, at an
annual rate of 0.60% of the average daily net assets of the Fund attributable to
the Class C shares. These fees are accrued daily as an expense of the Class B
and Class C shares. The Distributor also receives any EWC, as discussed above.
Under the Plans, the Distributor may compensate various financial services firms
for sales of Fund shares and may pay other commissions, fees and concessions to
such firms. The distribution fee compensates the Distributor for expenses
incurred in connection with activities primarily intended to result in the sale
of the Fund's Class B and Class C shares, including the payment of compensation
to firms, the printing of prospectuses and reports for persons other than
existing shareholders and the preparation, printing and distribution of sales
literature and advertising materials.
Among other things, the Plans provide that the Distributor will prepare reports
for the Board of Trustees on a quarterly basis showing amounts paid to the
various financial services firms and such other information as the Board may
reasonably request. The Plans will continue in effect indefinitely, provided
that such continuance is approved at least annually by vote of a majority of the
Board of Trustees, and a majority of the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Fund and who have no direct or
indirect financial interest in the operation of the Plans ("Qualified Board
Members"), cast at an in-person meeting called for such purpose. The Class B
Plan will also continue in effect indefinitely by a vote of at least a majority
of the outstanding voting securities of the Class B shares and the Class C Plan
will continue in effect indefinitely by a vote of at least a majority of the
outstanding voting securities if the Class C shares. Any material amendment to
the Plans must be approved by vote of a majority of the Board of Trustees and of
the Qualified Board Members. An amendment to the Class B Plan to increase
materially the amount to be paid to the Distributor by the Fund for distribution
services must be approved by a majority of the outstanding Class B shares and an
amendment to the Class C Plan to increase materially the amount to be paid to
the Distributor by the Fund for distribution
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<PAGE> 30
services must be approved by a majority of the outstanding Class C shares. While
the Plans are in effect, the selection and nomination of Trustees who are not
interested persons of the Fund will be committed to the discretion of the
Trustees who are not themselves interested persons of the Fund.
If a Plan is terminated in accordance with its terms, the obligation of the Fund
to make payments to the Distributor pursuant to a Plan will cease and the Fund
will not be required to make any payments past the termination date. Thus, there
is no legal obligation for the Fund to pay any expenses incurred by the
Distributor in excess of its fees under a Plan, if for any reason a Plan is
terminated in accordance with its terms. Future fees under a Plan may or may not
be sufficient to reimburse the Distributor for its expenses incurred.
TAX IDENTIFICATION NUMBER
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gains distributions and repurchases
and exchange proceeds from accounts (other than those of certain exempt payees)
without a correct certified Social Security or tax identification number and
certain other certified information or upon notification from the IRS or a
broker that withholding is required. The Fund reserves the right to reject new
account applications without a correct certified Social Security or tax
identification number. The Fund also reserves the right, following 30 days'
notice, to repurchase all shares in accounts without a correct certified Social
Security or tax identification number. A shareholder may avoid involuntary
repurchase by providing the Fund with a tax identification number during the
30-day notice period. Shareholders should direct their inquiries to Kemper
Service Company, 811 Main Street, Kansas City, Missouri 64105-2005 or to the
firm from which they received this Prospectus.
REPURCHASE OF SHARES
To provide shareholders with liquidity and the ability to receive net asset
value on a disposition of shares, the Fund, pursuant to a fundamental policy
that may only be changed by the vote of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act, will make quarterly offers to
repurchase a percentage of its outstanding shares at net asset value (each, a
"Repurchase Offer"). The first Repurchase Offer will take place in November
1999. Because the Fund is a closed-end investment company, shareholders will not
be able to redeem their shares on a daily basis.
As explained in more detail below, it is anticipated that each quarterly
"Repurchase Request Deadline" will be 5:00 p.m. Central time on the 10th
business day in the months February, May, August and November. The Fund may
determine the net asset value applicable to repurchases no later than the 14th
calendar day (or, if not a business day, the next business day) after the
Repurchase Request Deadline (the "Pricing Date"). The Fund will distribute
payment to shareholders on or before the "Repurchase Payment Deadline", which
will be no later than seven calendar days after Pricing Date. Shareholders of
record of the Fund will be sent notification of each Repurchase Offer 21 to 42
days prior to the Repurchase Request Deadline with respect to such Repurchase
Offer. It is unlikely that a secondary market for the Fund's shares will
develop, and neither the Distributor nor the firms will engage in any efforts to
develop a secondary market.
REPURCHASE AMOUNT
Each quarter, the Fund's Board of Trustees will determine the percentage of
shares to be repurchased ("Repurchase Amount"). The Repurchase Amount may vary
from 5% to 25% of shares outstanding on the Repurchase Request Deadline. The
Fund also may offer to repurchase its shares on a discretionary basis, not
pursuant to its fundamental policy, not more frequently than once every two
years, or more frequently if an exemption is obtained from this limitation.
There is no minimum number of shares that must be tendered before the Fund will
honor repurchase requests. In other words, if, in the aggregate, only one share
is tendered in a given quarter, the Fund must repurchase it. However, there is a
maximum Repurchase Amount, so shareholders should be aware of the risk that the
Fund may not be able to repurchase all shares tendered in any given quarter. See
"Oversubscribed Repurchase Offers; Pro Rata Allocation."
REPURCHASE REQUESTS
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Shareholders of record will be sent a Notification of Repurchase Offer
("Notification") 21 to 42 days before the next Repurchase Request Deadline. The
Notification will provide information about the Repurchase Offer, including the
Repurchase Amount, the Repurchase Request Deadline, the manner of submitting a
Repurchase Request, and the means by which shareholders may obtain the Fund's
net asset value. It is anticipated that each Repurchase Request Deadline will be
5:00 p.m. Central time on the 10th business day in the months of February, May,
August and November.
Shareholders who wish to tender shares for repurchase must notify the Fund on or
before the Repurchase Request Deadline in the manner designated by the Fund in
the Notification. THE REPURCHASE REQUEST DEADLINE IS A DEADLINE THAT WILL BE
STRICTLY OBSERVED. Repurchase requests may not be revoked after the Repurchase
Request Deadline. Shareholders that fail to submit Repurchase requests in good
order by this deadline will be unable to liquidate shares until a subsequent
Repurchase Offer. Repurchase requests will be considered to be in good order if
they meet the requirements set forth below under "Repurchase of
Shares--General."
A shareholder may tender all or a portion of his or her holdings (although the
Fund may not be able to repurchase the shareholder's entire tender if aggregate
tenders exceed the Repurchase Amount (as discussed further below)). However, a
shareholder's tax results may differ depending on whether the shareholder has
tendered all or only a portion of his or her shares. See "Tax Matters."
DETERMINATION OF REPURCHASE PRICE
The Fund will establish the Repurchase Price at a share's net asset value on the
Pricing Date. The Fund will compute net asset value daily (as described under
"Net Asset Value"), and shareholders may obtain daily net asset values by
calling 1-800-621-1048.
The Fund does not presently intend to deduct any repurchase fees from repurchase
proceeds (other than any applicable EWC). However, in the future, the Board of
Trustees may determine to charge a repurchase fee payable to the Fund to
compensate the Fund for its reasonable expenses directly related to the
repurchase. These fees could be used to compensate the Fund for, among other
things, its costs incurred in disposing of securities or in borrowing in order
to make payment for repurchased shares. Any repurchase fee will not exceed two
percent of the proceeds of the repurchase, unless permitted by applicable
regulation or exemption therefrom, and will be charged to all repurchased shares
on a pro rata basis. The Board may implement repurchase fees without a
shareholder vote.
PAYMENT
The Fund expects to distribute payment no later than seven calendar days after
the Pricing Date. Repurchase proceeds will be paid by wire transfer or check.
EARLY WITHDRAWAL CHARGES
CLASS B SHARES. Repurchases of Class B shares are subject to an EWC of 3.0%
during the first year after purchase, 2.5% during the second year, 2.0% during
the third year, and 1.0% during the fourth year. The EWC will be waived: (a) in
the event of the total disability (as evidenced by a determination by the
federal Social Security Administration) of the shareholder (including a
registered joint owner) occurring after the purchase of the shares being
repurchased; (b) in the event of the death of the shareholder (including a
registered joint owner); (c) for repurchases in a calendar year that do not
exceed 10% of the net asset value of a shareholder's account, provided such
shareholder participates in the Fund's dividend reinvestment program; (d) for
repurchases made pursuant to any IRA systematic withdrawal based on the
shareholder's life expectancy including, but not limited to, substantially equal
periodic payments described in Code Section 72(t)(2)(A)(iv) prior to age 59 1/2;
(e) for repurchases to satisfy required minimum distributions after age 70 1/2
from an IRA account (with the maximum amount subject to this waiver being based
only upon the shareholder's Kemper IRA accounts); (f) for repurchases of shares
held by shareholders whose broker or other financial service provider has waived
receipt of its commission on the sale of the shares repurchased, and (g) to the
extent necessary to comply with regulatory limitations. The EWC will also be
waived in connection with the following repurchases of shares held by employer
sponsored employee benefit plans maintained on the subaccount recordkeeping
system made available by Kemper Service Company (the "Shareholder Service
Agent") or its affiliate: (a) repurchases to satisfy participant loan advances
(note that loan repayments constitute new purchases for purposes of the EWC and
the conversion privilege); (b) repurchases in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund); (c) repurchases in connection
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with distributions qualifying under the hardship provisions of the Code; and (d)
repurchases representing returns of excess contributions to such plans.
CLASS C SHARES. An EWC of 1% may be imposed upon repurchase of Class C shares if
they are repurchased within one year of purchase. The charge will not be imposed
upon repurchase of reinvested dividends or share appreciation. The charge is
applied to the value of the shares repurchased excluding amounts not subject to
the charge. The EWC will be waived: (a) in the event of the total disability (as
evidenced by a determination by the federal Social Security Administration) of
the shareholder (including a registered joint owner) occurring after the
purchase of the shares being redeemed, (b) in the event of the death of the
shareholder (including a registered joint owner), (c) for repurchases made
pursuant to a systematic withdrawal plan (limited to 10% of the net asset value
of the account during the first year, (d) for repurchases made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Code
Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for repurchases to satisfy
required minimum distributions after age 70 1/2 from an IRA account (with the
maximum amount subject to this waiver being based only upon the shareholder's
Kemper IRA accounts), (f) for any participant-directed repurchase of shares held
by employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent, (g) for
repurchase of shares by an employer sponsored employee benefit plan that (i)
offers funds in addition to Kemper Funds (i.e., "multi-manager"), and (ii) whose
dealer of record has waived the advance of the first year administrative service
and distribution fees applicable to such shares and agrees to receive such fees
quarterly; and (h) to the extent necessary to comply with regulatory
limitations. The EWC will also be waived in connection with the following
repurchases of shares held by employer sponsored employee benefit plans
maintained on the subaccount recordkeeping system made available by Kemper
Service Company (the "Shareholder Service Agent") or its affiliate: (a)
repurchases to satisfy participant loan advances (note that loan repayments
constitute new purchases for purposes of the EWC and the conversion privilege);
(b) repurchases in connection with retirement distributions (limited at any one
time to 10% of the total value of plan assets invested in the Fund); (c)
repurchases in connection with distributions qualifying under the hardship
provisions of the Code; and (d) repurchases representing returns of excess
contributions to such plans.
EXAMPLE OF EWC. The following example will illustrate the operation of the EWC
(assuming no waiver is applicable). Assume that an investor makes a single
purchase of $10,000 of the Fund's Class B shares and that 16 months later the
value of the shares has grown by $1,000 through reinvested dividends and by an
additional $1,000 of share appreciation to a total of $12,000. If the investor
then tendered, and the Fund accepted for repurchase, the entire $12,000 in share
value, the EWC would be payable only with respect to $10,000 because neither the
$1,000 of reinvested dividends nor the $1,000 of share appreciation is subject
to the charge. The charge would be at the rate of 2.5% ($250) because it was in
the second year after the purchase was made.
The rate of the EWC is determined by the length of the period of ownership.
Investments are tracked on a monthly basis. The period of ownership for this
purpose begins the first day of the month in which the order for the investment
is received. For example, an investment made in December 1999 will be eligible
for the second year's EWC if repurchased on or after December 1, 2000. In the
event no specific order is requested when shares subject to an EWC are
repurchased, the repurchase will be made first from shares representing
reinvested dividends and then from the earliest purchase of shares. The
Distributor receives any EWC directly.
OVERSUBSCRIBED REPURCHASE OFFERS; PRO RATA ALLOCATION
In any given quarter shareholders may tender a number of shares that exceeds the
Repurchase Offer Amount (this Prospectus refers to this situation as an
"Oversubscribed Repurchase Offer"). In the event of an Oversubscribed Repurchase
Offer, the Fund may, but is not required to, repurchase additional shares up to
a maximum aggregate of two percent of the shares outstanding on the Repurchase
Request Deadline ("Additional Repurchase Amount"). If the Fund determines not to
repurchase the Additional Repurchase Amount, or if shareholders tender an amount
exceeding the Repurchase Offer Amount, the Fund will repurchase the shares on a
pro rata basis.
In the event of an Oversubscribed Repurchase Offer, shareholders may be unable
to liquidate some or all of their Fund shares during that quarterly Repurchase
Offer. A shareholder may have to wait until a later quarter to tender shares
that the Fund is unable to repurchase, and would be subject to the risk of net
asset value fluctuations during this time period. Some shareholders may tender
more shares than they wish to have repurchased in order to attempt to ensure the
repurchase of a specific minimum number of shares.
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ADOPTION OF REPURCHASE POLICY
The Board has adopted a resolution setting forth the Fund's fundamental policy
to conduct Repurchase Offers ("Repurchase Policy"). The Repurchase Policy may be
changed only by a majority vote of the Fund's outstanding voting securities, as
defined in the 1940 Act. The Repurchase Policy states that the Fund will make
Repurchase Offers at periodic intervals of three months between Repurchase
Request Deadlines, such Repurchase Request Deadlines to be on a business day and
time in the months of February, May, August and November to be determined by the
Board. The Repurchase Policy also provides that the Pricing Date will be no
later than 14 calendar days after each Repurchase Request Deadline (or the next
business day if the 14th calendar day is not a business day).
LIQUIDITY REQUIREMENTS
The Fund must maintain liquid assets equal to the Repurchase Offer Amount from
the time that the Notification is sent to shareholders until the Repurchase
Date. In connection with this requirement, the Fund will maintain a percentage
of its net assets equal to at least 100 percent of the Repurchase Amount in
assets: (a) that can be sold or disposed of in the ordinary course of business
at approximately the price at which the Fund has valued the asset within the
time period between the Repurchase Request Deadline and the Repurchase Payment
Deadline; or (b) that mature by the Repurchase Payment Deadline.
If, at any time, the Fund falls out of compliance with these liquidity
requirements, the Board will take whatever action it deems appropriate to ensure
compliance.
The Fund intends to finance Repurchase Offers with cash on hand, cash raised
through borrowings, or the liquidation of portfolio securities. There is some
risk that the need to sell Senior Loans to fund Repurchase Offers may affect the
market for those Senior Loans. In turn, this could diminish the Fund's net asset
value.
SUSPENSION OR POSTPONEMENT OF A REPURCHASE OFFER
The Fund may suspend or postpone a Repurchase Offer in limited circumstances,
and only by vote of a majority of the Board of Trustees, including a majority of
the Fund's Trustees who are not interested persons of the Fund. These
circumstances include the following:
(a) if the repurchase would cause the Fund to lose its status as a regulated
investment company under Subchapter M of the Code;
(b) for any period during which an emergency exists as a result of which it is
not reasonably practicable for the Fund to dispose of securities it owns or
to determine the value of the Fund's net assets; or
(c) for any other periods that the Commission permits by order for the
protection of shareholders.
In addition, although the Fund currently does not intend to list its shares on a
national securities exchange or provide for share quotations on an inter-dealer
quotation system of a national securities association (e.g., Nasdaq), if it does
so in the future, the Fund may suspend or postpone a Repurchase Offer in the
event that:
(a) the repurchase would cause the shares to lose their status on such exchange
or inter-dealer quotation system; or
(b) during any period in which any market on which the shares are principally
traded is closed, or during any period in which trading on the market is
restricted.
CONSEQUENCES OF REPURCHASE OFFERS
Although the Board believes that Repurchase Offers generally will be beneficial
to the Fund's shareholders, repurchases will decrease the Fund's total assets
and therefore have the possible effect of increasing the Fund's expense ratio.
Furthermore, if the Fund borrows to finance repurchases, interest on that
borrowing may reduce the Fund's net investment income. The Fund intends to offer
new shares continuously, which may alleviate these potential consequences,
although there is no assurance that the Fund will be able to secure new
investments.
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<PAGE> 34
Repurchase Offers provide shareholders with the opportunity to dispose of shares
at net asset value. The Fund does not anticipate that a secondary market will
develop, but in the event that a secondary market were to develop, it is
possible that shares would trade in that market at a discount to net asset
value. The existence of periodic Repurchase Offers at net asset value may not
alleviate such a discount.
For a discussion of the Federal income tax aspects of a repurchase, see "Tax
Matters."
GENERAL
The Fund will mail a Notification to shareholders of record in connection with
each quarterly Repurchase Offer. Any shareholder of record may request that the
Fund repurchase his or her shares pursuant to the terms and conditions described
above. When shares are held for the account of a shareholder by the Fund's
transfer agent, the shareholder may submit such shares for repurchase by sending
a written request with signatures guaranteed to Kemper Funds, Attention:
Redemption Department, P.O. Box 419557, Kansas City, Missouri 64141-6557. When
certificates for shares have been issued, they must be mailed to or deposited
with the Shareholder Service Agent, along with a duly endorsed stock power and
accompanied by a written request for repurchase. Repurchase requests and a stock
power must be endorsed by the account holder with signatures guaranteed by a
commercial bank, trust company, savings and loan association, federal savings
bank, member firm of a national securities exchange or other eligible financial
institution. The repurchase request and stock power must be signed exactly as
the account is registered including any special capacity of the registered
owner. Additional documentation may be requested, and a signature guarantee is
normally required, from institutional and fiduciary account holders, such as
corporations, custodians (e.g., under the Uniform Transfers to Minors Act),
executors, administrators, trustees or guardians.
If the proceeds of the repurchase (prior to the imposition of any EWC) are
$50,000 or less and the proceeds are payable to the shareholder of record at the
address of record, normally a written request by any one account holder without
a signature guarantee is sufficient for repurchases by individual or joint
account holders, and trust, executor, guardian and custodian account holders,
provided the trustee, executor, guardian, or custodian is named in the account
registration. Other institutional account holders may exercise this special
feature of tendering shares for repurchase by written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitation on liability described below, provided that this
privilege has been pre-authorized by the institutional account holder by written
instruction to the Shareholder Service Agent with signatures guaranteed. This
privilege of tendering shares for repurchase by written request without a
signature guarantee may not be used if the shareholder's account has had an
address change within 30 days of the request.
If the account holder has given authorization, proceeds of repurchases can be
sent by federal wire transfer to a single previously designated account. Once
this authorization is on file, shares may be tendered for repurchase without
signature guarantee subject to the limitation on liability described below. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire repurchase minimum. To change the designated account to receive wire
repurchase proceeds, send a written request to the Shareholder Service Agent
with signatures guaranteed as described above or contact the firm through which
shares of the Fund were purchased. The Fund reserves the right to terminate or
modify this privilege at any time.
The Fund or its agents may be liable for any losses, expenses or costs arising
out of fraudulent or unauthorized requests pursuant to the pre-authorized
privilege for institutional account holders to tender shares for repurchase in
writing without signature guarantee and the pre-authorized privilege of sending
proceeds of repurchases by federal wire transfer unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
written instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include requiring certain identifying information before acting upon
instructions and sending written confirmations.
When the Fund is asked to repurchase shares for which it may not have yet
received good payment (I.E., purchases by check, EXPRESS-Transfer or Bank Direct
Deposit), it may delay transmittal of repurchase proceeds until it has
determined that collected funds have been received for the purchase of such
shares, which will be up to 10 days from receipt by the Fund of the purchase
amount.
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Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on any account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount recordkeeping system made available through the Shareholder
Service Agent.
SPECIAL FEATURES
EXCHANGES
In conjunction with each quarterly Repurchase Offer and subject to terms and
conditions of such Repurchase Offer, Class A, Class B, and Class C shares of the
Fund may be exchanged for shares of the corresponding class of any of the Kemper
Technology Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper Small
Capitalization Equity Fund, Kemper Income and Capital Preservation Fund, Kemper
Municipal Bond Fund, Kemper Diversified Income Fund, Kemper High Yield Series,
Kemper U.S. Government Securities Fund, Kemper International Fund, Kemper State
Tax-Free Income Series, Kemper Short-Term U.S. Government Fund, Kemper Blue Chip
Fund, Kemper Global Income Fund, Kemper Intermediate Municipal Bond Fund, Kemper
Cash Reserves Fund, Kemper U.S. Mortgage Fund, Kemper Value Plus Growth Fund,
Kemper Value Series, Inc., Kemper Horizon Fund, Kemper New Europe Fund, Kemper
Asian Growth Fund, Kemper Aggressive Growth Fund, Kemper Global/International
Series, Inc., Kemper U.S. Growth and Income Fund, Kemper Small Cap Relative
Value Fund, Kemper-Dreman Financial Services Fund, Kemper Value Fund, Kemper
Global Discovery Fund, Kemper Classic Growth Fund and Kemper High Yield Fund II
("Kemper Funds") at their relative net asset values.
Class B and Class C shares of the Fund may be exchanged without an EWC being
imposed at the time of exchange. Fund shareholders will not be able to
participate in this exchange privilege at any time other than in connection with
a quarterly Repurchase Offer. For purposes of calculating the EWC that may be
imposed upon the repurchase of the Class B and Class C shares of a Kemper Fund
received in an exchange, the shares received in the exchange will retain the
original cost and purchase date of the Class B and Class C shares of the Fund
originally purchased by the investor, but the contingent deferred sales charge
("CDSC") schedule of the Kemper Fund shares received in the exchange will be
applicable. Accordingly, you may pay a higher CDSC upon redemption of Kemper
Fund Class B and Class C shares received in an exchange than you would have if
you had held such shares of the Fund for the same period of time and then
submitted those shares to the Fund for repurchase. You should consult the
prospectus of the applicable Kemper Fund before exchanging into a Kemper Fund.
Exchanges into the Fund from the Kemper Funds are not permitted. Therefore,
shareholders who exchange Fund shares for shares of other Kemper Funds will not
be able to exchange those shares back into shares of the Fund.
Shares of a Kemper Fund with a value in excess of $1,000,000 (except Kemper Cash
Reserves Fund) acquired by exchange through another Kemper Fund, or from a Money
Market Fund, may not be exchanged thereafter until they have been owned for 15
days (the "15-Day Hold Policy"). Each Kemper Fund reserves the right to invoke
the 15-Day Hold Policy for accounts of $1,000,000 or less if, in the investment
manager's judgement, the exchange activity may have an adverse effect on the
Kemper Fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to a fund and, therefore, may be subject to
the 15-Day Hold Policy. For purposes of determining whether the 15-Day Hold
Policy applies to a particular exchange, the value of the shares to be exchanged
shall be computed by aggregating the value of shares being exchanged for all
accounts under common control, discretion or advice, including without
limitation accounts administered by a financial services firm offering market
timing, asset allocation or similar services.
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Kemper Fund into which they are being exchanged.
Exchanges are made based on relative net asset values of the shares involved in
the exchange. There is no service fee for an exchange; however, dealers or other
firms may charge for their services in effecting exchange transactions.
Exchanges will be effected by repurchase of shares of the Fund held and purchase
of shares of the Kemper Fund at net asset value of the Kemper Fund determined on
the Repurchase Payment Date (or the next net asset value determined by such
Kemper Fund if no net asset value was determined on such Repurchase Payment
Date) with the proceeds of the Repurchase Offer. Elections to participate in an
exchange may be made on a shareholder's repurchase request form contained in
each Notification. For federal income tax purposes, any such exchange
constitutes a sale upon which a gain or loss may be realized, depending upon
whether the value of the shares being exchanged is more or less than the
shareholder's adjusted cost basis of such shares. Shareholders interested in
exercising the exchange privilege may obtain prospectuses of the other Kemper
Funds from dealers, other firms or the Distributor. Exchanges may be
accomplished by a designation on the Fund's quarterly repurchase request form.
Any share certificates must be
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<PAGE> 36
deposited prior to any exchange of such shares. The exchange privilege is not a
right and may be suspended, terminated or modified at any time. Exchanges may
only be made for funds that are available for sale in the shareholder's state of
residence. Currently, Tax-Exempt California Money Market Fund is available for
sale only in California and Investors Municipal Cash Fund is available for sale
only in certain states. Except as otherwise permitted by applicable regulations,
60 days' prior written notice of any termination or material change will be
provided.
BANK DIRECT DEPOSIT
A shareholder may purchase additional shares of the Fund through an automatic
investment program. With the Bank Direct Deposit Purchase Plan, investments are
made automatically (maximum $50,000) from the shareholder's account at a bank,
savings and loan or credit union into the shareholder's Fund account. By
enrolling in Bank Direct Deposit, the shareholder authorizes the Fund and its
agents to either draw checks or initiate Automated Clearing House debits against
the designated account at a bank or other financial institution. This privilege
may be selected by completing the appropriate section on the Account Application
or by contacting the Shareholder Service Agent for appropriate forms. A
shareholder may terminate his or her Purchase Plan by sending written notice to
Kemper Service Company, P.O. Box 419415, Kansas City, Missouri 64141-6415.
Termination by a shareholder will become effective within thirty days after the
Shareholder Service Agent has received the request. The Fund may immediately
terminate a shareholder's Purchase Plan in the event that any item is unpaid by
the shareholder's financial institution. The Fund may terminate or modify this
privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT
A shareholder may invest in the Fund through Payroll Direct Deposit or
Government Direct Deposit. Under these programs, all or a portion of a
shareholder's net pay or government check is automatically invested in the Fund
account each payment period. A shareholder may terminate participation in these
programs by giving written notice to the shareholder's employer or government
agency, as appropriate. (A reasonable time to act is required). The Fund is not
responsible for the efficiency of the employer or government agency making the
payment or any financial institutions transmitting payments.
TAX-SHELTERED RETIREMENT PLANS
The Shareholder Service Agent provides retirement plan services and documents
and the Distributor can establish investor accounts in any of the following
types of retirement plans:
- - Traditional, Roth and Education Individual Retirement Accounts ("IRAs").
This includes Simplified Employee Pension Plan ("SEP") IRA accounts and
prototype documents.
- - 403(b)(7) Custodial Accounts. This type of plan is available to employees of
most non-profit organizations.
- - Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans and materials for establishing
them are available from the Shareholder Service Agent upon request. Investors
should consult with their own tax advisers before establishing a retirement
plan.
INDIVIDUAL RETIREMENT ACCOUNTS
One of the tax-deferred retirement plan accounts that may hold Fund shares is an
individual retirement account ("IRA"). There are three kinds of IRAs that an
individual may establish: traditional IRAs, Roth IRAs and education IRAs. With a
traditional IRA, an individual may make a contribution of up to $2,000 or, if
less, the amount of the individual's earned income for any taxable year prior to
the year the individual reaches age 70 1/2. The contribution will be fully
deductible if neither the individual nor his or her spouse is an active
participant in an employer's retirement plan. If an individual is (or has a
spouse who is) an active participant in an employer-sponsored retirement plan,
the amount, if any, of IRA contributions that are deductible by such an
individual is determined by the individual's (or, if married filing jointly, the
couple's) adjusted gross income for the year. Even if an individual's
contributions to an IRA for a taxable year are not deductible, the individual
nonetheless may make nondeductible contributions up to
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<PAGE> 37
$2,000, or 100% of earned income if less, for that year. A higher-earning spouse
also may contribute up to $2,000 per year to the lower-earning spouse's own IRA,
whether or not the lower-earning spouse has earned income of less than $2,000,
as long as the spouses' joint earned income is at least equal to the combined
amount of the spouses' IRA contributions for the 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. Lump sum
distributions from another qualified retirement plan, may be rolled over into a
traditional IRA, also. Of course, withdrawals with respect to investments in the
Fund may only be effected pursuant to the Fund's quarterly repurchase feature.
With a Roth IRA, an individual may make only nondeductible contributions;
contributions can be made of up to $2,000 or, if less, the amount of the
individual's earned income for any taxable year, but only if the individual's
adjusted gross income for the year is less than $95,000 or, if married filing
jointly, the couple's adjusted gross income is less than $150,000 The maximum
contribution amount phases out and falls to zero between $95,000 and $110,000
for single persons and between $150,000 and $160,000 for married persons.
Contributions to a Roth IRA may be made even after the individual attains age 70
1/2. Distributions from a Roth IRA that satisfy certain requirements will not be
taxable when taken; other distributions of earnings will be taxable. An
individual with adjusted gross income of $100,000 or less generally may elect to
roll over amounts from a traditional IRA to a Roth IRA. The full taxable amount
held in the traditional IRA that is rolled over to a Roth IRA will be taxable in
the year of the rollover.
An education IRA provides a method for saving for the higher education expenses
of a child; it is not designed for retirement savings. Generally, amounts held
in an education IRA may be used to pay for qualified higher education expenses
at an eligible (postsecondary) educational institution. An individual may
contribute to an education IRA for the benefit of a child under 18 years old if
the individual's income does not exceed certain limits. The maximum contribution
for the benefit of any one child is $500 per year. Contributions are not
deductible, but earnings accumulate tax-free until withdrawal, and withdrawals
used to pay qualified higher education expenses of the beneficiary (or
transferred to an education IRA of a qualified family member) will not be
taxable. Other withdrawals will be subject to tax.
In addition, there are special IRA programs available for employers under which
an employer may establish IRA accounts for its employees in lieu of establishing
more complicated retirement plans, such as qualified profit sharing or 401(k)
plans. Known as SEP-IRAs (Simplified Employee Pension-IRA) and SIMPLE IRAs, they
permit employers to maintain a retirement program for their employees without
being subject to a number of the recordkeeping and testing requirements
applicable to qualified plans.
QUALIFIED RETIREMENT PLANS
Fund shares also may be held in profit sharing, money purchase pension, and
401(k) plan accounts. An employer, whether a corporation, partnership or other
kind of business entity, generally may maintain one or more qualified retirement
plans for its employees. These plans, which are qualified plans under Code
Section 401(a), are subject to numerous rules relating to such matters as the
maximum contribution that can be allocated to participant's accounts,
nondiscrimination, and distributions from the plan, as well as being subject in
many cases to the fiduciary duty and other provisions of the Employee Retirement
Income Securities Act of 1974, as amended. Businesses considering adopting a
qualified retirement plan are encouraged to seek competent professional advice
before adopting one of these plans.
403(B) PLAN ACCOUNTS
Fund shares also may be purchased as an investment for Code Section 403(b)(7)
custodial accounts. In general, employees of tax-exempt organizations described
in Code Section 501(c)(3) and of public school systems are eligible to
participate in 403(b) accounts. These arrangements may permit employer
contributions and/or employee salary reduction contributions, and are subject to
rules relating to such matters as the maximum contribution than can be made to a
participant's account, nondiscrimination, and distributions from the account.
GENERAL INFORMATION
Information regarding the establishment of IRAs or other retirement plans is
available from the Shareholder Service Agent upon request. A retirement plan
custodian may charge fees in connection with establishing and maintaining the
plan. An investor should consult with a competent adviser for specific advice
concerning his or her tax status and the possible benefits of establishing one
or
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<PAGE> 38
more retirement plan accounts. The description above is only very general; there
are numerous other rules applicable to these plans to be considered before
establishing one.
The illiquid nature of the shares of the Fund may affect the nature and timing
of distributions from tax sheltered retirement plans, including the ability to
meet minimum distribution requirements, and may affect the ability of
participants in such plans to rollover assets to other tax sheltered retirement
plans.
Shareholders should consult their tax advisers about the application of the
provisions of tax law in light of their particular tax situations.
DESCRIPTION OF THE FUND
The Fund was organized as a Massachusetts business trust on March 23, 1999, and
is registered with the Commission as a closed-end management investment company.
The Fund's Declaration of Trust, a copy of which is on file in the office of the
Secretary of State of Massachusetts and which is included in the Fund's
Registration Statement authorizes the issuance of an unlimited number of shares
of beneficial interest, par value $0.01. The Declaration of Trust provides that
the Trustees may authorize separate classes of shares of beneficial interest and
may establish separate series of shares, all without shareholder vote.
Under Massachusetts law, shareholders of a Massachusetts business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the Fund. The Declaration of Trust contains an express disclaimer
of shareholder liability in connection with the Fund's property or the acts,
obligations or affairs of the Fund. The Declaration of Trust also provides for
indemnification out of the Fund's property of any shareholder held personally
liable for the claims and liabilities to which a shareholder may become subject
by reason of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
The Trustees have overall responsibility for the management of the Fund under
Massachusetts law.
DIVIDENDS, VOTING AND LIQUIDATION RIGHTS
Each common share of beneficial interest of the Fund has one vote and shares
equally in dividends and distributions when and if declared by the Fund and in
the Fund's net assets upon liquidation. All shares, when issued, are fully paid
and are non-assessable by the Fund. There are no preemptive or conversion rights
applicable to any of the common shares. Fund shares do not have cumulative
voting rights and, as such, holders of more than 50% of the shares voting for
Trustees can elect all Trustees and the remaining shareholders would not be able
to elect any Trustees. The Fund does not intend to hold annual meetings of
shareholders.
STATUS OF SHARES
The Board of Trustees may classify or reclassify any issued or unissued shares
of the Fund into shares of any series by redesignating such shares or by setting
or changing in any one or more respects, from time to time, prior to the
issuance of such shares, the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, or terms or
conditions of repurchase of such shares. Any such classification or
reclassification will comply with the provisions of the 1940 Act.
The following table sets forth information about the Fund's Class A, Class B and
Class C shares, as of the date of this Prospectus. As of that date Class A,
Class B and Class C shares are the only shares authorized and issued by the
Fund.
<TABLE>
<CAPTION>
(1) (2) (3) (4)
AMOUNT OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF
REGISTRANT OR FOR ITS AMOUNT SHOWN
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT UNDER (3)
---------------- ----------------- ------------------------ -----------------------
<S> <C> <C> <C>
Class A shares Unlimited None None
Class B shares Unlimited None shares*
</TABLE>
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<PAGE> 39
<TABLE>
<S> <C> <C> <C>
Class C shares Unlimited None None
</TABLE>
* Class B shares are held by Scudder Kemper Investments, Inc.
FUNDAMENTAL AND NON-FUNDAMENTAL POLICIES OF THE FUND
Certain policies of the Fund specified herein as "fundamental" and the
investment restrictions of the Fund designated as fundamental as described in
the SAI are fundamental policies of the Fund and may not be changed without a
majority vote of the Fund's outstanding voting securities, which means the
affirmative vote of (a) more than 50% of the outstanding shares of the Fund or
(b) 67% or more of the shares present at a meeting if more than 50% of the
outstanding shares of the Fund are represented at the meeting in person or by
proxy, whichever is less (a "Majority Vote"). All other policies of the Fund,
including the Fund's investment objective, may be modified by resolution of the
Board of Trustees of the Fund.
ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST
The Fund's Declaration of Trust includes provisions that could have the effect
of limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Trustees by discouraging a
third party from seeking to obtain control of the Fund. In addition, in the
event a secondary market were to develop in the shares, such provisions could
have the effect of depriving holders of shares of an opportunity to sell their
shares at a premium over prevailing market prices.
The Declaration of Trust requires the favorable vote of the holders of at least
two-thirds of the outstanding common shares of beneficial interest of the Fund
then entitled to vote to approve, adopt or authorize certain transactions with
5%-or-greater holders of the common shares (a "Principal Shareholder") and their
associates, unless the Board of Trustees shall by resolution have approved a
memorandum of understanding with such holders, in which case normal voting
requirements would be in effect. For purposes of these provisions, a Principal
Shareholder refers to any person who, whether directly or indirectly and whether
alone or together with its affiliates or associates, beneficially owns 5% or
more of the outstanding common shares of beneficial interest of the Fund. The
transactions subject to these special approval requirements are: (i) the merger
or consolidation of the Fund or any subsidiary of the Fund with or into any
Principal Shareholder; (ii) the issuance of any securities of the Fund to any
Principal Shareholder for cash; (iii) the sale, lease or exchange of all or any
substantial part of the assets of the Fund to any Principal Shareholder (except
assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purpose of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period);
or (iv) the sale, lease or exchange to the Fund or any subsidiary thereof, in
exchange for securities of the Fund, of any assets of any Principal Shareholder
(except assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period).
A Trustee may be removed from office without cause by a written instrument
signed by at least two-thirds of the remaining Trustees or by a vote of the
holders of at least two-thirds of the Fund's common shares.
Conversion of the Fund from a "closed-end company" to an "open-end company"
under the 1940 Act will require the vote of the holders of two-thirds of the
common shares outstanding. However, if such conversion is unanimously
recommended by the Trustees, the Majority Vote of the shareholders of the Fund
will be sufficient to authorize conversion.
Such votes by the holders of the Fund's common shares will be in addition to any
other vote required by law or pursuant to the terms of any preferred shares of
the Fund that may be issued and outstanding.
The Board of Trustees has determined that the voting requirements described
above, which, in some cases, are greater than the minimum requirements under
Massachusetts law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Declaration of Trust on file with the
Commission for the full text of these provisions.
INVESTMENT MANAGEMENT AND OTHER SERVICES
ADVISER
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<PAGE> 40
Scudder Kemper Investments, Inc. is the Fund's investment adviser. The principal
address of the Adviser is 345 Park Avenue, New York, New York 10154-0010. The
Adviser, as a subsidiary of Zurich Financial Services, is one of the largest and
most experienced investment counsel firms in the world, managing assets for
institutional and corporate clients, retirement and pension plans, insurance
companies, mutual fund investors, and individuals. The Adviser offers a full
range of investment counsel and asset-management capabilities, based on a
combination of proprietary research and disciplined, long term investment
strategies. Zurich Financial Services is a financial services holding company
incorporated in Switzerland and owned 57% by Zurich Allied AG and 43% by Allied
Zurich p.l.c. The Adviser has served as investment manager to the Fund since its
inception. As of December 31, 1998, the Adviser had more than $281.1 billion in
assets under management.
The Fund's portfolio is managed by a portfolio management team consisting of
Jonathan Trutter and Mark Wittnebel. Mr. Trutter is a Senior Vice President and
director of the Bank Loan Department of the Adviser and has been with the
Adviser since 1989. Mr. Trutter has been a portfolio manager at the Adviser
since May 1995. Mr. Wittnebel is a Senior Vice President in the Bank Loan
Department of the Adviser and has been with the Adviser since 1989. Messrs.
Trutter and Wittnebel have been members of the Adviser's Fixed Income Department
for the last five years. Messrs. Trutter and Wittnebel have been co-managers of
the Fund since its inception.
INVESTMENT MANAGEMENT AGREEMENT
The Investment Management Agreement (the "Management Agreement") with the
Adviser, dated March 31, 1999, provides that the Adviser acts as investment
adviser, manages the Fund's investments, administers the Fund's business
affairs, furnishes offices, necessary facilities and equipment, provides
clerical, bookkeeping and administrative services, provides shareholder and
information services and permits any of its officers or employees to serve
without compensation as Trustees or officers of the Fund if duly elected to such
positions. Under the Management Agreement, the Fund is responsible for all of
its expenses, including fees and expenses incurred in connection with its
organization and initial offering; fees and expenses incurred in connection with
membership in investment company organizations; fees and expenses of the Fund's
accounting agent; brokers' commissions; legal, auditing and accounting expenses;
taxes and governmental fees; the fees and expenses of the transfer agent; the
expenses of and the fees for registering and qualifying securities for sale; the
fees and expenses of Trustees, officers and employees of the Fund 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.
For its investment management services, the Fund pays the Adviser an investment
management fee, payable monthly, at the annual rate, expressed as a percentage
of average daily net assets, of 0.50% of the first $1 billion of average daily
net assets, 0.49% of the next $2 billion, 0.48% of the next $2 billion, 0.47% of
the next $5 billion, and 0.45% of average daily net assets over $10 billion. The
fee is payable monthly, provided that 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. The Adviser has agreed to
reduce its investment management fee to 0% of the average daily net assets of
the Fund through November 30, 1999. The full investment management fee will be
gradually reinstated during the one year period ending November 30, 2000. The
effect of this fee reduction is to reduce operating expenses of the Fund and
thereby increase investment performance.
The Management Agreement provides that the Adviser shall not be liable for any
error of judgment or of law, or for any loss suffered by the Fund in connection
with the matters to which the Management 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 obligations and duties or by reason of its
reckless disregard of its obligations and duties under the Management Agreement.
CUSTODIAN
The Fund's securities and cash are held under a custodian agreement by State
Street Bank and Trust Company, whose principal place of business is 225 Franklin
Street, Boston, Massachusetts 02110.
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<PAGE> 41
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Kemper Service Company ("KSvC"), an affiliate of the Adviser, serves as transfer
agent, registrar and dividend disbursing agent for the Fund's shares. KSvC also
serves as Shareholder Service Agent for the Fund.
FUND ACCOUNTING AGENT
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net asset
values for the Fund.
ADMINISTRATIVE SERVICES
The Distributor provides information and administrative services for
shareholders of the Fund pursuant to an Administrative Services Agreement with
the Fund (the "Administrative Services Agreement"). The Distributor may enter
into related arrangements with broker-dealer firms or other service or
administrative firms ("service firms"), that provide services and facilities for
their customers or clients who are investors in the Fund. Such administrative
services and assistance may include, but are not limited to, establishing and
maintaining shareholder accounts and records, processing purchase and repurchase
transactions, answering routine inquiries regarding the Fund and its special
features, and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. The Distributor bears all
of its expenses of providing services pursuant to the Administrative Services
Agreement, including the payment of any service fees. For services under the
Administrative Services Agreement, the Fund pays the Distributor a fee, payable
monthly, at the annual rate of up to 0.25% of average daily net assets of the
Fund. The Distributor then pays each service firm a service fee at an annual
rate of up to 0.25% of net assets of the Fund maintained and serviced by the
service firm. Service firms to which service fees are paid may include
affiliates of the Distributor.
The Distributor also may provide some of the above services and may retain any
portion of the fee under the Administrative Services Agreement not paid to
service firms to compensate itself for administrative functions performed for
the Fund. Currently, the administrative services fee payable to the Distributor
is based only upon Fund assets in accounts for which there is a service firm
listed on the Fund's records and it is intended that the Distributor will pay
all of the administrative services fee that it receives from the Fund to service
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 there is a service firm of record. In addition, the Distributor may, from
time to time, from its own resources pay certain service firms additional
amounts for ongoing administrative services and assistance provided to their
customers and clients who are shareholders of the Fund.
YEAR 2000 READINESS
Like all mutual portfolios, this portfolio could be affected by the inability of
some computer systems to recognize the year 2000. The Adviser has a year 2000
readiness program designed to address this problem, and is also researching the
readiness of suppliers and business partners as well as issuers of securities
the portfolio owns. Still, there's some risk that the year 2000 problem could
materially affect the portfolio's operations (such as its ability to calculate
net asset value and process purchases and redemptions), its investments, or
securities markets in general.
DIVIDENDS AND DISTRIBUTIONS
DISTRIBUTION POLICY
The Fund's present policy is to declare daily distributions on Class A, Class B
and Class C shares for which the Fund has received payment in an amount
approximating the net investment income of the Fund. Dividends paid by the Fund
with respect to each class of its shares will be calculated in the same manner,
at the same time and on the same day. The level of income of dividends per share
(as a percentage of net asset value) will be lower for Class B and Class C
shares than for Class A shares primarily as a result of the distribution
services fee applicable to Class B and Class C shares. Distributions of capital
gains, if any, will be paid in the same proportion for each class. Net
investment income of the Fund consists of all interest income, fee income, other
ordinary income earned by the Fund on its portfolio assets and net short-term
capital gains, less all expenses of the Fund. Expenses of the Fund are accrued
each day. Distributions to shareholders cannot be assured, and the amount of
each monthly distribution is likely to vary.
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<PAGE> 42
Distributions of income will normally be made monthly and distributions of net
realized capital gains will normally be made annually.
Income dividends may be distributed in cash or reinvested in additional full and
fractional shares pursuant to the Fund's Dividend Reinvestment Program,
discussed below. Shareholders receive statements on a periodic basis reflecting
any distributions credited or paid to their account. Any fees or commissions
paid to facilitate the sale of portfolio securities, including Senior Loans, in
connection with quarterly repurchase offers or other portfolio transactions may
reduce the dividend yield.
DIVIDEND REINVESTMENT PROGRAM
The Fund's Dividend Reinvestment Program (the "Program") allows participating
shareholders to reinvest all dividends and capital gain distributions in
additional shares of the Fund. Shares purchased by participants in the Program
in connection with the reinvestment of dividends will be issued by the Fund at
net asset value. Generally for Federal income tax purposes, shareholders
receiving additional shares under the Program will be treated as having received
a distribution equal to the amount payable to them in cash as a distribution had
the shareholder not participated in the Program. All distributions to
shareholders whose shares are registered in their own names automatically will
be paid in shares, unless the shareholder elects to receive the distributions in
cash. Shareholders may elect to receive dividends and capital gain distributions
in cash by notifying KSvC, as Program Agent. Additional information about the
Program may be obtained from KSvC at 1-800-641-1048. If your shares are
registered in the name of a broker-dealer or other nominee (an "intermediary"),
you must contact the intermediary regarding its status under the Program,
including whether the intermediary will participate in the Program on your
behalf. No fees or expenses are imposed on shareholders by the Fund or KSvC for
participants in the Program.
DIVIDEND DIVERSIFICATION
A shareholder also may, upon written request by completing the appropriate
section of the application form or by calling 1-800-641-1048, elect to have all
dividends and other distributions paid on shares invested in Class A, Class B or
Class C shares of certain mutual funds advised by the Adviser or its affiliates,
so long as a pre-existing account for such shares exists for the shareholder. A
shareholder may call the phone number shown above to obtain a list of the mutual
funds available and to request current prospectuses.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the distribution payment
date.
TAX MATTERS
The Fund intends to operate as a "regulated investment company" under the Code.
To do so, the Fund must meet certain income, distribution and diversification
requirements. In any fiscal year in which the Fund so qualifies and distributes
to shareholders substantially all of its net investment income and net capital
gains, the Fund itself is generally relieved of any federal income or excise
tax.
All dividends and capital gain distributions distributed to shareholders are
taxable whether they are reinvested or received in cash, unless the shareholder
is exempt from taxation or entitled to tax deferral. Dividends paid out of the
Fund's investment company taxable income (including interest, dividends, if any,
and net short-term capital gains) will be taxable to shareholders as ordinary
income. If a portion of the Fund's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Fund may be eligible for
the corporate dividends-received deduction. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital losses),
if any, designated as capital gain dividends are taxable as long-term capital
gains, regardless of how long a shareholder has held the Fund's shares, and will
generally be subject to a maximum federal tax rate of 20%. Early each year,
shareholders will be notified as to the amount and federal tax status of all
dividends and capital gains paid during the prior year. Such dividends and
capital gains may also be subject to state or local taxes. Dividends declared in
October, November, or December with a record date in such month and paid during
the following January will be treated as having been paid by the Fund and
received by shareholders on December 31 of the calendar year in which declared,
rather than the calendar year in which the dividends are actually received.
42
<PAGE> 43
If, pursuant to an offer by the Fund to repurchase its shares, a shareholder
sells all shares of the Fund that he or she owns or is considered to own, the
shareholder may realize a taxable gain or loss. This gain or loss will be
treated as capital gain or loss if the Fund shares are held as capital assets
and will be long-term or short-term depending upon the shareholder's holding
period for the shares. If, pursuant to an offer by the Fund to repurchase its
shares, a shareholder sells less than all of the shares of the Fund that he or
she owns or is considered to own, the sale may not qualify as an exchange, and
the proceeds received may be treated as a dividend, return of capital or capital
gain, depending on the Fund's earning and profits and the shareholder's basis in
the tendered shares. If that occurs, there is a risk that non-tendering
shareholders may be considered to have received a deemed distribution as a
result of the Fund's purchase of tendered shares, and all or a portion of that
deemed distribution may be taxable as a dividend.
If a shareholder has not furnished a certified correct taxpayer identification
number (generally a Social Security number) and has not certified that
withholding does not apply, or if the Internal Revenue Service has notified the
Fund that the taxpayer identification number listed on the account is incorrect
according to their records or that the shareholder is subject to backup
withholding, federal law generally requires the Fund to withhold 31% from any
dividends and/or repurchases (including exchange repurchases). Amounts withheld
are applied to federal tax liability; a refund may be obtained from the Internal
Revenue Service if withholding results in overpayment of taxes. Federal law also
requires the Fund to withhold 30% or the applicable tax treaty rate from
ordinary income dividends paid to certain non-resident alien and other non-U.S.
shareholder accounts.
This is a brief summary of some of the federal income tax laws that affect an
investment in the Fund. Please see the SAI and a tax adviser for further
information.
PERFORMANCE INFORMATION
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information may include a distribution rate and an average compounded
distribution rate of the Fund for specified periods of time. Such information
may also include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc., Business Week, Forbes or
other industry publications.
The Fund's distribution rate generally is determined on a monthly basis with
respect to the immediately preceding monthly distribution period. The
distribution rate is computed by first annualizing the Fund's distributions per
share during such a monthly distribution period and dividing the annualized
distribution by the Fund's maximum offering price per share on the last day of
such period. The Fund calculates the compounded distribution rate by adding one
to the monthly distribution rate, raising the sum to the power of 12 and
subtracting one from the product. In circumstances in which the Fund believes
that, as a result of decreases in market rates of interest, its expected monthly
distributions may be less than the distributions with respect to the immediately
preceding monthly distribution period, the Fund reserves the right to calculate
the distribution rate on the basis of a period of less than one month.
When utilized by the Fund, distribution rate and compounded distribution rate
figures are based on historical performance and are not intended to indicate
future performance. Distribution rate, compounded distribution rate and net
asset value per share can be expected to fluctuate over time.
Advertisements and other sales materials for the Fund may also include
information depicting the Fund's average annual total return and total return.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in the Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in the Fund
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter (or
if any such period has not yet elapsed, at the end of a shorter period
corresponding to the life of the Fund for performance purposes). Average annual
total return figures represent the average annual percentage change over the
period in question. Total return figures represent the aggregate percentage or
dollar value change over the period in question.
The Fund's Class A, Class B and Class C shares are sold at net asset value.
Repurchases of Class B shares within the first four years and Class C shares
within the first year after purchase may be subject to an EWC. Average annual
total return figures do, and total return figures may, include the effect of the
EWC for the Class B and Class C shares that may be imposed at the end of the
period in question. Performance figures for the Class B and Class C shares not
including the effect of the applicable EWC would be reduced if it were included.
43
<PAGE> 44
The Fund's returns and net asset value will fluctuate. Shares of a class of the
Fund may be submitted for repurchase by an investor at the class' then current
net asset value, which may be more or less than original cost. Repurchase of
Class B shares and Class C shares may be subject to an EWC as described above.
Additional information concerning the Fund's performance appears in the
Statement of Additional Information. Additional information about the Fund's
performance also appears in its Annual Report to Shareholders and Semiannual
Report to Shareholders, each of which is available without charge from the Fund.
LEGAL MATTERS
The validity of the shares offered hereby will be passed on for the Fund by
Dechert Price & Rhoads, Washington, D.C., counsel to the Fund.
REGISTRATION STATEMENT
The Fund has filed with the Securities and Exchange Commission, Washington,
D.C., a Registration Statement under the Securities Act of 1933, relating to the
shares offered hereby. For further information with respect to the Fund and its
shares, reference is made to such Registration Statement and the exhibits filed
with it.
SHAREHOLDER REPORTS
The Fund issues reports to its shareholders semi-annually that include financial
information.
FINANCIAL STATEMENTS
The Fund will furnish without charge, when available, copies of its Annual
Report and any subsequent Semi-Annual Report to Shareholders upon request to the
Fund, 222 South Riverside Plaza, Chicago, Illinois 60606, toll-free
1-800-621-1048.
44
<PAGE> 45
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
General Information
- --------------------------------------------------------------------------------
Investment Restrictions and Fundamental Policies
- --------------------------------------------------------------------------------
Repurchase Offer Fundamental Policy
- --------------------------------------------------------------------------------
Additional Information about Investments and Investment
- --------------------------------------------------------------------------------
Techniques
- --------------------------------------------------------------------------------
Management
- --------------------------------------------------------------------------------
Control Persons and Principle Holders of Securities
- --------------------------------------------------------------------------------
Portfolio Transactions
- --------------------------------------------------------------------------------
Liquidity Requirements
- --------------------------------------------------------------------------------
Net Asset Value
- --------------------------------------------------------------------------------
Taxation
- --------------------------------------------------------------------------------
Financial Statements
- --------------------------------------------------------------------------------
Report of Independent Auditors
- --------------------------------------------------------------------------------
Appendix A -- Ratings of Fixed Income Investments
- --------------------------------------------------------------------------------
45
<PAGE> 46
[KEMPER FUNDS LOGO]
KEMPER FLOATING RATE FUND
222 South Riverside Plaza, Chicago, Illinois 60606
800-621-1048
FUND INVESTMENT ADVISER AND AGENTS
INVESTMENT ADVISER
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INDEPENDENT AUDITORS
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606
DISTRIBUTOR AND
ADMINISTRATIVE SERVICES
PROVIDER
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
TRANSFER AGENT
Kemper Service Company
811 Main Street
Kansas City, Missouri 64105
LEGAL COUNSEL
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE ADVISER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OFFERED BY THIS PROSPECTUS, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY SUCH PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF. HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE
THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE
AMENDED OR SUPPLEMENTED ACCORDINGLY.
PROSPECTUS
, 1999
46
<PAGE> 47
KEMPER FLOATING RATE FUND
STATEMENT OF ADDITIONAL INFORMATION
, , 1999
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated , 1999. This
Statement of Additional Information does not include all information that a
prospective investor should consider before purchasing shares of the Fund, and
investors should obtain and read the Prospectus prior to purchasing shares. A
copy of the Prospectus may be obtained without charge, by calling
1-800-621-1048. This Statement of Additional Information incorporates by
reference the entire Prospectus.
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. The registration statement
may be obtained from the Commission upon payment of the fee prescribed, or
inspected at the Commission's office at no charge. The registration statement is
also available on the Commission's website (www.sec.gov).
The financial statements appearing in the Fund's Annual Report to
Shareholders dated August 31, 1999 are incorporated herein by reference. The
Fund's Annual Report accompanies this Statement of Additional Information and
may be obtained without charge by calling 1-800-231-8568.
<PAGE> 48
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION..................................................
INVESTMENT RESTRICTIONS AND FUNDAMENTAL POLICIES.....................
REPURCHASE OFFER FUNDAMENTAL POLICY..................................
ADDITIONAL INFORMATION ABOUT INVESTMENTS AND
INVESTMENT TECHNIQUES..............................................
MANAGEMENT...........................................................
PORTFOLIO TRANSACTIONS...............................................
LIQUIDITY REQUIREMENTS...............................................
NET ASSET VALUE......................................................
TAXATION.............................................................
FINANCIAL STATEMENTS.................................................
REPORT OF INDEPENDENT AUDITORS.......................................
APPENDIX A -- RATINGS OF FIXED INCOME INVESTMENTS....................
<PAGE> 49
GENERAL INFORMATION
Kemper Floating Rate Fund (the "Fund") is a non-diversified, closed-end
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"), that continuously offers its shares to the
public. The Fund will conduct quarterly repurchase offers for its shares
beginning in November 1999. The Fund's investment manager is Scudder Kemper
Investments, Inc. (the "Adviser"). The Fund's investment objective is to seek as
high a level of current income as is consistent with the preservation of
capital. The Fund's principal office is located at 222 South Riverside Plaza,
Chicago, Illinois 60606.
Capitalized terms not defined in this Statement of Additional Information
have the same meaning as that set forth in the Prospectus.
INVESTMENT RESTRICTIONS AND FUNDAMENTAL POLICIES
The following fundamental policies cannot be changed without the approval of
the holders of a majority of the Fund's outstanding voting securities. In
accordance with the requirements of the 1940 Act a "majority of the Fund's
outstanding voting securities" means the lesser of either: (a) the vote of 67
percent or more of the voting securities present at the annual or a special
meeting of the Fund's shareholders, if the holders of more than 50 percent of
the Fund's outstanding voting securities are present or represented by proxy; or
(b) the vote of more than 50 percent of the Fund's outstanding voting
securities.
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. Make loans except as permitted under the 1940 Act, as amended and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time, except that the Fund may (i) acquire Senior Loans, debt
securities and other obligations in which the Fund is authorized to
invest in accordance with its investment objective and policies, (ii)
enter into repurchase agreements, and (iii) lend its portfolio
securities.
5. Purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investment secured by
real estate or interests therein, except that the Fund reserves freedom
of action to hold and to sell real estate as acquired as a result of the
Fund's ownership of securities.
6. Purchase physical commodities or contracts relating to physical
commodities.
7. Engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter in
connection with the disposition of portfolio securities or to the extent
that the Fund may be acting as an agent or co-agent in connection with
the origination of Senior Loans.
The Fund has adopted the following non-fundamental investment policies which
may be changed by the Fund's Board of Trustees without shareholder approval.
As a matter of non-fundamental policy, the Fund may not:
1. Invest for the purpose of exercising control over management of any
company.
<PAGE> 50
2. Invest its assets in securities of any investment company, except by open
market purchases, including an ordinary broker's commission, or in
connection with a merger, acquisition of assets, consolidation or
reorganization, and any investments in the securities of other investment
companies, in compliance with the 1940 Act.
3. Purchase securities on margin or make short sales of securities, provided
that the Fund may enter into futures contracts and related options and
make initial and variation margin deposits in connection therewith.
4. Mortgage, pledge, or hypothecate any assets except in connection with
borrowings in amounts not in excess of the lesser of the amount borrowed
or 10% of the value of its total assets at the time of such borrowing;
provided that the Fund may enter into futures contracts and related
options. Optioned securities are not considered to be pledged for
purposes of this limitation.
5. Invest in oil, gas or mineral exploration or development programs.
Notwithstanding the Fund's investment policies and restrictions, the Fund
may invest all or part of its investable assets in a management investment
company with substantially the same investment objective, policies and
restrictions as the Fund. This could allow creation of a "master/feeder"
structure in the future, although the Fund has no current intention to
restructure in this manner.
If a percentage restriction on investment policies or the investment or use
of assets set forth in the Prospectus and this Statement of Additional
Information is adhered to at the time a transaction is effected, later changes
in percentage resulting from changing values will not be considered a violation.
REPURCHASE OFFER FUNDAMENTAL POLICY
The Board of Trustees has adopted a resolution setting forth the Fund's
fundamental policy that it will conduct quarterly Repurchase Offers.
The Repurchase Offer Fundamental Policy states that the Fund will make
Repurchase Offers at periodic intervals of three months between Repurchase
Request Deadlines, such Repurchase Request Deadlines to be on a business day in
the months of February, May, August and November determined by the Board of
Trustees. The Repurchase Offer Fundamental Policy also provides that the Pricing
Date will be no later than 14 calendar days after each Repurchase Request
Deadline (or the next business day if the 14th calendar day is not a business
day).
The Repurchase Offer Fundamental Policy may be changed only with approval of
a majority of the Fund's outstanding voting securities.
The first Repurchase Offer is scheduled to take place in November 1999.
ADDITIONAL INFORMATION ABOUT INVESTMENTS
AND INVESTMENT TECHNIQUES
Some of the different types of securities in which the Fund may invest,
subject to its investment objective, policies and restrictions, are described in
the Prospectus under "Investment Objective and Policies." Additional information
concerning certain of the Fund's investments and investment techniques is set
forth below.
EQUITY SECURITIES
In connection with its purchase or holding of interests in Senior Loans,
CLOs, subordinated and unsecured loans, high yield securities or other
investments of the Fund, the Fund may acquire (and subsequently sell) equity
securities or exercise warrants that it receives. The Fund normally will not
hold more than 20% of its total assets in
<PAGE> 51
equity securities. Equity securities will not be treated as Senior Loans;
therefore, an investment in such securities will not count toward the 80% of the
Fund's total assets that normally will be invested in Senior Loans. Equity
securities are subject to financial and market risks and can be expected to
fluctuate in value.
REPURCHASE AGREEMENTS
In general, the Fund does not engage in repurchase agreements. The Fund has
the ability, however, pursuant to its investment objective and policies, to
enter into repurchase agreements (a purchase of, and a simultaneous commitment
to resell, a financial instrument at an agreed upon price on an agreed upon
date) only with member banks of the Federal Reserve System, member firms of the
New York Stock Exchange ("NYSE") or other entities determined by the Adviser to
be creditworthy. When participating in repurchase agreements, the Fund buys
securities from a vendor, e.g., a bank or brokerage firm, with the agreement
that the vendor will repurchase the securities at a higher price at a later
date. The Fund may be subject to various delays and risks of loss if the vendor
is unable to meet its obligation to repurchase. Under the 1940 Act, repurchase
agreements are deemed to be collateralized loans of money by the Fund to the
vendor. In evaluating whether to enter into a repurchase agreement, the Adviser
will consider carefully the creditworthiness of the vendor. If the member bank
or member firm that is the party to the repurchase agreement petitions for
bankruptcy or otherwise becomes subject to the U.S. Bankruptcy Code, the law
regarding the rights of the Fund to enforce the terms of the repurchase
agreement is unsettled. The securities underlying a repurchase agreement will be
marked to market every business day so that the value of the collateral is at
least equal to the value of the loan, including the accrued interest thereon,
and the Adviser will monitor the value of the collateral. No specific limitation
exists as to the percentage of the Fund's assets which may be used to
participate in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
In general, the Fund does not engage in reverse repurchase agreements. The
Fund has the ability, however, pursuant to its investment objective and
policies, to enter into reverse repurchase agreements. A reverse repurchase
agreement is an instrument under which the Fund may sell an underlying debt
instrument and simultaneously obtain the commitment of the purchaser to sell the
security back to the Fund at an agreed upon price on an agreed upon date.
Reverse repurchase agreements will be considered borrowings by the Fund and as
such are subject to the Fund's restrictions on borrowing. Borrowings by the Fund
create an opportunity for greater total return, but at the same time, increase
exposure to capital risk. The Fund will maintain in a segregated account with
its custodian cash or liquid high grade portfolio securities in an amount
sufficient to cover its obligations with respect to reverse repurchase
agreements. The Fund will receive payment for such securities only upon physical
delivery or evidence of book entry transfer by its custodian. Regulations of the
Commission require either that securities sold by the Fund under a reverse
repurchase agreement be segregated pending repurchase or that the proceeds be
segregated on the Fund's books and records pending repurchase. Reverse
repurchase agreements may involve certain risks in the event of default or
insolvency of the other party, including possible loss from delays or
restrictions upon the Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them.
LENDING SENIOR LOANS AND OTHER PORTFOLIO INSTRUMENTS
To generate additional income, the Fund may lend its portfolio securities,
including an interest in a Senior Loan, in an amount up to 33 1/3% of the Fund's
total assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. No lending may be made with any companies
affiliated with the Adviser. During the time portfolio securities are on loan,
the borrower pays the Fund any dividends or interest paid on such securities,
and the Fund may invest the cash collateral and earn additional income, or it
may receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit. As with other extensions
of credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially.
<PAGE> 52
The Fund may seek to increase its income by lending financial instruments in
its portfolio in accordance with present regulatory restrictions applicable to
the Fund. The lending of financial instruments is a common practice in the
securities industry. The loans are required to be secured continuously by
collateral, consistent with the requirements of the 1940 Act discussed below,
maintained on a current basis at an amount at least equal to the market value of
the portfolio instruments loaned. The Fund has the right to call a Senior Loan
and obtain the portfolio instruments loaned at any time on such notice as
specified in the transaction documents. For the duration of the Senior Loan, the
Fund will continue to receive the equivalent of the interest paid by the issuer
on the portfolio instruments loaned and may also receive compensation for the
loan of the financial instrument. Any gain or loss in the market price of the
instruments loaned that may occur during the term of the Senior Loan will be for
the account of the Fund.
The Fund may lend its portfolio instruments so long as the terms and the
structure of such loans are not inconsistent with the requirements of the 1940
Act, which currently require that (a) the borrower pledge and maintain with the
Fund collateral consisting of cash, a letter of credit issued by a domestic U.S.
bank, or securities issued or guaranteed by the U.S. government having a value
at all times not less than 100% of the value of the instruments loaned, (b) the
borrowers add to such collateral whenever the price of the instruments loaned
rises (i.e., the value of the loan is "marked to the market" on a daily basis),
(c) the loan be made subject to termination by the Fund at any time, and (d) the
Fund receive reasonable interest on the loan (which may include the Fund's
investing any cash collateral in interest bearing short-term investments), any
distributions on the loaned instruments and any increase in their market value.
The Fund may lend its portfolio instruments to member banks of the Federal
Reserve System, members of the NYSE or other entities determined by the Adviser
to be creditworthy. All relevant facts and circumstances, including the
creditworthiness of the qualified institution, will be monitored by the Adviser,
and will be considered in making decisions with respect to the lending of
portfolio instruments.
The Fund may pay reasonable negotiated fees in connection with loaned
instruments. In addition, voting rights may pass with the loaned securities, but
if a material event were to occur affecting such a loan, the Fund will retain
the right to call the loan and vote the securities. If a default occurs by the
other party to such transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transaction but such remedies may be
subject to bankruptcy and insolvency laws which could materially and adversely
affect the Fund's rights as a creditor. However, the loans will be made only to
firms deemed by the Adviser to be of good financial standing and when, in the
judgment of the Adviser, the consideration which can be earned currently from
loans of this type justifies the attendant risk.
INTEREST RATE HEDGING TRANSACTIONS
The Fund may, pursuant to its investment objective and policies, engage in
certain hedging transactions including interest rate swaps and the purchase or
sale of interest rate caps and floors. The Fund expects to engage in such
transactions with respect to no more than 20% of its total assets, which would
be that portion of the Fund's portfolio not represented by variable rate
securities. The Fund may undertake these transactions primarily for the
following reasons: to preserve a return on or value of a particular investment
or portion of the Fund's portfolio, to protect against decreases in the
anticipated rate of return on floating or variable rate financial instruments
which the Fund owns or anticipates purchasing at a later date, or for other risk
management strategies such as managing the effective dollar-weighted average
duration of the Fund's portfolio. Market conditions and the judgment of the
Adviser will determine whether and in what circumstances the Fund would employ
any of the hedging techniques described below.
Interest Rate Swaps, Caps and Floors. 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 an obligation to make floating rate
payments on a specified dollar amount, referred to as the "notional" principal
amount, for an obligation to make fixed rate payments. For example, the Fund may
seek to shorten the effective interest rate redetermination period of a Senior
Loan in its portfolio that has an interest rate redetermination period of one
year. The Fund could
<PAGE> 53
exchange its right to receive fixed income payments for one year from a borrower
for the right to receive payments under an obligation that readjusts monthly. In
such event, the Fund would consider the interest rate redetermination period of
such Senior Loan to be the shorter period. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate floor.
The Fund will not enter into swaps, caps or floors if, on a net basis, the
aggregate notional principal amount with respect to such agreements exceeds the
net assets of the Fund or to the extent the purchase of swaps, caps or floors
would be inconsistent with the Fund's other investment restrictions.
The Fund will not treat swaps covered in accordance with applicable regulatory
guidance as senior securities. The Fund will usually enter into interest rate
swaps on a net basis, i.e., where the two parties make net payments with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlement with respect to each interest rate swap will be accrued and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account. If the
Fund enters into a swap on other than a net basis, the Fund will maintain in the
segregated account the full amount of the Fund's obligations under each such
swap. The Fund may enter into swaps, caps and floors with member banks of the
Federal Reserve System, members of the NYSE or other entities determined by the
Adviser. If a default occurs by the other party to such transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction but such remedies may be subject to bankruptcy and insolvency laws
which could materially and adversely affect the Fund's rights as a creditor.
The swap, cap and floor market has grown substantially in recent years with
a large number of banks and financial services firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, this
market has become relatively liquid. There can be no assurance, however, that
the Fund will be able to enter into interest rate swaps or to purchase interest
rate caps or floors at prices or on terms the Adviser believes are advantageous
to the Fund. In addition, although the terms of interest rate swaps, caps and
floors may provide for termination, there can be no assurance that the Fund will
be able to terminate an interest rate swap or to sell or offset interest rate
caps or floors that it has purchased.
General. The successful utilization of hedging and risk management
transactions requires skills different from those needed in the selection of the
Fund's portfolio securities and depends on the Adviser's ability to predict
correctly the direction and degree of movements in interest rates. Although the
Fund believes that use of the hedging and risk management techniques described
above will benefit the Fund, if the Adviser's judgment about the direction or
extent of the movement in interest rates is incorrect, the Fund's overall
performance would be worse than if it had not entered into any such
transactions. For example, if the Fund had purchased an interest rate swap or an
interest rate floor to hedge against its expectation that interest rates would
decline but instead interest rates rose, the Fund would lose part or all of the
benefit of the increased payments it would receive as a result of the rising
interest rates because it would have to pay amounts to its counterparty under
the swap agreement or would have paid the purchase price of the interest rate
floor. The Fund will incur brokerage and other transaction costs in connection
with its hedging transactions.
BORROWING
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of 300% of the
aggregate outstanding principal balance of indebtedness. Additionally, under the
1940 Act, the Fund may not declare any dividend or other distribution upon any
class of its capital stock, or purchase any such capital stock, unless the
aggregate indebtedness of the Fund has at the time of the declaration of any
such dividend or distribution or at the time of any such purchase an asset
coverage of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be.
<PAGE> 54
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell interests in Senior Loans and other
portfolio securities on a "when issued" and "delayed delivery" basis. No income
accrues to the Fund on such interests or securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
interests or securities. These transactions are subject to market fluctuation;
the value of the interests in Senior Loans and other portfolio debt securities
at delivery may be more or less than their purchase price, and yields generally
available on such interests or securities when delivery occurs may be higher or
lower than yields on the interests or securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or liquid securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. The Fund will make
commitments to purchase such interests or securities on such basis only with the
intention of actually acquiring these interests or securities, but the Fund may
sell such interests or securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
interests or securities for the Fund's portfolio consistent with the Fund's
investment objective and policies and not for the purpose of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis.
ADDITIONAL INFORMATION ON SENIOR LOANS
Senior Loans are direct obligations of corporations or other business
entities and are generally arranged by banks or other commercial lending
institutions and made generally to finance internal growth, mergers,
acquisitions, stock repurchases, and leveraged buyouts. Senior Loans usually
include restrictive covenants which must be maintained by the borrower. Such
covenants, in addition to the timely payment of interest and principal, may
include mandatory prepayment provisions arising from free cash flow,
restrictions on dividend payments and usually state that a borrower must
maintain specific minimum financial ratios as well as establishing limits on
total debt. A breach of a covenant, which is not waived by the agent, is
normally an event of acceleration, i.e., the agent has the right to call the
outstanding Senior Loan. In addition, loan covenants may include mandatory
prepayment provisions stemming from free cash flow. Free cash flow is cash that
is in excess of capital expenditures plus debt service requirements of principal
and interest. The free cash flow shall be applied to prepay the Senior Loan in
an order of maturity described in the loan documents. Under certain interests in
Senior Loans, the Fund may have an obligation to make additional loans upon
demand by the borrower. The Fund intends to reserve against such contingent
obligations by segregating sufficient assets in high quality short-term liquid
investments or borrowing to cover such obligations.
In a typical interest in a Senior Loan, the agent administers the loan and
has the right to monitor the collateral. The agent is also required to segregate
the principal and interest payments received from the borrower and to hold these
payments for the benefit of the lenders. The Fund normally looks to the agent to
collect and distribute principal of and interest on a Senior Loan. Furthermore,
the Fund looks to the agent to use normal credit remedies, such as to foreclose
on collateral; monitor credit loan covenants; and notify the lenders of any
adverse changes in the borrower's financial condition or declarations of
insolvency. At times the Fund may also negotiate with the agent regarding the
agent's exercise of credit remedies under a Senior Loan. The agent is
compensated for these services by the borrower as is set forth in the loan
agreement. Such compensation may take the form of a fee or other amount paid
upon the making of the Senior Loan and/or an ongoing fee or other amount.
The loan agreement in connection with Senior Loans sets forth the standard
of care to be exercised by the agents on behalf of the lenders and usually
provides for the termination of the agent's agency status in the event that it
fails to act properly, becomes insolvent, enters FDIC receivership, or if not
FDIC insured, enters into
<PAGE> 55
bankruptcy or if the agent resigns. In the event an agent is unable to perform
its obligations as agent, another lender would generally serve in that capacity.
The Fund believes that the principal credit risk associated with acquiring
Senior Loans from another lender is the credit risk associated with the borrower
of the underlying Senior Loan. The Fund may incur additional credit risk,
however, when the Fund acquires a participation in a Senior Loan from another
lender because the Fund must assume the risk of insolvency or bankruptcy of the
other lender from which the Senior Loan was acquired. However, in acquiring
Senior Loans, the Fund conducts an analysis and evaluation of the financial
condition of each such lender. The Fund has taken the following measures in an
effort to reduce such risks. The Fund will only acquire participations in Senior
Loans if the lender selling the participation, and any other persons
interpositioned between the Fund and the lender, at the time of investment has
outstanding debt or deposit obligations rated investment grade (BBB or A-3 or
higher by Standard & Poor's Ratings Group ("S&P") or Baa or P-3 or higher by
Moody's Investors Service ("Moody's")) or determined by the Adviser to be of
comparable quality. Long-term debt rated BBB by S&P is regarded by S&P as having
adequate capacity to pay interest and repay principal and debt rated Baa by
Moody's is regarded by Moody's as a medium grade obligation, i.e., it is neither
highly protected nor poorly secured. Commercial paper rated A-1 by S&P indicates
that the degree of safety regarding timely payment is considered by S&P to be
either overwhelming or very strong and issues of commercial paper rated Prime-1
by Moody's are considered by Moody's to have a superior ability for repayment of
senior short-term debt obligations.
Senior Loans, unlike certain bonds, usually do not have call protection.
This means that interests comprising the Fund's portfolio, while having a stated
one to ten-year term, may be prepaid, often without penalty. The Fund generally
holds Senior Loans to maturity unless it has become necessary to sell them to
satisfy any Repurchase Offers or to adjust the Fund's portfolio in accordance
with the Adviser's view of current or expected economic or specific industry or
borrower conditions.
Senior Loans frequently require full or partial prepayment of a loan when
there are asset sales or a securities issuance. Prepayments on Senior Loans may
also be made by the borrower at its election. The rate of such prepayments may
be affected by, among other things, general business and economic conditions, as
well as the financial status of the borrower. Prepayment would cause the actual
duration of a Senior Loan to be shorter than its stated maturity. Prepayment may
be deferred by the Fund. This should, however, allow the Fund to reinvest in a
new loan and recognize as income any unamortized loan fees. This may result in a
new facility fee payable to the Fund.
Because interest rates paid on these Senior Loans periodically fluctuate
with the market, it is expected that the prepayment and a subsequent purchase of
a new Senior Loan by the Fund will not have a material adverse impact on the
yield of the portfolio. See "Portfolio Transactions."
Under a Senior Loan, the borrower generally must pledge as collateral assets
which may include one or more of the following: cash; accounts receivable;
inventory; property, plant and equipment; both common and preferred stock in its
subsidiaries; trademarks, copyrights, patent rights; and franchise value. The
Fund may also receive guarantees as a form of collateral. In some instances, a
Senior Loan may be secured only by stock in a borrower or its affiliates. The
Fund may also invest in Senior Loans not secured by any collateral. The market
value of the assets serving as collateral (if any) will, at the time of
investment, in the opinion of the Adviser, equal or exceed the principal amount
of the Senior Loan. The valuations of these assets may be performed by an
independent appraisal. If the agent becomes aware that the value of the
collateral has declined, the agent may take action as it deems necessary for the
protection of its own interests and the interests of the other lenders,
including, for example, giving the borrower an opportunity to provide additional
collateral or accelerating the loan. There is no assurance, however, that the
borrower would provide additional collateral or that the liquidation of the
existing collateral would satisfy the borrower's obligation in the event of
nonpayment of scheduled interest or principal, or that such collateral could be
readily liquidated. The Fund may invest up to 20% of its total assets in Senior
Loans that are not secured by collateral.
<PAGE> 56
The Fund may be required to pay and may receive various fees and commissions
in the process of purchasing, selling and holding Senior Loans. The fee
component may include any, or a combination of, the following elements:
arrangement fees, non-use fees, facility fees, letter of credit fees and ticking
fees. Arrangement fees are paid at the commencement of a loan as compensation
for the initiation of the transaction. A non-use fee is paid based upon the
amount committed but not used under the loan. Facility fees are on-going annual
fees paid in connection with a loan. Letter of credit fees are paid if a loan
involves a letter of credit. Ticking fees are paid from the initial commitment
indication until loan closing if for an extended period. The amount of fees is
negotiated at the time of transaction.
If legislation or state or federal regulators impose additional requirements
or restrictions on the ability of financial institutions to make loans that are
considered highly leveraged transactions, the availability of Senior Loans for
investment by the Fund may be adversely affected. In addition, such requirements
or restrictions could reduce or eliminate sources of financing for certain
borrowers. This would increase the risk of default. If legislation or federal or
state regulators require financial institutions to dispose of Senior Loans that
are considered highly leveraged transactions or subject such Senior Loans to
increased regulatory scrutiny, financial institutions may determine to sell such
Senior Loans. Such sales could result in prices that, in the opinion of the
Adviser, do not represent fair value. If the Fund attempts to sell a Senior Loan
at a time when a financial institution is engaging in such a sale, the price the
Fund could get for the Senior Loan may be adversely affected.
REAL ESTATE
The Fund may acquire real estate or invests therein as a consequence of the
Fund's ownership of securities. It is the policy of the Fund to liquidate real
estate or interests therein promptly after acquiring such assets. It is unlikely
that more than 5% of the Fund's total assets will ever be invested in real
estate or interests therein.
MANAGEMENT
INVESTMENT ADVISER
Scudder Kemper Investments, Inc. (the "Adviser"), 345 Park Avenue, New York,
New York 10154, the global investment management business of Zurich Financial
Services Group (the "Group"), is one of the largest and most experienced
investment management organizations in the world, managing assets for
institutional and corporate clients, retirement and pension plans, insurance
companies, mutual fund investors, and individuals. The Adviser offers a full
range of investment counsel and asset management capabilities, based on a
combination of proprietary research and disciplined, long-term investment
strategies.
Headquartered in Zurich, Switzerland, Zurich Financial Services Group is one
of the global leaders in the financial services industry, providing its
customers with products and solutions in the area of financial protection and
asset accumulation. The Group has four core businesses: non-life and life
insurance, reinsurance and asset management.
The Investment Management Agreement provides that the Adviser will provide
portfolio management services, place portfolio transactions in accordance with
policies expressed in the Fund's Registration Statement, pay the Fund's office
rent, and render significant administrative services on behalf of the Fund (not
otherwise provided by third parties) necessary for the Fund's operating as a
closed-end investment company, including, but not limited to, preparing reports
to and meeting materials for the Fund's Board and reports and notices to Fund
shareholders; supervising, negotiating contractual arrangements with, to the
extent appropriate, and monitoring the performance of various third-party and
affiliated service providers to the Fund (such as the Fund's transfer and
pricing agents, fund accounting agent, custodian, accountants and others) and
other persons in any capacity deemed necessary or desirable to Fund operations;
preparing and making filings with the Commission and other regulatory and
self-regulatory organizations, including but not limited to, preliminary and
definitive proxy materials, post-effective amendments to the Fund's registration
statement and semi-annual reports on Form N-SAR; overseeing the
<PAGE> 57
tabulation of proxies by the Fund's transfer agent; assisting in the preparation
of filing of the Fund's Federal, state and local tax returns; preparing and
filing the Fund's Federal excise tax returns pursuant to Section 4982 of the
Internal Revenue Code of 1986, as amended; providing assistance with investor
and public relations matters; monitoring the valuation of portfolio securities
and the calculation of net asset value; monitoring the registration of shares of
the Fund under applicable Federal and state securities laws; maintaining or
causing to be maintained for the Fund all books, records and reports and any
other information required under the 1940 Act, to the extent such books, records
and reports and other information are not maintained by the Fund's custodian or
other agents of the Fund; assisting in establishing accounting policies of the
Fund; assisting in the resolution of accounting issues that may arise with
respect to the Fund's operations and consulting with the Fund's independent
accountants, legal counsel and other agents as necessary in connection
therewith; establishing and monitoring the Fund's operating expense budgets;
reviewing the Fund's bills; processing the payment of bills that have been
approved by an authorized person; assisting the Fund in determining the amount
of dividends and distributions available to be paid by the Fund to its
shareholders, preparing and arranging for the printing of dividend notices to
shareholders, and providing the transfer and dividend paying agent, the
custodian, and the accounting agent with such information as is required for
such parties to effect the payment of dividends and distributions; and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Fund's Board.
Under the Investment Management Agreement, the Fund is responsible for other
expenses, including organizational expenses (including out-of-pocket expenses,
but not including the Adviser's overhead or employee costs); brokers'
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; legal, auditing and accounting expenses; payment for portfolio
pricing or valuation services to pricing agents, accountants, bankers and other
specialists, if any; taxes and governmental fees; the fees and expenses of the
Fund's transfer agent; expenses of preparing share certificates and any other
expenses, including clerical expenses, of issuance, offering, distribution,
sale, redemption or repurchase of shares; the expenses of and fees for
registering or qualifying securities for sale; the fees and expenses of those
Trustees who are not "interested persons" of the Fund (as defined in the 1940
Act); the cost of printing and distributing reports, notices and dividends to
current shareholders; and the fees and expenses of the Fund's custodians,
subcustodians, accounting agent, dividend disbursing agents and registrars. 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 expenses of shareholders' and other meetings and its expenses
incurred in connection with litigation and the legal obligation it may have to
indemnify officers and Trustees of the Fund with respect thereto. The Fund is
also responsible for the maintenance of books and records which are required to
be maintained by the Fund's custodian or other agents of the Fund; telephone,
telex, facsimile, postage and other communications expenses; any fees, dues and
expenses incurred by the Fund in connection with membership in investment
company trade organizations; expenses of printing and mailing prospectuses and
statements of additional information of the Fund and supplements thereto to
current shareholders; costs of stationery; fees payable to the Adviser and to
any other Fund advisors or consultants; expenses relating to investor and public
relations; interest charges, bond premiums and other insurance expense; freight,
insurance and other charges in connection with the shipment of the Fund's
portfolio securities; and other expenses.
The Adviser is responsible for the payment of the compensation and expenses
of all Trustees, officers and executive employees of the Fund (including the
Fund's share of payroll taxes) affiliated with the Adviser and making available,
without expense to the Fund, the services of such Trustees, officers and
employees as may duly be elected officers of the Fund, subject to their
individual consent to serve and to any limitations imposed by law. The Fund is
responsible for the fees and expenses (specifically including travel expenses
relating to Fund business) of Trustees not affiliated with the Adviser
("Non-Interested Trustees"). Under the Investment Management Agreement, the
Adviser also pays the Fund's share of payroll taxes.
In return for the services provided by the Adviser as investment manager and
the expenses it assumes under the Investment Management Agreement, the Fund pays
the Adviser a management fee which is payable monthly, at the annual rate,
expressed as a percentage of average daily net assets, of 0.50% of the first $1
billion of average daily net assets, 0.49% of the next $2 billion, 0.48% of the
next $2 billion, 0.47% of the next $5 billion, and 0.45%
<PAGE> 58
of average daily net assets over $10 billion. The fee is payable monthly,
provided that 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.
The Adviser has agreed to reduce its investment management fee to 0% of the
Fund's average daily net assets through November 30, 1999. The investment
management fee will be gradually reinstated during the one year period ending
November 30, 2000. During the period from commencement of operations to the end
of the Fund's fiscal year, August 31, 1999, the Distributor agreed to reduce its
administrative services and distribution fee and the Adviser agreed to reimburse
other expenses to the extent necessary to maintain maximum expense ratios
ranging from 0% to 1.00%. During the period from May 25, 1999 (commencement of
operations) to August 31, 1999, the Adviser absorbed $ pursuant to
these arrangements.
The Investment Management Agreement further 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 such 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 such agreement. The
Investment Management Agreement also provides that purchase and sale
opportunities, which are suitable for more than one client of the Adviser, will
be allocated by the Adviser in an equitable manner. Lastly, the Investment
Management Agreement contains a provision stating that it supersedes all prior
agreements.
The Investment Management Agreement may be terminated without penalty upon
sixty (60) days' written notice by either party. The Fund may agree to terminate
its Investment Management Agreement either by the vote of a majority of the
outstanding voting securities of the Fund, or by a vote of the Board. The
Investment Management Agreement may also be terminated at any time without
penalty by the vote of a majority of the outstanding voting securities of the
Fund or by a vote of the Board if a court establishes that the Adviser or any of
its officers or directors has taken any action resulting in a breach of the
Adviser's covenants under the Investment Management Agreement. As stated above,
the Investment Management Agreement automatically terminates in the event of its
assignment.
FUND ACCOUNTING AGENT
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts 02110, a subsidiary of the Adviser, is responsible for
determining the net asset value of the Fund, recording daily trading activity,
and maintaining all accounting records related thereto. SFAC receives a fee for
its services to the Fund at the annual rate of 0.025% of the first $150,000,000
of average daily net assets, 0.0075% of the next $850,000,000, and 0.0045% of
the excess over $1 billion. This fee increases by 1/3 for each additional class
of shares the Fund establishes. The minimum monthly fee is $3,125. SFAC also
charges $7.50 per month for each issue maintained by the Fund and a fee ranging
from $5.00 to $25.00 per portfolio or derivatives transaction. The Fund paid
fees to SFAC from May 25, 1999 (commencement of operations) through August 31,
1999 of $ , after the effect of the expense absorption by the Adviser
referred to above.
DISTRIBUTOR
Pursuant to an Underwriting and Distribution Services Agreement
("Distribution Agreement"), Kemper Distributors, Inc., 222 South Riverside
Plaza, Chicago, Illinois 60606, a subsidiary of the Adviser, is the principal
underwriter and distributor for the shares of the Fund and acts as agent of the
Fund in the continuous offering of its shares. The Distributor 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
the Distributor pays for the printing and distribution of copies thereof used in
connection with the offering of shares to prospective investors. The Distributor
also pays for supplementary sales literature and advertising costs.
<PAGE> 59
The Distribution Agreement 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 Fund, including the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
Distribution 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 the Distributor 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, and a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
Distribution Agreement, or a "majority of the outstanding voting securities" of
the class of the Fund, as defined under the 1940 Act.
ADMINISTRATIVE SERVICES
Administrative services are provided to the Fund under an Administrative
Services Agreement ("Administrative Agreement") with the Distributor. The
Distributor bears all its expenses of providing services pursuant to the
Administrative Agreement, including the payment of service fees. For the
services under the Administrative Agreement, the Fund pays the Distributor an
administrative services fee, payable monthly, at an annual rate of up to 0.25%
of average daily net assets of the shares of the Fund. The Fund paid
administrative services fees to the Distributor from May 25, 1999 (commencement
of operations) through August 31, 1999 of $ , after fee reductions of
$ as referred to above.
The Distributor enters into related arrangements with various broker-dealer
firms and other service or administrative firms ("service 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 repurchase 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 B shares, the Distributor currently advances
to service 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, the Distributor
currently intends to pay service firms a service fee at a rate of up to 0.25%
(calculated monthly and paid quarterly) of the net assets attributable to Class
A, Class B and Class C shares maintained and serviced by the service firm. After
the first year, a service firm becomes eligible for the quarterly service fee
and the fee continues until terminated by the Distributor or the Fund. Services
to which service fees may be paid may include affiliates of the Distributor.
The Distributor also may provide some of the above services and may retain
any portion of the fee under the Administrative Agreement not paid to service
firms to compensate itself for administrative functions performed for the Fund.
Currently, the administrative services fee payable to the Distributor is based
only upon Fund assets in accounts for which a service firm provides
administrative services listed on the Fund's records and it is intended that the
Distributor will pay all the administrative services fee that it receives from
the Fund to service 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 there is a service firm of record. The Board of
Trustees of the Fund, in its discretion, may approve basing the fee to the
Distributor on all Fund assets in the future. In addition, the Distributor may,
from time to time, from its own resources, pay certain service firms additional
amounts for ongoing administrative services and assistance provided to their
customers and clients who are shareholders of the Fund.
Certain Trustees or officers of the Fund are also directors or officers of
the Adviser or the Distributor, as indicated under "Officers and Trustees."
CUSTODIAN
<PAGE> 60
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Fund's custodian and maintains custody of all
securities and cash held by the Fund.
TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT
Kemper Service Company ("KSvC"), 811 Main Street, Kansas City, Missouri
64105, a subsidiary of the Adviser, is the Fund's transfer agent and dividend
disbursing agent and, as such, generally serves as "Shareholder Service Agent"
of the Fund. KSvC receives as transfer agent the following from the Fund: annual
account fees of $14.00 ($23.00 for retirement accounts) per account, plus set up
charges; annual fees associated with the early withdrawal charge; an asset-based
fee of 0.05%; and out-of-pocket reimbursement. For the fiscal year ended August
31, 1999 the Fund paid KsvC $ in annual fees associated with the early
withdrawal charge, after the effect of the expense absorption by the Adviser
referred to above.
TRUSTEES AND OFFICERS
The Trustees and Executive Officers of the Fund and their principal
occupations during the last five years are set forth below.
<TABLE>
<CAPTION>
POSITION
WITH PRINCIPAL OCCUPATIONS DURING
NAME, ADDRESS AND AGE THE FUND THE PAST FIVE YEARS
--------------------- -------- ------------------------------------------------------------
<S> <C> <C>
James E. Akins Trustee Consultant on International, Political and Economic Affairs;
2904 Garfield Terrace, N.W formerly a career United States Foreign Service Officer,
Washington, DC 20008 Energy Advisor for the White House, and United States
Date of birth: 10/15/26 Ambassador to Saudi Arabia.
James R. Edgar Trustee Distinguished Fellow, Institute of Government and Public
1927 County Road, 150E Affairs, University of Illinois; Director, Kemper Insurance
Seymour, Illinois Companies; formerly, Illinois Governor, 1991-99.
Date of birth: 7/22/46
Arthur R. Gottschalk Trustee Retired; formerly, President, Illinois Manufacturers
10642 Brookridge Drive Association; Trustee, Illinois Masonic Medical
Frankfort, IL Center; formerly, Illinois State Senator, Vice President,
Date of birth: 2/13/25 The Reuben H. Donnelly Corporation, and attorney.
*Cornelia M. Small Trustee Managing Director, Scudder Kemper Investments, Inc.
345 Park Avenue
New York, NY 10154
Date of birth: 7/28/44
*Thomas W. Littauer Trustee Managing Director, Scudder Kemper Investments, Inc.;
Two International Place Vice President formerly, Head of Broker Dealer Division of an unaffiliated
Boston, MA 02110 investment management firm during 1997; prior thereto,
Date of birth: 4/26/55 President of Client Management Services of an unaffiliated
investment management firm from 1991 to 1996.
Frederick T. Kelsey Trustee Retired; formerly, consultant to Goldman, Sachs & Co.;
4010 Arbor Lane formerly, President, Treasurer and Trustee of Institutional
Unit 102 Liquid Assets and its affiliated mutual
Northfield, IL 60093 funds; Trustee of the Northern Institutional
Date of birth: 4/25/27 Funds; formerly Trustee of the Pilot Funds.
</TABLE>
<PAGE> 61
<TABLE>
<S> <C> <C>
Fred B. Renwick Trustee Professor of Finance, New York University,
3 Hanover Square Stern School of Business; Director, the
Suite 20H Wartburg Home Foundation; Chairman, Investment
New York, NY 10004 Committee of Morehouse College Board of
Date of birth: 2/1/30 Trustees; Director, American Bible Society
Investment Committee; formerly, member of the
Investment Committee of Atlanta University
Board of Trustees; formerly, Director of Board
of Pensions Evangelical Lutheran Church of
America.
John G. Weithers Trustee Retired; formerly, Chairman of the Board and
311 Springlake Chief Executive Officer, Chicago Stock
Hinsdale, IL 60521 Exchange; Director, Federal Life Insurance
Date of birth: 8/8/33 Company; President of the Members of the
Corporation and Trustee, DePaul University.
*Mark S. Casady President Managing Director, Scudder Kemper Investments,
Two International Place Inc.
Boston, MA 02110
Date of birth: 9/21/60
*Philip J. Collora Vice President Senior Vice President, Scudder Kemper
222 South Riverside Plaza and Secretary Investments, Inc.
Chicago, IL 60606
Date of birth: 11/15/45
*John R. Hebble Treasurer Senior Vice President, Scudder Kemper
222 South Riverside Plaza, Investments, Inc.
Chicago, IL 60606
Date of birth: 6/27/58
*Ann M. McCreary Vice President Managing Director, Scudder Kemper Investments,
345 Park Avenue Inc.
New York, NY 10154
Date of birth: 11/6/56
*Robert C. Peck Vice President Managing Director, Scudder Kemper Investments,
222 South Riverside Plaza, Inc.; formerly, Executive Vice President, Van
Chicago, IL 60606 Kampen American Capital, Inc.; Senior Vice
Date of birth: 10/1/46 President, Manufacturers Hanover Investment
Corporation
*Jonathan Trutter Vice President Senior Vice President, Scudder Kemper
222 South Riverside Plaza Investments, Inc.
Chicago, IL 60606
Date of birth: 11/29/57
Mark Wittnebel Vice President Senior Vice President, Scudder Kemper
Investments, Inc.
*Maureen E. Kane Assistant Vice President, Scudder Kemper Investments,
Two International Place Secretary Inc.; formerly, Assistant Vice President of an
</TABLE>
<PAGE> 62
<TABLE>
<S> <C> <C>
Boston, MA 02110 unaffiliated investment management firm;
Date of birth: 2/14/62 formerly, Associate Staff Attorney of an
unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
*Brenda Lyons Assistant Senior Vice President, Scudder Kemper
Two International Place Treasurer, Investments, Inc.
Boston, MA 02110 Treasurer
Date of birth: 2/21/63
*Caroline Pearson Assistant Senior Vice President, Scudder Kemper
Two International Place Secretary Investments Inc.; formerly, Associate, Dechert
Boston, MA 02110 Price & Rhoads (law firm) from 1989 to 1997.
Date of birth: 4/1/62
</TABLE>
* Interested person of the Fund as defined in the 1940 Act.
The Board has an audit and governance committee that is composed of Messrs.
Akins, Edgar, Gottschalk, Kelsey, Renwick, and Weithers. The Committee makes
recommendations regarding the selection of independent auditors for the Fund,
confers with the independent auditors regarding the Fund's financial statements,
the results of audits and related matters, seeks and reviews nominees for Board
membership and performance other tasks as the Board assigns.
COMPENSATION OF TRUSTEES
The Trustees and officers who are "interested persons" as designated above
receive no compensation from the Fund. The table below shows estimated amounts
to be paid or accrued to those Trustees who are not designated "interested
persons" during the current fiscal year, except that the information regarding
the total compensation from the Fund and Fund complex in the last column is for
the calendar year 1998 and does not include estimated amounts received from the
Fund for the current fiscal year.
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND COMPLEX(2)
NAME FROM FUND PAID TO TRUSTEES
- --------------------- ------------------------- ----------------------
<S> <C> <C>
James E. Akins........................................................ $ $
James R. Edgar........................................................ $ $
Arthur R. Gottschalk(1)............................................... $ $
Frederick T. Kelsey................................................... $ $
Fred B. Renwick....................................................... $ $
John G. Weithers...................................................... $ $
</TABLE>
(1) Includes deferred fees. Pursuant to a deferred compensation agreement with
the Fund, deferred amounts accrued interest monthly at a rate approximate to
the yield of Zurich Money Funds -- Zurich Money Market Fund.
(2) Includes compensation for service on the Boards of 15 Kemper Funds
with 50 fund portfolios. Each Trustee currently serves as trustee of 16
Kemper Funds with 56 funds portfolios.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
<PAGE> 63
[TO BE PROVIDED]
PORTFOLIO TRANSACTIONS
The primary objective of the Adviser in placing orders for the purchase and
sale of securities for the Fund is to obtain the most favorable net results
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on compatible 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 may purchase Senior Loans in individually negotiated transactions
with commercial banks, thrifts, insurance companies, finance companies and other
financial institutions. In determining whether to purchase Senior Loans from
these financial institutions, the Adviser may consider, among other factors, the
financial strength, professional ability, level of service and research
capability of the institution. While financial institutions generally are not
required to repurchase Senior Loans which they have sold, they may act as
principal or on an agency basis in connection with the Fund's disposition of
Senior Loans. The Fund has no obligation to deal with any bank, broker or dealer
in execution of transactions in portfolio securities.
The Fund's purchases and sales of fixed-income securities may be 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
Adviser or 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 authorized when placing portfolio
transactions for the Fund to pay a brokerage commission in excess of that which
another broker might charge for executing the same transaction on account of the
receipt of research, market or statistical information. The Adviser has entered
into arrangements with certain broker/dealers pursuant to which a broker/dealer
will provide research, market or statistical information to the Adviser or the
Fund in exchange for the direction by the Adviser of brokerage transactions to
the broker/dealer. The Adviser may give consideration to those firms that have
sold or are selling shares of a fund managed by the Adviser. 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.
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.
<PAGE> 64
The Trustees of the Fund review from time to time whether the recapture for
the benefit of the Fund of some portion of the brokerage commissions, if any, 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 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 whenever necessary, in management's
opinion, to meet the Fund's objective.
It is not anticipated that the Fund will pay significant brokerage
commissions. However, on occasion it may be necessary or desirable to purchase
or sell a security through a broker on an agency basis, in which case the Fund
will incur a brokerage commission. For the fiscal period from May 25, 1999
(commencement of operations) through August 31, 1999, the Fund paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
---------------------------- --------------------- -------------------- --------------------------
Total Brokerage Brokerage Total Amount of Percentage Allocated to
Commissions Paid in Fiscal Commissions Paid to Commissions Paid Firms Based on Research
1998 Firms Based on to Affiliates
Research
---------------------------- --------------------- -------------------- --------------------------
<S> <C> <C> <C>
---------------------------- --------------------- -------------------- --------------------------
$----------- $----------- $----------- $-----------
---------------------------- --------------------- -------------------- --------------------------
</TABLE>
The Fund will not purchase securities from its affiliates in principal
transactions unless an exemption is available from applicable regulations.
LIQUIDITY REQUIREMENTS
From the time that the Fund sends a Notification to shareholders until the
Pricing Date, the Fund will maintain a percentage of the Fund's assets equal to
at least 100 percent of the Repurchase Offer Amount in assets: (a) that can be
sold or disposed of in the ordinary course of business at approximately the
price at which the Fund has valued the asset within the time period between the
Repurchase Request Deadline and the next Repurchase Payment Deadline; or (b)
that mature by the next Repurchase Payment Deadline.
In the event that the Fund's assets fail to comply with the requirements in
the preceding paragraph, the Board shall cause the Fund to take such action as
the Board deems appropriate to ensure compliance.
NET ASSET VALUE
The net asset value per share of the Fund is the value of one share and is
determined separately for each class by dividing the value of the Fund's net
assets attributable to that class by the number of shares of that class
outstanding. The per share net asset value of classes of shares will vary based
on expenses borne by each class. The net asset value of shares of the Fund is
computed as of the close of regular trading on the New York Stock Exchange (the
"Exchange") on each day the Exchange is open for trading. The Exchange is
scheduled to be closed on the following holidays: New Year's Day, Dr. Martin
Luther King, Jr., Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
<PAGE> 65
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the time and in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.
Securities listed primarily on foreign exchanges may trade on days when the
Fund's net asset value is not computed, and therefore, the net asset value of a
Fund may be significantly affected on days when investors have no access to the
Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by the Fund's pricing agent(s)
which reflect broker-dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide market maker.
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.
If a security is traded on more than one exchange, or upon one or more
exchanges and the over-the-counter market, quotations are taken from the market
in which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee, most
fairly reflects the fair market value of the property on the valuation date.
<PAGE> 66
TAXATION
Set forth below is a discussion of certain U.S. Federal income tax issues
concerning the Fund and the purchase, ownership, and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances. This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisers with regard to the federal tax
consequences of the purchase, ownership, or disposition of Fund shares, as well
as the tax consequences arising under the laws of any state, foreign country, or
other taxing jurisdiction.
TAX STATUS OF THE FUND
The Fund intends to be taxed as a regulated investment company under
Subchapter M of the Code. Accordingly, the Fund must, among other things: (a)
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities or currencies; and (b) diversify its holdings so that, at the end of
each fiscal quarter, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, the securities
of other regulated investment companies and other securities, with such other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities and the securities of other regulated investment
companies).
As a regulated investment company, the Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, the Fund must distribute during each calendar year
an amount equal to the sum of: (a) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year; (b) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year; and (c) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
A distribution will be treated as paid on December 31 of a calendar year if
it is declared by the Fund in October, November or December of that year with a
record date in such a month and paid by the Fund during January of the following
year. Such a distribution will be taxable to shareholders in the calendar year
in which the distribution is declared, rather than the calendar year in which it
is received.
DISTRIBUTIONS
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Dividends paid
by the Fund to a corporate shareholder, to the extent such dividends are
attributable to dividends received by the Fund from U.S. corporations, may,
subject to limitation, be eligible for the dividends received deduction.
However, the alternative minimum tax applicable to corporations may reduce the
value of the dividends received deduction.
<PAGE> 67
The excess of net long-term capital gains over net short-term capital losses
realized, distributed and properly designated by the Fund, whether paid in cash
or reinvested in Fund shares, will generally be taxable to shareholders as
long-term gain, regardless of how long a shareholder has held Fund shares. Net
capital gains from assets held for one year or less will be taxed as ordinary
income.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
DISPOSITIONS
Upon a repurchase, redemption, sale or exchange of shares of the Fund, a
shareholder will realize a taxable gain or loss depending upon his or her basis
in the shares. A gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands, and the rate of tax will
depend upon the shareholder's holding period for the shares. Any loss realized
on a redemption, sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including through reinvestment of dividends) within a
period of 61 days, beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case the basis of the shares acquired will be
adjusted to reflect the disallowed loss. If a shareholder holds Fund shares for
six months or less and during that period receives a distribution taxable to the
shareholder as long-term capital gain, any loss realized on the sale of such
shares during such six-month period would be a long-term loss to the extent of
such distribution.
If, within 90 days after purchasing Fund shares with a sales charge, a
shareholder exchanges the shares and acquires new shares at a reduced (or
without any) sales charge pursuant to a right acquired with the original shares,
then the shareholder may not take the original sales charge into account in
determining the shareholder's gain or loss on the disposition of the shares.
Gain or loss will generally be determined by excluding all or a portion of the
sales charge from the shareholder's tax basis in the exchanged shares, and the
amount excluded will be treated as an amount paid for the new shares.
If, pursuant to an offer by the Fund to repurchase its shares, a shareholder
sells all shares of the Fund that he or she owns or is considered to own, the
shareholder may realize a taxable gain or loss. This gain or loss will be
treated as capital gain or loss if the Fund shares are held as capital assets
and will be long-term or short-term depending upon the shareholder's holding
period for the shares. If, pursuant to an offer by the Fund to repurchase its
shares, a shareholder sells less than all of the shares of the Fund that he or
she owns or is considered to own, the sale may not qualify as an exchange, and
the proceeds received may be treated as a dividend, return of capital or capital
gain, depending on the Fund's earning and profits and the shareholder's basis in
the tendered shares. If that occurs, there is a risk that non-tendering
shareholders may be considered to have received a deemed distribution as a
result of the Fund's purchase of tendered shares, and all or a portion of that
deemed distribution may be taxable as a dividend.
BACKUP WITHHOLDING
The Fund generally will be required to withhold federal income tax at a rate
of 31% ("backup withholding") from dividends paid (other than exempt-interest
dividends), capital gain distributions, and redemption proceeds to shareholders
if: (a) the shareholder fails to furnish the Fund with the shareholder's correct
taxpayer identification number or social security number; (b) the IRS notifies
the shareholder or the Fund that the shareholder has failed
<PAGE> 68
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect; or (c) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Non-U.S.
shareholders may be subject to U.S. tax rules that differ significantly from
those summarized above, including the likelihood that ordinary income dividends
to them would be subject to withholding of U.S. tax at a rate of 30% (or a lower
treaty rate, if applicable).
FUND INVESTMENTS
Market Discount. If the Fund purchases a debt security at a price lower than
the stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount." If the amount of
market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of: (a) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account); or (b) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by the Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
Original Issue Discount. Certain debt securities acquired by the Fund may be
treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by the Fund, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes as interest
and, therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies. Some debt securities may be
purchased by the Fund at a discount that exceeds the original issue discount on
such debt securities, if any. This additional discount represents market
discount for federal income tax purposes (see above).
Options, Futures and Forward Contracts. Any regulated futures contracts and
certain options (namely, nonequity options and dealer equity options) in which
the Fund may invest may be "section 1256 contracts." Gains (or losses) on these
contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by the
Fund may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Fund, and
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that the Fund may make with respect
to its straddle positions may also affect the amount, character and timing of
the recognition of gains or losses from the affected positions.
<PAGE> 69
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Fund are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Constructive Sales. Under certain circumstances, the Fund may recognize gain
from a constructive sale of an "appreciated financial position" it holds if it
enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
Section 988 Gains or Losses. Gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues income or other
receivables or accrues expenses or other 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 some investments, including debt securities and
certain forward contracts denominated in a foreign currency, gains or losses
attributable to fluctuations in the value of the foreign currency between the
acquisition and disposition of the position also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as "section 988" gains
or losses, increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income. If section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his or her Fund shares.
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS
Ernst & Young, LLP are the Fund's independent auditors providing audit and
tax return preparation services and assistance and consultation in connection
with the review of various Commission filings.
REPORTS
When available, the Fund will furnish, without charge, a copy of its Annual
and Semi-Annual Reports to Shareholders upon request to the Fund, 222 South
Riverside Plaza, Chicago, Illinois 60606 or call 1-800-621-1048.
FINANCIAL STATEMENTS
[to be provided by amendment]
<PAGE> 70
APPENDIX A -- RATINGS OF FIXED INCOME INVESTMENTS
STANDARD & POOR'S RATINGS GROUP BOND RATINGS
AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt--edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well
<PAGE> 71
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
<PAGE> 72
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements: Included in Part A: None
(i) Included in Part B: [to be filed by
amendment]
2.Exhibits
(a) Declaration of Trust of Registrant.*
(b) By-Laws of Registrant.*
(c) Not Applicable.
(d) Declaration of Trust and By-laws of Registrant.*
(e) Not Applicable.
(f) Not Applicable.
(g) Investment Management Agreement between Registrant and Scudder
Kemper Investments, Inc.*
(h) (1) Underwriting and Distribution Services Agreement between
Registrant and Kemper Distributors, Inc.*
(2) Form of Selling Group Agreement.*
(i) Not Applicable.
(j) Custodian Contract between Registrant and State Street Bank and
Trust Company. Filed herewith.
(k) (1) Administrative Services Agreement between Registrant and
Kemper Distributors, Inc.*
(2) Agency Agreement between Registrant and Kemper Service
Company.*
(3) Fund Accounting Services Agreement between Registrant and
Scudder Fund Accounting Corporation.*
(4) Distribution Plan for Class B shares.*
(5) Amended and Restated Multi-Distribution System Plan of
Registrant. To be filed by amendment.
(6) Distribution Plan for Class C Shares. To be filed by
amendment.
<PAGE> 73
(l) Opinion and Consent of Dechert Price & Rhoads. To be filed by
amendment.
(m) Not Applicable
(n) (1) Consent of independent auditors. To be filed by
amendment.
(2) Powers of Attorney*
(o) Not Applicable.
(p) Subscription Agreement for Initial Capital.**
(q) Not Applicable.
(r) Not Applicable.
- ------------
* Incorporated by reference to Pre-effective Amendment No. 1 to
Registrant's Registration Statement, as filed with the SEC on April 27, 1999.
** Incorporated by reference to Pre-effective Amendment No. 2 to
Registrant's Registration Statement, as filed with the SEC on May 25, 1999.
ITEM 25. MARKETING AGREEMENTS
See Underwriting and Distribution Services Agreement filed as Exhibit
(h) to this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration Fees................................................................................... $
------------
Legal Fees and Expenses............................................................................. $
------------
National Association of Securities Dealers, Inc. Fees............................................... $
------------
Accounting Fees and Expenses........................................................................ $
------------
Blue Sky Fees....................................................................................... $
------------
Miscellaneous Expenses.............................................................................. $
------------
Total...................................................................................... $
------------
</TABLE>
- ------------
ITEM 27. PERSON CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of , 1999, the each Class of shares of the Fund had the following
number of record owners.
<PAGE> 74
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares ________
Class B Shares None
Class C Shares None
ITEM 29. INDEMNIFICATION
A policy of insurance covering Scudder Kemper Investments, Inc., its affiliates
including Scudder Investor Services, Inc., and all of the registered investment
companies advised by Scudder Kemper Investments, Inc. insures the Registrant's
trustees and officers and others against liability arising by reason of an
alleged breach of duty caused by any negligent act, error or accidental omission
in the scope of their duties. Article IV, Sections 4.1 - 4.3 of the Registrant's
Declaration of Trust states as follows:
Section 4.1. No Personal Liability of Shareholders, Trustees, Etc. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property or the acts, obligations or affairs of the
Trust. No Trustee, officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person; and all such
Persons shall look solely to the Trust Property for satisfaction of claims of
any nature arising in connection with the affairs of the Trust. If any
Shareholder, Trustee, officer, employee, or agent, as such, of the Trust, is
made a party to any suit or proceeding to enforce any such liability of the
Trust, he shall not, on account thereof, be held to any personal liability. The
Trust shall indemnify and hold each Shareholder harmless from and against all
claims and liabilities, to which such Shareholder may become subject by reason
of his being or having been a Shareholder, and shall reimburse such Shareholder
for all legal and other expenses reasonably incurred by him in connection with
any such claim or liability. The indemnification and reimbursement required by
the preceding sentence shall be made only out of the assets of the one or more
Series of which the shareholder who is entitled to indemnification or
reimbursement was a shareholder at the time the act or event occurred which gave
rise to the claim against or liability of said shareholder. The rights accruing
to a Shareholder under this Section 4.1 shall not impair any other right to
which such Shareholder may be lawfully entitled, nor shall anything herein
contained restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not specifically provided
herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee, officer, employee or
agent of the Trust shall be liable to the Trust, its Shareholders, or to any
Shareholder, Trustee, officer, employee, or agent thereof for any action or
failure to act (including without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of trust) except for his own
bad faith, willful misfeasance, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the exceptions and
limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or officer of the Trust
shall be indemnified by the Trust to the fullest extent permitted by law against
all liability and against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or having been a Trustee
or officer and against amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal, administrative or
other, including appeals), actual or threatened; and the words
<PAGE> 75
"liability" and "expenses" shall include, without limitation, attorneys' fees,
costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b)No indemnification shall be provided hereunder to a Trustee or officer:
(i) against any liability to the Trust, a series thereof, or the
Shareholders by reason of a final adjudication by a court or other body before
which a proceeding was brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office;
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust;
(iii) in the event of a settlement or other disposition not involving a
final adjudication as provided in paragraph (b)(i) or (b)(ii) resulting in a
payment by a Trustee or officer, unless there has been a determination that such
Trustee or officer did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office:
(A) by the court or other body approving the settlement or other
disposition; or
(B) based upon a review of readily available facts (as opposed to a
full trial-type inquiry) by (x) vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the Disinterested Trustees
then in office act on the matter) or (y) written opinion of independent legal
counsel.
(c) The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or officer and shall
insure to the benefit of the heirs, executors, administrators and assigns of
such a person. Nothing contained herein shall affect any rights to
indemnification to which personnel of the Trust other than Trustees and officers
may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim, action,
suit or proceeding of the character described in paragraph (a) of this Section
4.3 may be advanced by the Trust prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the recipient to repay such amount if it is
ultimately determined that he is not entitled to indemnification under this
Section 4.3, provided that either:
(i) such undertaking is secured by a surety bond or some other
appropriate security provided by the recipient, or the Trust shall be insured
against losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees act on the matter) or an
independent legal counsel in a written opinion shall determine, based upon a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the recipient ultimately will be found
entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one who is
not (i) an Interested Person of the Trust (including anyone who has been
exempted from being an Interested Person by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or proceeding.
* * *
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant, pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification
<PAGE> 76
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question as to whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The description of the business of Scudder Kemper Investments, Inc. is
set forth under the caption "Investment Management and Other Services" in the
Prospectus and "Management-Investment Adviser" in the SAI forming part of this
Registration Statement.
The information as to the Directors and officers of Scudder Kemper
Investments, Inc. set forth in Scudder Kemper Investment's Form ADV filed with
the Securities and Exchange Commission (File No. 801-252), as amended through
the date hereof, is incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
Accounts and Records of the Fund are maintained at (i) the Fund's
office at 222 South Riverside Plaza, Chicago, Illinois 60606, (ii) the offices
of Scudder Kemper Investments, Inc. at 345 Park Avenue, New York, New York,
10154-0010, and (iii) the offices of Scudder Kemper Investments, Inc. at 2
International Place, Boston, Massachusetts 02110-4103.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, maintains all the records in its capacity as custodian of
the Registrant's assets. Kemper Service Company, 811 Main Street, Kansas City,
Missouri, maintains all the required records in its capacity as transfer,
dividend paying and shareholder service agent of the Registrant.
ITEM 32. MANAGEMENT SERVICES
Not Applicable.
ITEM 33. UNDERTAKINGS
1. Not Applicable
2. Not Applicable.
3. Not Applicable
4. a. Registrant undertakes to file during any period in which
offers or sales are being made, a post-effective amendment to this registration
statement: (i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933; (ii) to reflect in the Prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
b. Registrants undertakes that, for the purpose of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
<PAGE> 77
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
c. Registrant undertakes to remove from registration by means of
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
5. Not Applicable.
6. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional Information.
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boston, and State of Massachusetts, on this 2nd day
of September, 1999.
KEMPER FLOATING RATE FUND
By: /s/ Mark S. Casady
------------------
Mark S. Casady
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<S> <C> <C>
/s/ Mark S. Casady President (Principal September 2, 1999
- ------------------ Executive Officer)
Mark S. Casady
/s/ John R. Hebble Treasurer (Principal Financial September 2, 1999
- ------------------ and Accounting Officer)
John R. Hebble
* Trustee September 2, 1999
--------------
James E. Akins
Trustee September 2, 1999
- ------------------
James R. Edgar
* Trustee September 2, 1999
--------------
Arthur R. Gottschalk
* Trustee September 2, 1999
--------------
Frederick T. Kelsey
* Trustee September 2, 1999
--------------
Thomas W. Littauer
* Trustee September 2, 1999
--------------
Kathryn L. Quirk
</TABLE>
<PAGE> 79
<TABLE>
<S> <C> <C>
* Trustee September 2, 1999
--------------
Fred B. Renwick
* Trustee September 2, 1999
--------------
Cornelia M. Small
* Trustee September 2, 1999
--------------
John G. Weithers
</TABLE>
* By: /s/ Maureen Kane
-----------------
Maureen Kane
As Attorney-In-Fact
* Pursuant to Powers of Attorney previously filed.
<PAGE> 80
KEMPER FLOATING RATE FUND
EXHIBITS FILED WITH POST-EFFECTIVE AMENDMENT NO.1
EXHIBIT NO. EXHIBIT
- ----------- -------
2(j) Custodian Contract between Registrant and State
Street Bank and Trust Company.
<PAGE> 1
EXHIBIT (2)(j)(1)
CUSTODIAN CONTRACT
between
KEMPER FLOATING RATE FUND
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Employment of Custodian and Property to be Held By It...........................................1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States.............................................2
2.1 Holding Securities.....................................................................2
2.2 Delivery of Securities.................................................................2
2.3 Registration of Securities.............................................................4
2.4 Bank Accounts..........................................................................4
2.5 Availability of Federal Funds..........................................................5
2.6 Collection of Income...................................................................5
2.7 Payment of Fund Monies.................................................................5
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased...................................................................7
2.9 Appointment of Agents..................................................................7
2.10 Deposit of Securities in U.S. Securities System........................................7
2.11 Fund Assets Held in the Custodian's
Direct Paper System....................................................................8
2.12 Segregated Account.....................................................................9
2.13 Ownership Certificates for Tax Purposes ..............................................10
2.14 Proxies...............................................................................10
2.15 Communications Relating to Fund Securities............................................10
2.16 Services Relating to Loans............................................................10
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside the United States........................................................10
3.1 Appointment of Foreign Sub-Custodians.................................................10
3.2 Assets to be Held.....................................................................11
3.3 Foreign Securities Depositories.......................................................11
3.4 Agreements with Foreign Banking Institutions..........................................11
3.5 Access of Independent Accountants of the Fund.........................................11
3.6 Reports by Custodian..................................................................11
3.7 Transactions in Foreign Custody Account...............................................12
3.8 Liability of Foreign Sub-Custodians...................................................12
3.9 Liability of Custodian................................................................12
3.10 Reimbursement for Advances............................................................13
3.11 Monitoring Responsibilities...........................................................13
3.12 Branches of U.S. Banks................................................................13
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
3.13 Tax Law 14
4. Payments for Sales or Repurchases or Redemptions
of Shares .....................................................................................14
5. Proper Instructions............................................................................14
6. Actions Permitted without Express Authority....................................................15
7. Evidence of Authority..........................................................................15
8. Duties of Custodian with Respect to the Books of Account
and Calculations of Net Asset Value and Net Income.............................................16
9. Records 16
10. Opinion of Fund's Independent Accountants......................................................16
11. Reports to Fund by Independent Public Accountants..............................................16
12. Compensation of Custodian......................................................................17
13. Responsibility of Custodian....................................................................17
14. Effective Period, Termination and Amendment....................................................18
15. Successor Custodian............................................................................19
16. Interpretive and Additional Provisions........................................................ 19
17. Massachusetts Law to Apply.....................................................................20
18. Prior Contracts................................................................................20
19. Shareholder Communications Election............................................................20
</TABLE>
<PAGE> 4
CUSTODIAN CONTRACT
This Contract between Kemper Floating Rate Fund, a business trust
organized and existing under the laws of The Commonwealth of Massachusetts and
having its principal place of business at 222 South Riverside Plaza, Chicago,
Illinois 60606 (the "Fund"), and State Street Bank and Trust Company, a
Massachusetts trust company having its principal place of business at 225
Franklin Street, Boston, Massachusetts 02110 (the "Custodian"),
WITNESSETH:
THAT, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto do hereby agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including loans and participation and other interests in loans ("Loans") and
securities (as used herein, the term "securities" shall include Loans) which it
desires to be held in places within the United States of America ("domestic
securities") and securities it desires to be held outside the United States of
America ("foreign securities") pursuant to the provisions of the Fund's
declaration of trust (the "Declaration of Trust"). The Fund agrees to deliver to
the Custodian all securities and cash owned by it and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Fund from time to time, and the cash consideration
received by it for such new or treasury shares of beneficial interest of the
Fund ("Shares") as may be issued or sold from time to time. The Custodian shall
not be responsible for any property of the Fund held or received by the Fund and
not delivered to the Custodian.
Upon receipt of "Proper Instructions" (as such term is defined in
Article 5 of this Contract), the Custodian shall from time to time employ one or
more sub-custodians located in the United States of America, including any state
or political subdivision thereof and any territory over which its political
sovereignty extends (the "United States" or "U.S."), but only in accordance with
an applicable vote by the board of trustees of the Fund (the "Board of
Trustees") and provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian. The Custodian may employ as sub-custodians for the Fund's foreign
securities the foreign banking institutions and foreign securities depositories
designated in Schedule A hereto but only in accordance with the provisions of
Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of the Fund all non-cash property to be held by it in
the United States, including all documents, certificates and other
such instruments including any schedule of payments ("Financing
Documents") as are received by the Custodian, and all domestic
securities owned by the Fund other than (a) securities which are
maintained in a "U.S. Securities System" (as such term is defined in
Section 2.10 of this Contract) and (b) commercial paper of an issuer
for which State Street Bank and Trust Company acts as issuing and
paying agent ("Direct Paper") which is deposited and/or maintained in
the Custodian's Direct Paper System pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund and held by the Custodian or in a
U.S. Securities System account of the Custodian, which account shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for its customers ("U.S. Securities
System Account") or in the Custodian's Direct Paper book-entry system
account, which account shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise for its
customers ("Direct Paper System Account") only upon receipt of Proper
Instructions from the Fund, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
<PAGE> 5
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.10
hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that, in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's U.S.
Securities System Account, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent for the
Fund (the "Transfer Agent"), for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Fund's currently effective prospectus and statement of
additional information (the "Prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
<PAGE> 6
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund, a
certified copy of a resolution of the Board of Trustees or of
the executive committee thereof signed by an officer of the
Fund and certified by the Fund's Secretary or Assistant
Secretary specifying the securities of the Fund to be
delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of
such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a nominee
to be used in common with other registered investment companies having
the same investment adviser as the Fund, or in the name or nominee name
of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the Fund under the
terms of this Contract shall be in "street name" or other good delivery
form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize reasonable
efforts only to (i) timely collect income due the Fund on such
securities and (ii) notify the Fund of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or
exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund,
subject only to draft or order by the Custodian acting pursuant to the
terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for
the account of the Fund, other than cash maintained by the Fund in a
bank account established and used in accordance with Rule 17f-3 under
the Investment Company Act of 1940, as amended. Funds held by the
Custodian for the Fund may be deposited by it to its credit as
Custodian in the banking department of the Custodian or in such other
banks or trust companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank or trust company
shall be qualified to act as a custodian under the Investment Company
Act of 1940, as amended (the "Investment Company Act") and that each
such bank or trust company and the funds to be deposited with each such
bank or trust company shall on behalf of the Fund be approved by vote
of a majority of the Board of Trustees. Such funds shall be deposited
by the Custodian in its capacity as Custodian and shall be withdrawable
by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon agreement between the Fund and the
Custodian, the Custodian shall, upon the receipt of Proper Instructions
from the Fund, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in
the amount of checks received in payment for Shares of the Fund which
are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3 and that
certain Loan Services Addendum by and between the Fund and the
Custodian dated as of the date hereof (the "Loan Services Addendum")
attached hereto, the Custodian shall collect on a timely basis all
income and other payments with respect to United States-registered
securities held hereunder and payments with respect to Loans to which
the Fund shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to domestic bearer securities if, on the
date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such income, as
collected, to the Fund's account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for payment all
coupons and other income items requiring presentation as and when they
become due and shall collect interest when due on securities held
hereunder. Collection of income due the Fund on domestic securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund; the Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data in its possession as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian
of the income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund, which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out monies of the Fund in the
following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Fund but only (a) against the delivery of such securities
or evidence of title to such options, futures contracts or
options on futures contracts to the Custodian (or any bank,
banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment
Company Act to act as a custodian and has been designated by
the
<PAGE> 7
Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
U.S. Securities System, in accordance with the conditions set
forth in Section 2.10 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.11; (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the Custodian
along with written evidence of the agreement by the Custodian
to repurchase such securities from the Fund or (e) for
transfer to a time deposit account of the Fund in any bank,
whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions from the Fund
as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management fees,
accounting fees, transfer agent fees, legal fees and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Fund
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For the fulfillment of the Fund's obligations with respect
to unfunded commitments incurred in connection with Loans; or
8) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund, a certified
copy of a resolution of the Board of Trustees or of the
executive committee thereof signed by an officer of the Fund
and certified by the Fund's Secretary or an Assistant
Secretary, specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the
person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of the Fund is made by the Custodian in advance of receipt of
the securities purchased in the absence of specific written
instructions from the Fund to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as
if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act to
act as a custodian, as its agent to carry out such of the provisions of
this Article 2 as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in U.S. Securities Systems. The Custodian may
deposit and/or maintain domestic securities owned by the Fund in a
clearing agency registered with the Securities and Exchange Commission
(the "SEC") under Section 17A of the Exchange Act, which acts as a
securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies (a "U.S.
Securities System") in accordance with applicable Federal Reserve Board
and SEC rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep domestic securities of the Fund in a
U.S. Securities System provided that such securities are
represented in a U.S. Securities System Account;
2) The records of the Custodian with respect to securities of the
Fund which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Fund;
<PAGE> 8
3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the U.S. Securities System Account and (ii) the
making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Fund; the
Custodian shall transfer securities sold for the account of
the Fund upon (i) receipt of advice from the U.S. Securities
System that payment for such securities has been transferred
to the U.S. Securities System Account and (ii) the making of
an entry on the records of the Custodian to reflect such
transfer and payment for the account of the Fund. Copies of
all advices from the U.S. Securities System of transfers of
securities for the account of the Fund shall identify the
Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund in the form of a written
advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the
U.S. Securities System for the account of the Fund;
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for
safeguarding securities deposited in the U.S. Securities
System;
5) The Custodian shall have received from the Fund the initial or
annual certificate, as the case may be, required by Article 14
hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the U.S. Securities System
by reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
U.S. Securities System; at the election of the Fund, it shall
be entitled to be subrogated to the rights of the Custodian
with respect to any claim against the U.S. Securities System
or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or
damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in the
Direct Paper System Account which shall not include any assets
of the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next business
day following such transfer and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the account of the
Fund; and
6) Upon the reasonable request of the Fund, the Custodian shall
provide the Fund with any report on the Direct Paper System's
system of internal accounting controls which had been prepared
as of the time of such request.
<PAGE> 9
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund establish and maintain a segregated account
or accounts for and on behalf of the Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in a U.S. Securities System Account by the
Custodian pursuant to Section 2.10 hereof (i) in accordance with the
provisions of any agreement among the Fund, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the
NASD (or any futures commission merchant registered under the Commodity
Exchange Act), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities exchange
(or the Commodity Futures Trading Commission or any registered Contract
Market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by the
Fund, (iii) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the SEC relating to the maintenance
of segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, but only, in the case of this clause
(iv), upon receipt of, in addition to Proper Instructions from the
Fund, a certified copy of a resolution of the Board of Trustees or of
the executive committee thereof signed by an officer of the Fund and
certified by the Fund's Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of the Fund held by it and
in connection with transfers of such securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.15 Communications Relating to Fund Securities. Subject to the provisions
of Section 2.3, the Custodian shall transmit promptly to the Fund all
written information (including, without limitation, pendency of calls
and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund and the maturity of futures contracts purchased or
sold by the Fund) received by the Custodian from issuers (which term,
for this purpose, includes sellers of Loans) of the securities being
held for the Fund. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Fund all written information
received by the Custodian from issuers of the securities whose tender
or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Fund desires to take action with
respect to any tender offer, exchange offer or any other similar
transaction, the Fund shall notify the Custodian at least three (3)
business days prior to the date on which the Custodian is to take such
action.
2.16 Services Relating to Loans. The Custodian shall, pursuant to the terms
thereof, perform certain additional services with respect to the Fund's
Loans as may be described in the Loan Services Addendum.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto (the "foreign sub-custodians"). Upon
receipt of Proper Instructions, together with a certified resolution of
the Board of Trustees, the Custodian and the Fund may agree to amend
Schedule A hereto from time to time to designate additional foreign
banking institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
foreign sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, and (b) cash and cash
equivalents in such amounts as the Custodian or the Fund may determine
to be reasonably necessary to effect the Fund's foreign securities
transactions. The Custodian shall identify on its books as belonging to
the Fund, the foreign securities of the Fund held by each foreign
sub-custodian.
<PAGE> 10
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon
in writing by the Custodian and the Fund, assets of the Funds shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as
sub-custodians pursuant to the terms hereof. Where possible, such
arrangements shall include entry into agreements containing the
provisions set forth in Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that (a) the assets of the
Fund will not be subject to any right, charge, security interest, lien
or claim of any kind in favor of the foreign banking institution or its
creditors or agent, except a claim of payment for their safe custody or
administration; (b) beneficial ownership of the assets of the Fund will
be freely transferable without the payment of money or value other than
for custody or administration; (c) adequate records will be maintained
identifying the assets as belonging to the Custodian on behalf of its
customers; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted
under applicable law the independent public accountants for the Fund,
will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign sub-custodian
will be subject only to the instructions of the Custodian or its
agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use reasonable efforts to arrange for the
independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by foreign sub-custodians,
including but not limited to an identification of entities having
possession of Fund securities and other assets and advices or
notifications of any transfers of securities to or from each custodial
account maintained by a foreign banking institution for the Custodian
on behalf of its customers indicating, as to securities acquired for
the Fund the identity of the entity having physical possession of such
securities.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.7, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the United States by
foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the
Fund and delivery of securities maintained for the account of the Fund
may be effected in accordance with the customary established securities
trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or
to a dealer therefor (or an agent for such purchaser or dealer) against
a receipt with the expectation of receiving later payment for such
securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may
be maintained in the name of such entity's nominee to the same extent
as set forth in Section 2.3 of this Contract, and the Fund agrees to
hold any such nominee harmless from any liability as a holder of record
of such securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care
in the performance of its duties and to indemnify, and hold harmless,
the Custodian and the Fund from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of the
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made
whole for any such loss, damage, cost, expense, liability or claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a
U.S. bank as contemplated by Section 3.12 hereof, the Custodian shall
not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation,
<PAGE> 11
currency restrictions, or acts of war or terrorism or any loss where
the sub-custodian has otherwise exercised reasonable care.
Notwithstanding the foregoing provisions of this Section 3.9, in
delegating custody duties to State Street London Ltd., the Custodian
shall not be relieved of any responsibility to the Fund for any loss
due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses
(excluding a bankruptcy or insolvency of State Street London Ltd. not
caused by political risk) due to Acts of God, nuclear incident or
other losses under circumstances where the Custodian and State Street
London Ltd. have exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of the Fund
including the purchase or sale of foreign exchange or of contracts for
foreign exchange, or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any
property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of
the Fund's assets to the extent necessary to obtain reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund (during the month of June) information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the Custodian
will promptly inform the Fund in the event that the Custodian learns of
a material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the SEC is notified by such foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the local currency
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally
accepted U.S. accounting principles).
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
Fund assets are maintained in a foreign branch of a banking institution
which is a "bank" as defined by Section 2(a)(5) of the Investment
Company Act meeting the qualification set forth in Section 26(a) of
said Act. The appointment of any such branch as a sub-custodian shall
be governed by Article 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in
an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the
direction of the Custodian, State Street London Ltd. or both.
3.13 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Fund or the Custodian
as custodian of the Fund by the tax law of the United States. It shall
be the responsibility of the Fund to notify the Custodian of the
obligations imposed on the Fund or the Custodian as custodian of the
Fund by the tax law of jurisdictions other than those mentioned in the
above sentence, including responsibility for withholding and other
taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist the
Fund with respect to any claim for exemption or refund under the tax
law of jurisdictions for which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent and deposit into the account of the Fund such payments as are
received for Shares of the Fund issued or sold from time to time by the Fund.
The Custodian will provide timely notification to the Fund and the Transfer
Agent of any receipt by it of payments for Shares of the Fund.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees pursuant thereto, the Custodian shall, upon receipt of instructions
from the Transfer Agent, make funds available for payment to holders of Shares
who have delivered to the Transfer Agent a request for redemption or repurchase
of their Shares. In connection with the redemption or repurchase of Shares, the
Custodian is authorized upon receipt of instructions from the Transfer Agent to
wire funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares, the
Custodian shall honor checks drawn on the Custodian by a holder of Shares, which
checks have been furnished by the Fund to
<PAGE> 12
the holder of Shares, when presented to the Custodian in accordance with such
procedures and controls as are mutually agreed upon from time to time between
the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialed by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. If given pursuant to procedures to be agreed upon by the
Custodian and the Fund, Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices. For purposes of this
Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which requires a segregated
asset account in accordance with Section 2.12.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Board of
Trustees.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Trustees as conclusive evidence (a) of the authority of any person to act in
accordance with such vote or (b) of any determination or of any action by the
Board of Trustees pursuant to the Declaration of Trust as described in such
vote, and such vote may be considered as in full force and effect until receipt
by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees to keep the books of
account of the Fund and/or compute the net asset value per share of the
outstanding Shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Fund as described in the Prospectus and shall advise the Fund and the
Transfer Agent daily of the total amount of such net income and, if instructed
in writing by an officer of the Fund to do so, shall advise the Transfer Agent
periodically of the division of such net income among its various components.
The calculations of the net asset value per share and the daily income of the
Fund shall be made at the time or times described from time to time in the
Prospectus.
<PAGE> 13
9. Records
The Custodian shall with respect to the Fund create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company
Act, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder. All such records shall be the property of the Fund and shall at all
times during the regular business hours of the Custodian be open for inspection
by duly authorized officers, employees or agents of the Fund and employees and
agents of the SEC. The Custodian shall, at the Fund's request, supply the Fund
with a tabulation of securities owned by the Fund and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.
10. Opinion of Fund's Independent Accountants
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-2 and N-SAR or other annual
reports to the SEC and with respect to any other SEC requirements.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports shall be of
sufficient scope and in sufficient detail, as may reasonably be required by the
Fund to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian as agreed upon from time to time between the
Fund and the Custodian.
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Section 3.9)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by Section 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
<PAGE> 14
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to the Custodian.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, the purchase or sale of foreign exchange or of
contracts for foreign exchange, and assumed settlement), or in the event that
the Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any property
at any time held for the account of the applicable Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund's assets
to the extent necessary to obtain reimbursement.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of the date of its execution,
shall continue in full force and effect until terminated as hereinafter
provided, may be amended at any time by mutual agreement of the parties hereto
and may be terminated by either party by an instrument in writing delivered or
mailed, postage prepaid to the other party, such termination to take effect not
sooner than thirty (30) days after the date of such delivery or mailing;
provided, however that the Custodian shall not with respect to the Fund act
under Section 2.10 hereof in the absence of receipt of an initial certificate of
the Secretary or an Assistant Secretary that the Board of Trustees has approved
the initial use of a particular Securities System by the Fund, as required by
Rule 17f-4 under the Investment Company Act and that the Custodian shall not
with respect to the Fund act under Section 2.11 hereof in the absence of receipt
of an initial certificate of the Secretary or an Assistant Secretary that the
Board of Trustees has approved the initial use of the Direct Paper System by the
Fund; provided further, however, that the Fund shall not amend or terminate this
Contract in contravention of any applicable federal or state regulations, or any
provision of the Declaration of Trust, and further provided, that the Fund may
at any time by action of the Board of Trustees (i) substitute another bank or
trust company for the Custodian by giving notice as described above to the
Custodian or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
15. Successor Custodian
If a successor custodian shall be appointed by the Board of Trustees,
the Custodian shall, upon termination, deliver to such successor custodian at
the offices of the Custodian, duly endorsed and in the form for transfer, all
securities of the Fund then held by it hereunder and shall transfer to an
account of the successor custodian all of the securities of the Fund held in a
Securities System. If no such successor custodian shall be appointed, the
Custodian shall, in like manner, upon receipt of a certified copy of a vote of
the Board of Trustees, deliver at the offices of the Custodian and transfer such
securities, funds and other properties in accordance with such vote. In the
event that no written order designating a successor custodian or certified copy
of a vote of the Board of Trustees shall have been delivered to the Custodian on
or before the date when such termination shall become effective, then the
Custodian shall have the right to deliver to a bank or trust company, which is a
"bank" as defined in the Investment Company Act, doing business in Boston,
Massachusetts, or New York, New York, of its own selection, having an aggregate
capital, surplus, and undivided profits, as shown by its last published report,
of not less than $25,000,000, all securities, funds and other properties held by
the Custodian and all instruments held by the Custodian relative thereto and all
other property held by it under this Contract on behalf of the Fund and to
transfer to an account of such successor custodian all of the securities of the
Fund held in any Securities System. Thereafter, such bank or trust company shall
be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force
<PAGE> 15
and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Declaration of Trust. No interpretive or additional provisions made as
provided in the preceding sentence shall be deemed to be an amendment of this
Contract.
17. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
18. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the assets of the Fund.
19. Shareholder Communications Election
SEC Rule 14b-2 requires banks which hold securities for the account of
customers to respond to requests by issuers of securities for the names,
addresses and holdings of beneficial owners of securities of that issuer held by
the bank unless the beneficial owner has expressly objected to disclosure of
this information. In order to comply with the rule, the Custodian needs the Fund
to indicate whether it authorizes the Custodian to provide the Fund's name,
address, and share position to requesting companies whose securities the Fund
owns. If the Fund tells the Custodian "no", the Custodian will not provide this
information to requesting companies. If the Fund tells the Custodian "yes" or
does not check either "yes" or "no" below, the Custodian is required by the rule
to treat the Fund as consenting to disclosure of this information for all
securities owned by the Fund or any funds or accounts established by the Fund.
For the Fund's protection, the Rule prohibits the requesting company from using
the Fund's name and address for any purpose other than corporate communications.
Please indicate below whether the Fund consents or objects by checking one of
the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of May 26, 1999.
<PAGE> 16
ATTEST KEMPER FLOATING RATE FUND
By:
- ---------------------- -------------------------------
Name: Name:
Title:
ATTEST STATE STREET BANK AND TRUST COMPANY
By:
- ---------------------- ------------------------------
Name: Stephanie L. Poster Name: Ronald E. Logue
Title: Vice President Title: Vice Chairman
<PAGE> 17
SCHEDULE A
17F-5 APPROVAL
The Board of Trustees of Kemper Floating Rate Fund has approved the following
foreign banking institutions and foreign securities depositories within State
Street's Global Custody Network for use as subcustodians for the Fund's
securities, cash and cash equivalents held outside of the United States:
NONE
<PAGE> 18
LOAN SERVICES ADDENDUM
TO
CUSTODIAN CONTRACT DATED AS OF MAY 26, 1999
BY AND BETWEEN
KEMPER FLOATING RATE FUND AND STATE STREET BANK AND TRUST COMPANY
This Loan Services Addendum is made as of the twenty-sixth day of May, 1999, by
and between Kemper Floating Rate Fund (the "Fund") and State Street Bank and
Trust Company (the "Custodian").
A. The Fund and the Custodian have entered into that certain Custodian
Contract dated as of May 26, 1999 (as amended, modified or supplemented from
time to time, the "CUSTODIAN CONTRACT").
B. Pursuant to Section 2.16 of the Custodian Contract, the Fund has
requested and the Custodian has agreed that the Custodian shall, as the Fund's
agent, perform certain supplemental services in accordance with, and subject to
the terms of, this Addendum, all as more particularly set forth below.
1. Capitalized Terms.
Capitalized terms used herein and not defined herein are used as defined in
the Custodian Agreement.
2. Safekeeping.
All Financing Documents delivered to the Custodian pursuant to Section 1 of
the Custodian Contract shall be held by the Custodian at its offices in Boston,
Massachusetts.
3. Duties of the Custodian with Respect to Loan Services.
(a) The Custodian shall accept such Financing Documents as may be
delivered to it from time to time by the Fund.
(b) In the event payments with respect to a Loan ("Loan Payment") are
not received by the Custodian on the date on which they are due ("Payment Date")
as reflected in the Payment Schedule (as such term is defined in Section 4(c)
below) of the Loan, or in the case of interest payments, not received either on
the interest payable date (the "Interest Payable Date") of the Loan or in the
amount of their accrued interest payable, the Custodian shall promptly, but in
no event later than one (1) business day after the Payment Date or the Interest
Payable Date, give telephonic notice to the party obligated under the Financing
Documents to make such Loan Payment (the "Obligor") of its failure to make
timely payment and also notify the Fund of such Obligor's failure to make the
Loan Payment. The Custodian shall have no responsibility with respect to the
collection of Loan Payments that are past due, other than the duty to notify the
Obligor and the Fund as provided herein.
(c) The Custodian shall have no responsibilities or duties whatsoever
under this Addendum or in the Custodian Contract, with respect to Loans or the
Financing Documents, except for such responsibilities as are expressly set forth
herein and in the Custodian Contract. Without limiting the generality of the
foregoing, the Custodian shall have no obligation to preserve any rights against
prior parties or to exercise any right or perform any obligation in connection
with the Loans. In case any question arises as to its duties hereunder, the
Custodian may request instructions from the Fund and shall be entitled at all
times to refrain from taking any action unless it has received Proper
Instructions from the Fund and the Custodian shall in all events have no
liability, risk or cost for any action taken pursuant to and in compliance with
the Proper Instructions. Further, and without limiting the generality of the
foregoing, so long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Addendum and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties.
<PAGE> 19
(d) The Custodian shall be held to the exercise of reasonable care in
carrying out the provisions of this Addendum, but shall be kept indemnified by
and shall be without liability to the Fund for any action taken or omitted by it
in good faith without negligence. Without limiting the generality of the
foregoing, the Custodian shall be only responsible and accountable for Loan
Payments actually received by it and identified as for the account of the Fund.
Further, any and all credits and payments credited to the Fund, with respect to
Loans, shall be conditional upon clearance and actual receipt by the Custodian
of final payment thereon.
(e) The Custodian shall, upon the Fund's request, release to the Fund's
investment adviser or to any party as the Fund may specify, any Financing
Documents being held on behalf of the Fund.
4. Responsibilities of the Fund.
With respect to each Loan held by the Custodian hereunder in accordance
with the provisions of the Custodian Contract and the provisions hereof, the
Fund shall (a) cause the Financing Documents evidencing such Loan to be
delivered to the Custodian; (b) include with such Financing Documents an
amortization schedule of payments (the "Payment Schedule") identifying the
amount and due dates of scheduled principal payments; and (c) cause the
Custodian to be named as its nominee for payment purposes under the Financing
Documents or otherwise provide for the direct payment of the Payments to the
Custodian.
In the event that, pursuant to Section 8 of the Custodian Contract, the
Fund directs the Custodian to compute the net asset value per share of the
outstanding Shares of the Fund, the Fund shall from time to time designate both
the pricing sources to be utilized and the tolerance ranges to be applied by the
Custodian via a price source authorization form, in form and substance
satisfactory to the Custodian which form, inter alia, provides that the
Custodian shall have no liability for any incorrect data provided to it by a
pricing source, including without limitation, a third party pricing service, the
Fund or an investment manager.
5. Instructions; Authority to Act.
The certificate of the Secretary or an Assistant Secretary of the Fund,
identifying certain individuals to be officers of the Fund or employees of the
investment adviser of the Fund authorized to sign any such instructions, may be
received and accepted as conclusive evidence of the incumbency and authority of
such to act and may be considered by the Custodian to be in full force and
effect until it receives written notice to the contrary from the Secretary or
Assistant Secretary of the Fund. Notwithstanding any other provision of this
Addendum or the Custodian Contract, the Custodian shall have no responsibility
to ensure that any investment by the Fund with respect to Loans has been
authorized.
6. Amendment and Termination.
This Addendum may be amended by the Fund and the Custodian at any time, but
only in writing by an instrument signed by both parties. This Addendum shall
terminate upon the terms provided for in the Custodian Contract with respect to
its termination, or upon the termination of the Custodian Agreement, provided
that the Fund has the express right to terminate this Addendum upon thirty (30)
days written notification.
7. Attachment.
In case any portion of the Loans or the Financing Documents shall be
attached or levied upon pursuant to an order of court, or the delivery or
disbursement thereof shall be stayed or enjoined by an order of court, or any
other order, judgment or decrees shall be made or entered by any court affecting
the property of the Fund or any act of the Custodian relating thereto, the
Custodian is hereby expressly authorized in its sole discretion to obey and
comply with all orders, judgments or decrees so entered or issued, without the
necessity of inquire whether such court had jurisdiction, and, in case the
Custodian obeys or complies with any such order, judgment or decree, it shall
not be liable to anyone by reason of such compliance.
8. Parties in Interest; No Third Party Benefit.
This Addendum shall be binding upon and inure to the benefit of the
respective successors and assigns of the parties hereto. This Addendum is not
intended for, and shall not be construed to be intended for, the benefit of any
third parties and may not be relied upon or enforced by any third parties.
<PAGE> 20
9. Notices, etc.
All notices, applications and other communications hereunder shall be in
writing and shall be deemed to have been given or made when delivered by
recognized overnight delivery service or sent by telecopy transmission:
(a) if to the Fund, c/o Scudder Kemper Investments, Inc., 222 South
Riverside Plaza, Chicago, Illinois 60606, Attention , or such
other address as may have been furnished to the Custodian in writing by the
Fund; and
(b) if to the Custodian, to State Street Bank and Trust Company, Two
International Place, 2IP/5, Boston, Massachusetts 02110, Attention: Corporate
Trust, or at such other address as may have been furnished to the Fund by the
Custodian in writing, with a copy to State Street Bank and Trust Company, One
Heritage Drive, JPB/2N, North Quincy, Massachusetts 02171, Attention: Donald P.
DeMarco, Vice President.
10. Examination of Securities and Related Documents.
Upon the Fund's reasonable prior notice to the Custodian, the Board of
Trustees, the Fund's accountants, attorneys and auditors will be permitted to
examine the Financing Documents then in the physical possession of the Custodian
and any records pertaining thereto during the Custodian's normal business hours.
11. Headings.
The headings set forth in this Addendum appear for convenience only and
shall not affect the interpretation of this Addendum.
12. Governing Law.
This Addendum shall be construed and enforced in accordance with, and
rights of the parties shall be governed by, the internal laws of The
Commonwealth of Massachusetts.
13. Severability.
In the event any term hereof is determined to be invalid or
unenforceable, such determination shall not affect the remaining terms.
14. Non-Assignability.
The rights and obligations of the parties to this Addendum are
non-assignable.
