As filed with the Securities and Exchange Commission on March 23, 1999
1933 Act File No. 33-______
1940 Act File No. 811-_____
- -------------------------------------------------------------------------------
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. ___
|_| Post-Effective Amendment No. ___
and
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
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) 781-1121
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
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement.
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|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=========================== --------------------- --------------------------- -------------------------- =====================
<S> <C> <C> <C> <C> <C>
Proposed Maximum
Title of Securities Amount Being Proposed Maximum Offering Aggregate Offering Amount of
Being Registered Registered Price Per Unit(1) Price(1) Registration Fee(2)
=========================== ===================== =========================== ========================== =====================
Common Shares of 500,000 $2.00 $1,000,000 $278
Beneficial Interest (par
value $.01 per share)
=========================== ===================== =========================== ========================== =====================
<FN>
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933.
(2) Transmitted prior to filing.
</FN>
</TABLE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
<PAGE>
KEMPER FLOATING RATE FUND
CROSS-REFERENCE SHEET
PART A
<TABLE>
<CAPTION>
Item No. Caption Location in Prospectus
- -------- ------- ----------------------
<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................................Not.Applicable
5. Plan of Distribution................................Front.Cover.Page; Prospectus Summary;
Offering 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>
<PAGE>
PART B
<TABLE>
<CAPTION>
Location in Statement
Caption of Additional Information
<S> <C> <C>
Item No.
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
Policy; Repurchase Offer Fundamental
Policy; Additional Information about
Investments and Investment Techniques
18. Management..........................................Management...
19. Control Persons and Principal Holders of
Securities..........................................Not.Applicable
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.
<PAGE>
SUBJECT TO COMPLETION
Dated March 23, 1999
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor offers
to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation or offer to buy nor shall there be any sale of these securities in
any State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
Prospectus
Kemper Floating Rate Fund
Kemper Floating Rate Fund (the "Fund") is a newly-organized, non-diversified
closed-end management investment company that is continuously offered and makes
quarterly repurchase offers for its securities at net asset value, subject to
certain conditions. 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 by investing primarily in interests in senior
floating rate loans ("Senior Loans"), the interest rates of which float
periodically based upon a benchmark indicator of prevailing interest rates.
Senior Loans are business loans that have a senior right to payment. They are
made to corporations and other borrowers and are often secured by specific
assets of the borrower. 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.
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.
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. See "Risk
Factors and Special Considerations" beginning on page ___. The Fund has no
current intention of borrowing to finance long-term portfolio investment, but
may borrow to satisfy repurchases, to fund commitments to purchase Senior Loans,
and to manage cash flow.
This prospectus applies to the offering of Class B shares of beneficial interest
of the Fund, which may be continuously issued and sold from time to time by the
Fund (the "Offering") through Kemper Distributors, Inc. (the "Distributor"), as
distributor and principal underwriter, and through broker-dealers who have
entered into selected dealer agreements with the Distributor. See "Plan of
Distribution." During the initial offering period, the Class B shares will be
offered at $2.00 per share. Thereafter, the shares will be sold at a price per
share equal to net asset value. There is no initial sales charge or underwriting
discount on purchases of shares. The Distributor will pay the broker-dealers and
financial service firms ("selected dealers") participating in the continuous
offering. The minimum initial investment is $1,000 ($250 for individual
retirement accounts). Orders for Class B shares will only be accepted by
selected dealers prior to the closing date of the initial offering period,
currently scheduled for May 25, 1999. Thereafter, orders will be accepted by
selected dealers and the Distributor.
The Fund is currently offering one class of common shares, called "Class B",
which will not be subject to a front-end sales commission, but will be subject
to a declining contingent deferred sales charge over a four year period and an
annual distribution fee, as well as other expenses. Although the Fund currently
offers only Class B shares, the Fund may in the future offer other classes of
shares, which may be subject to a front-end sales commission or a contingent
deferred sales charge.
Class B shares are being offered at $2.00 per share during an initial period
scheduled to end on May 25, 1999 (the "Initial Offering Period"), and in a
continuous offering thereafter. Orders received by the Distributor after May 25,
1999 will be priced at the Fund's net asset value. The Initial Offering Period
is subject to adjustment by agreement between the Fund and the Distributor.
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. 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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON 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 Securities and Exchange
Commission (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 SEC's website (www.sec.gov).
-----------------
<TABLE>
<CAPTION>
------------------------------ ----------------------------- -------------------------- -------------------------
Price to Public(1) Sales Load(2) Proceeds to Fund(3)
------------------------------ ----------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
------------------------------ ----------------------------- -------------------------- -------------------------
Per Class B share $2.00 None $2.00
Total [ ] None [ ]
------------------------------ ----------------------------- -------------------------- -------------------------
<FN>
(1) The shares are offered on a best efforts basis at a price of $2.00 per
share during the Initial Offering Period and at net asset value
thereafter. The proceeds of the initial offering will be received by
the Fund and invested pursuant to the Fund's investment policies. It is
estimated that the proceeds of the initial offering will be invested
over a period of one month, subject to market conditions.
(2) Class B shares are subject to a contingent deferred sales charge, a
distribution fee, and an administrative services fee. The Distributor
will pay all sales commissions to authorized firms from its own assets.
(3) Assuming the sale of all shares registered hereby, and exclusion of
approximately [$_______] of organizational and initial offering
expenses payable by the Fund. These expenses will be recognized by the
Fund and charged against the Fund's income in its first fiscal period.
</FN>
</TABLE>
The date of this Prospectus is __________, 1999
<PAGE>
TABLE OF CONTENTS
Prospectus Summary...........................................................4
Risk Factors And Special Considerations At A Glance..........................6
Fund Expenses................................................................8
Use Of Proceeds..............................................................9
Investment Objective And Policies............................................9
General Information On Senior Loans.........................................14
Risk Factors And Special Considerations.....................................16
Offering Of Shares..........................................................18
Repurchase Of Shares........................................................22
Special Features............................................................25
Description Of The Fund.....................................................28
Investment Management And Other Services....................................30
Dividends And Distributions.................................................32
Tax Matters.................................................................33
Performance Information.....................................................33
Legal Matters...............................................................34
Registration Statement......................................................34
Shareholder Reports.........................................................34
Financial Statements........................................................34
Table Of Contents Of Statement Of Additional Information....................35
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this Prospectus.
======================================= =======================================
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 by primarily acquiring
interests in Senior Loans with interest
rates that float periodically based on a
benchmark indicator of prevailing
interest rates, such as the Prime Rate
or the London Inter-Bank Offered Rate
("LIBOR"). 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 also employ techniques such as
borrowing to accommodate cash flow, to
fund commitments to purchase Senior
Loans, and to finance repurchase offers,
but does not anticipate borrowing to
finance long-term investment.
- --------------------------------------- ======================================
Continuous Offering The Fund intends continuously to offer
its Shares through Kemper Distributors,
Inc. (the "Distributor"), as principal
underwriter, and through selected
dealers at a public offering price of
$2.00 per share during the Initial
Offering Period, and at a price equal to
the net asset value per share
thereafter. Minimum initial investments
are $1,000 ($250 for individual
retirement accounts) and minimum
subsequent investments are $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 is invested
in Senior Loans. Up to 20% of total
assets may be held in cash and other
investments, including fixed-rate debt
obligations, short- to medium-term
notes, high-yield/high-risk securities,
equity securities, hybrid and synthetic
loans, and asset-backed securities. A
maximum of 25% of the Fund's total
assets may be invested in any one
industry.
The Fund invests at least 90% of its
total assets in partnerships, limited
liability companies, or other business
entities organized under U.S. law or
domiciled in Canada or U.S. territories
and possessions. The Senior Loans 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 that are organized or
located in countries other than the
United States.
- --------------------------------------- ======================================
======================================= ======================================
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
repurchases are scheduled to occur in
the months of February, May, August and
November.
======================================= ======================================
Distributions Income dividends are 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.
======================================= ======================================
Investment Adviser Scudder Kemper Investments, Inc.
======================================= ======================================
Distributor and Administrative
Services Provider Kemper Distributors, Inc.
======================================= ======================================
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
This Prospectus contains certain statements that may be deemed to be
"forward-looking statements." Actual results could differ materially from those
projected in the forward-looking statements as a result of uncertainties set
forth below and elsewhere in the Prospectus. For additional information, see
"Risk Factors and Special Considerations."
- --------------------------------------- =======================================
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 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 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.
---------------------------------------
=======================================
Borrowing The Fund is authorized to borrow money
in an amount up to 33 1/3% of the Fund's
assets (after giving effect to the
amount borrowed). The Fund currently
intends to borrow only for the purposes
of obtaining short-terms credits in
connection with repurchase offers, to
manage cash flow, and to fund
commitments to purchase Senior Loan
interests. 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 Trust's common shares
of beneficial interest, which include
the Class B 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, and the terms of such
borrowings may grant lenders certain
voting rights in the event of default in
the payment of interest or the repayment
of principal. Interest payments and fees
incurred in connection with such
borrowings will reduce the amount of net
income available for payment to the
holders of commons shares. The Fund does
not currently intend to 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 (after giving
effect to the amount borrowed).
- --------------------------------------- =======================================
- --------------------------------------- =======================================
Limited Secondary Market Because of a limited secondary market
for Senior Loans for Senior Loans, the Fund may be
limited in its ability to sell portfolio
holdings at carrying value 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 purchase of high-yield/high risk
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 value of the Fund's
shares, particularly in response to
economic downturns.
======================================= =======================================
======================================= =======================================
<PAGE>
FUND EXPENSES
The following table is intended to assist the Fund's shareholders (the
"Shareholders") in understanding the various costs and expenses associated with
investing in Class B shares of the Fund. Because the Fund does not yet have an
operating history, this information is based on estimated fees, expenses and net
assets for the fiscal year ending November 30, 1999.
Shareholder Transaction Expenses(1)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) ............ NONE
Maximum Sales Charge on Reinvested
Dividends......................................... NONE
Maximum Deferred Sales Charge (Load) (2) .......... 3.00%
Exchange Fee ...................................... NONE
Annual Expenses (estimated as a percentage
of average net assets)
Management Fees (3) .............................. ___%
Administrative Services Fee (4) .................. .25%
Distribution Fee (6)................. ............ ___%
Other Operating Expenses (5) ..................... .45%
Total Annual Expenses.................................. ___%
----
Total Annual Expenses (After Minimum Fee Waiver (7) ___%
(1) Investment dealers and other firms may independently charge additional fees
for shareholder transactions or for advisory services; please see their
materials for details.
(2) The maximum contingent deferred sales charge ("CDSC") on Class B shares
applies to repurchases during the first year. The charge is 3.0% during the
first year, 2.5% during the second year, 2.0% during the third year, and 1.5%
during the fourth year. There is no CDSC thereafter.
(3) Pursuant to an investment management agreement with the Fund, the Adviser is
entitled to receive an investment management fee of ____% of the average daily
net assets of the Fund with graduated fee reductions based on increased asset
levels. See "Investment Management and Other Services -- Adviser."
(4) Pursuant to an Administrative Services Agreement with the Fund, the
Distributor is entitled to receive a fee of 0.25% of the average daily net
assets of the Fund.
(5) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year.
(6) Pursuant to the Class B share Distribution Plan, the Class B shares pay
an annual distribution fee of 0.___% of average daily net assets.
(7) The Adviser has voluntarily agreed to waive at least ___% of its investment
management fees through November 30, 1999. The full investment management fee
will be gradually reinstated during the fiscal year ending November 30, 2000.
The effect of this fee waiver is to reduce operating expenses of the Fund and
thereby increase investment performance.
<TABLE>
================================================== =============== ============== =============== =============
Example 1 year 3 years 5 years 10 years
================================================== ------------ -- ----------- -- ----------- --- -------------
<S> <C> <C> <C> <C> <C>
================================================== ============ == =========== == =========== === =============
$1,000 investment, assuming a 5% annual return.
$--- $--- $--- $---
================================================== ============ == =========== == =========== === =============
</TABLE>
This hypothetical example assumes that all dividends and other
distributions are reinvested at net asset value and that the percentage amounts
listed under Annual Expenses above remain the same in the years shown, and is
shown after giving effect to the fee waiver. The above tables and the assumption
in the hypothetical example of a 5% annual return are required by regulation of
the Securities and Exchange 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 foregoing example should not be considered a representation of past
or future expenses, and actual expenses may be greater or less than those shown.
USE OF PROCEEDS
The Fund will invest net proceeds of this offering, after payment of
organizational and offering expenses by the Fund, in accordance with the Fund's
investment objective and policies within approximately one month after the end
of the Initial Offering Period. The precise time frame for these investments
will depend on the availability of Senior Loans and other relevant conditions.
Pending such investment, the Fund will invest the net proceeds of this offering
in investment grade short-term or medium-term debt obligations.
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 without shareholder approval. The Fund
seeks to achieve its objective primarily by investing in interests in variable
or floating rate 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 float periodically based upon a
benchmark indicator of prevailing interest rates, such as the Prime Rate or
LIBOR, and invests only in Senior Loans 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 objectives, including high-yield/high risk
securities. The Fund may invest up to 10% of its total assets in Senior Loans
and other securities that are issued by non-U.S. entities, although such
investments will be U.S. dollar denominated. All percentage limitations in this
prospectus and SAI are applied as of the time of investment.
Under the Fund's policies, Senior Loans are considered 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 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.
Senior Loans vary in yield according to their terms and conditions, how often
they pay interest, and when rates are reset. The Fund 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 U.S. dollar denominated Senior Loans of non-U.S. entities with
interest rates tied to other non-domestic interest rates, including the Paris
Inter-Bank Offered Rate.
Senior Loans that the Fund may acquire include participation interests
in lease financings ("Lease Participations") where the collateral quality,
credit quality of the borrower and the likelihood of payback are believed by the
Adviser to generally be the same as those applied to conventional Senior Loans.
A Lease Participation is also required to have a floating interest rate that is
indexed to a benchmark indicator of prevailing interest rates, such as LIBOR or
the Prime Rate.
Subject to certain limitations, 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 in any one industry.
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 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 adjustable rate 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 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
floating- and variable-rate Senior Loans in which the Fund primarily invests
float periodically in response to changes in interest rates. However, because
variable 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 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/high-risk 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 yield on an investment in the Fund's
shares will likely fluctuate in response to changes in prevailing interest
rates.
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 that are organized or located in countries
other than the United States, Canada, or in U.S. territories and/or possessions.
Although the Senior Loans will require payment of interest and principal in U.S.
dollars, these borrowers 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.
Interest Rates
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 the London Inter-Bank Offered Rate ("LIBOR"), the
Federal Reserve federal funds rate, the prime rate offered by one or more major
United States banks (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 Fund expects that at least 75% of its total assets will be invested in
Senior Loans that at the time of investment provided the borrower with the
option of selecting an interest rate that is based on the Prime 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.
Interest rates on Senior Loans may adjust daily, monthly, quarterly,
semi-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. 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 considers 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.
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 adjustable
rate 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 income
securities in response to the changes in interest rates. Changes in interest
rates can, however, cause some fluctuation in the Fund's net asset value.
Portfolio Maturity
Although the Fund has no restrictions on portfolio maturity, normally
at least 80% of the total assets invested in Senior Loans are composed of Senior
Loans with maturities of one to ten years with rates of interest which typically
reset either daily, monthly, or quarterly. The maximum period of time of
interest rate reset on any Senior Loans in which the Fund may invest is one
year.
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.
Credit Analysis
When evaluating a borrower 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. The Fund acquires a collateralized Senior Loan only if the
Adviser believes that the collateral coverage equals or exceeds the outstanding
principal amount of the Senior Loan. The Fund does not impose any minimum
standard regarding the rating of any outstanding debt securities of borrowers.
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 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 leverage 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 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. 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
loans, 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 acquired in connection with investment or restructuring of a Senior
Loan, and other instruments as described under "Additional Information About
Investments and Investment Techniques" in the SAI. Short-term 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
opinion 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.
Hybrid and Synthetic Loans
The Fund may invest up to 20% of its total assets in Hybrid and
Synthetic Loans as part of its investment in "Other Investments" as described
above, and Hybrid and Synthetic Loans will not count toward the 80% of the
Fund's total assets that are normally invested in Senior 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 only in Hybrid Loans that are secured debt of the borrower,
although they may not in all instances be considered senior debt of the
borrower. With Hybrid Loans, the Fund may not possess a senior claim to all of
the collateral securing the Hybrid Loan. 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 certain loan covenants, their negotiating power or
voting rights in the event of a default may be diminished. As a result, the
lenders' interests may not be represented as significantly as in the case of a
conventional Senior Loan. 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 or call protection.
Collateralized Loan Obligations
The Fund may invest up to 5% of its total assets in 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 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 5% of its total assets, measured at the
time of investment, in subordinated and unsecured loans. The Fund may acquire a
subordinated loan only if, at the time of acquisition, it acquires or holds a
Senior Loan from the same borrower. 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 specific 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. The Fund will
acquire unsecured loans only where the Adviser believes, at the time of
acquisition, that the Fund would have the right to payment upon default that is
not subordinate to any other creditor. The maximum of 5% of the Fund's total
assets invested in subordinated and unsecured loans will constitute part of the
20% of the Fund's total assets that may be invested in "Other Investments" as
described above, and will not count toward the 80% of the Fund's total assets
that are normally invested in Senior Loans.
Equity Securities
The Fund may invest up to 20% of its total assets in equity securities
acquired in connection with investment or restructuring of a Senior Loan,
including common stocks, preferred stocks, convertible securities and warrants.
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 anytime 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 change. 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.
Use of Hedging Techniques
The Fund may enter into various interest rate hedging and risk
management transactions. Certain of these interest rate hedging and risk
management transactions may be considered to involve derivative instruments,
subject to availability of such instruments and the Adviser's discretion. 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 be 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
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 floating or variable 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 of the hedging and
risk management techniques described below. 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. The
Fund will incur brokerage and other costs in connection with its hedging
transactions. See "Interest Rate Hedging Transactions" in the SAI.
Use of Borrowing
The Fund may borrow money in amounts up to 33-1/3% of the value of its
total assets to finance repurchase offers (as described below under "Repurchase
Offers"), to fund commitments to purchase Senior Loans, for other temporary,
extraordinary or emergency purposes, or, while the Fund does not have any
current intention of doing so, for the purpose of financing additional
investments. 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 also may issue one or more series of preferred shares,
although it has no present intention to do so. The Fund does not currently
intend to use borrowings for long-term financial leverage purposes. Accordingly,
as a non-fundamental policy, 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
(after giving effect to 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 issuance of additional classes of preferred shares involves
offering expenses and other costs and may limit the Fund's freedom to pay
dividends on its common shares or to engage in other activities. Borrowings and
the issuance of a class of preferred stock having priority over the Fund's
shares of beneficial interest offered hereby create an opportunity for greater
income per common share, but at the same time such borrowing or issuance is a
speculative technique in that it will increase the Fund's exposure to capital
risk. These risks may be reduced through the use of borrowings and preferred
stock that have floating rates of interest.
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 a floating rate, such as LIBOR.
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 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 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 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, the agent on a Senior Loan is responsible for monitoring collateral
and for exercising remedies available to the lenders such as foreclosure upon
collateral.
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 will acquire Senior Loans from and sell Senior Loans to the following
lenders: money center banks, selected regional banks and selected non-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, generally the agent 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 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 Fund's investment in Senior Loans generally may take one of several
forms including: acting as one of the group of lenders originating a Senior Loan
(an "original lender"); 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; 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. The Fund may serve as the agent or co-agent for a Senior Loan. See
"Additional Information About Investments and Investment Techniques --
Originating Senior Loans" in the SAI.
When the Fund is a member of the originating syndicate group for a
Senior Loan, it may share in a fee paid to the original lenders. When the Fund
is an original lender or acquires an assignment, it will have a direct
contractual relationship with the borrower, may enforce compliance by the
borrower with the terms of the Senior 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.
To a lesser extent, the Fund invests 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 is an original lender, it will have a direct contractual
relationship with the borrower. If the terms of an interest in a Senior Loan
provide that the Fund is in privity with the borrower, the Fund has direct
recourse against the borrower in the event the borrower fails to pay scheduled
principal or interest. In all other cases, the Fund looks to the agent to use
appropriate credit remedies against the borrower. 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 such an 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 Statement of Additional
Information.
This Prospectus includes certain statements that may be deemed to be
"forward-looking statements." Other than descriptions of historical facts, all
statements included in this Prospectus that address activities, events or
developments that either the Fund or the Adviser expects, believes or
anticipates will or may occur in the future, including such matters as the use
of proceeds, investment strategies, and other such matters, may be considered
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Fund or the Adviser in light of experience and
perception of historical trends, current conditions, expected future
developments and other factors deemed appropriate under the circumstances. Such
statements are subject to (i) a number of assumptions, risks and uncertainties,
including the risk factors discussed below, (ii) general economic and business
conditions, (iii) the investment opportunities (or lack thereof) that may be
presented to and pursued by the Fund, (iv) changes in laws or regulations and
(v) other factors, many of which are beyond the control of the Fund. Prospective
investors are cautioned that any such statements are not guarantees of future
performance and that actual results or developments may differ materially from
those described in the forward-looking statements.
Credit Risks and Realization of Investment Objective. 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
nonpayment 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 NAV of Fund Shares or the amount
of its dividends. 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 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.
In the event of the bankruptcy of a borrower, the Fund could experience
delays or limitations with respect to its ability to realize the benefits of the
collateral securing the Senior Loan. Among the credit risks involved in a
bankruptcy would be an assertion that the pledging of collateral to secure the
Senior Loan constituted a fraudulent conveyance or preferential transfer that
would have the effect of nullifying or subordinating the Fund's rights to the
rights of other creditors of the borrower under applicable law.
Investment decisions will be based largely on the credit analysis
performed by the Adviser's investment personnel, and such analysis may be
difficult to perform for many issuers. 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 issuers have
not issued securities to the public and are not subject to reporting
requirements under federal securities laws. Generally, issuers 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.
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 float 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.
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 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." Nevertheless,
the Fund will experience price volatility, the extent of which will be affected
by the types of securities and techniques the Fund uses.
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. In addition, Senior Loans in which the Fund invests
generally require the consent of the borrower prior to sale or assignment. These
consent requirements may delay or impede the Fund's ability to sell Senior
Loans. The Fund may have difficulty disposing of illiquid assets 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 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 a 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.
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.
High-yield/High-risk Securities. The Fund may invest up to 5% of its
total assets in high-yield/high-risk securities. High-yield securities are high
yield/high risk 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 obligation, 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 daily 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.
Investment in high yield securities by the Fund may result in greater
net asset value fluctuation than if the Fund did not make such investments.
OFFERING OF SHARES
Class B Shares. During the Initial Offering Period, the Fund will offer
Class B shares at a price of $2.00 per share. Thereafter, the Fund intends to
engage in a continuous public offering of its Class B shares at net asset value.
Class B shares are not subject to a front-end sales charge, but incur a
declining contingent deferred sales charge ("CDSC") if the shares are
repurchased by the Fund within four years of purchase. Specifically, if redeemed
during the first year after purchase, the CDSC is 3.0%; if redeemed during the
second year after purchase, the CDSC is 2.5%; if redeemed during the third year
after purchase, the CDSC is 2.0%; if redeemed during the fourth year after
purchase, the CDSC is 1.5%. Repurchases thereafter do not incur a CDSC.
The CDSC 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 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 and (d) 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). The CDSC will also be waived in
connection with the following repurchases of shares held by employer sponsored
employee benefit plans maintained on the subaccount record keeping system made
available by 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 contingent deferred sales charge 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 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.
The following example will illustrate the operation of the CDSC. 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 submitted for repurchase, and the Fund
accepted for repurchase, the entire $12,000 in share value, the CDSC 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 CDSC 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 charge if redeemed on or after December 1, 2000.
In the event no specific order is requested when shares subject to a CDSC 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 CDSC directly.
Distribution Arrangements. The Fund has entered into a Distribution
Agreement with the Distributor, a form of which has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part. 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 certain broker-dealers and financial service firms which have entered
into selected dealer agreements with the Distributor ("selected dealers"). The
shares will be offered on a continuous basis at net asset value after the
Initial Offering Period. Shareholders will have the option of submitting shares
for repurchase quarterly, subject to the terms and conditions described below
under "Repurchase Offers."
Class B shares of the Fund are being offered during an initial period
scheduled to end on May 25, 1999 on a best efforts basis through the Distributor
and selected dealers, subject to the terms and conditions of the Distribution
Agreement (the "Initial Offering Period"). The Initial Offering Period is
subject to adjustment by agreement between the Fund and the Distributor.
On the expiration of the Initial Offering Period, all subscriptions
received by the selected dealers during the Initial Offering Period will be
forwarded to the Fund and Class B shares will be issued. The Distributor will
not accept subscriptions prior to the expiration of the Initial Offering Period.
To the extent that investors make payment to the selected dealers prior to the
expiration of the Initial Offering Period, the selected dealers may benefit from
the temporary use of the funds.
The Distribution Agreement provides that the Distributor will, subject
to the terms and conditions thereof, purchase on the expiration of the Initial
Offering Period, the shares for which it obtains purchase orders from investors
and for which orders are accepted by the Fund. There is no assurance that any
shares will be sold. The Fund and the Distributor reserve the right to withdraw,
cancel or modify the offering of shares during the Initial Offering Period
without notice and the Fund reserves the right to refuse any order for shares in
whole or in part.
The Distributor will compensate selected dealers participating in the
Initial Offering at a rate of 4.0% of the aggregate sales price of the shares
purchased from the Fund by such selected dealer ("Sales Price"). After the
Initial Offering Period, dealers will be compensated at a rate of 3.0% of the
Sales Price.
The Distributor may, from time to time, pay or allow to firms a 1%
commission on the amount of shares of the Fund sold under the following
conditions: (i) the purchased shares are held in a Kemper IRA account, (ii) the
shares are purchased as a direct "roll over" of a distribution from a qualified
retirement plan account maintained on a participant subaccount record keeping
system provided by Kemper Service Company, (iii) the registered representative
placing the trade is a member of a group of persons designated by the
Distributor in acknowledgment of their dedication to the employee benefit plan
area; and (iv) the purchase is not otherwise subject to a commission.
In addition to the discounts or commissions described above, the
Distributor will, during the Initial Offering Period and 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.
After expiration of the Initial Offering Period, Class B shares may be
purchased in a continuous offering through the selected dealers at the public
offering price, which will be the net asset value next determined after receipt
of an order 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. Unless
otherwise indicated in a further Prospectus supplement, the Distributor as
underwriter will act as underwriter on a reasonable efforts basis.
The Fund anticipates that from time to time certain of the selected
dealers 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.
Shares may be purchased with a minimum investment of $1,000 (or $250 in
the case of qualified plans or Individual Retirement Accounts). Additional
Shares may be purchased for a minimum investment of $100 (or $50 in the case of
qualified plans or Individual Retirement Accounts). Under an automatic
investment plan, such as Bank Direct Deposit, Payroll Direct Deposit or
Government Direct Deposit, the minimum initial and subsequent investment is $50.
These minimum amounts may be changed at any time in management's discretion.
Share certificates will not be issued unless requested in writing and
may not be available for certain types of account registrations. It is
recommended that investors not request share certificates unless needed for a
specific purpose. 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 services firms 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 dealers, as described above. Banks are currently
prohibited under the Glass-Steagall Act from providing certain underwriting or
distribution services. Brokers, banks or other financial services firms 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 after the Initial Offering Period
will be confirmed at a price based on the net asset value of the Fund next
determined after receipt in good order by the Distributor of the order
accompanied by payment. However, orders received by selected dealers 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 effective on that day ("trade date"). The Fund
reserves the right to determine the net asset value more frequently than once a
day if deemed desirable. Dealers and other financial services firms are
obligated to transmit orders promptly. Collection may take significantly longer
for a check drawn on a foreign bank than for a check drawn on a domestic bank.
Therefore, if an order is accompanied by a check drawn on a foreign bank, funds
must normally be collected before shares will be purchased.
Selected dealers and other 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 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.
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 to new investors. During the period of such suspension, persons who are
already shareholders of the Fund normally are 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,
IL 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 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 SEC. 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.
A distribution plan has been adopted for the Class B shares that comply
with the terms of Rule 12b-1 under the 1940 Act (the "Plan"). The Plan provides
for fees payable as an expense of the Class B shares, that are used by the
Distributor to pay for distribution services for that class. The Plan is
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 company, it has undertaken to comply with the terms of Rule
12b-1 pursuant to exemptive relief obtained under the 1940 Act.
For its services under the Plan, the Distributor receives a fee from the
Fund, payable monthly, at the annual rate of 0.__% of average daily net assets
of the Fund attributable to the Class B shares. This fee is accrued daily as an
expense of the Class B shares. The Distributor also receives any CDSC, as
discussed above.
Under the Plan, the Distributor may compensate various financial
services firms ("firms") for sales of Fund shares and may pay other commissions,
fees and concessions to such firms. The distribution fee compensates the
Distributor for expenses incurred in connection with activities primarily
intended to result in the sale of the Fund's Class B shares, including the
printing of prospectuses and reports for persons other than existing
shareholders and the preparation, printing and distribution of sales literature
and advertising materials.
Among other things, the Plan provides that the Distributor will prepare
reports for the Board of Trustees on a quarterly basis showing amounts paid to
the various firms and such other information as the Board may reasonably
request. The Plan 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 Plan ("Qualified Board Members"),
cast at an in-person meeting called for such purpose, or by vote of at least a
majority of the outstanding voting securities of the Class B shares. Any
material amendment to the Plan must be approved by vote of a majority of the
Board of Trustees, and of the Qualified Board Members. An amendment to the 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 voting
securities of the class of the Class B shares. While the Plan is in effect, the
selection and nomination of Directors who are not "interest persons" of the Fund
shall be committed to the discretion of the Trustees who are not themselves
"interested persons" of the Fund.
If the Plan is terminated in accordance with its terms, the obligation
of the Fund to make payments to the Distributor pursuant to the 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 the Plan, if for any
reason the Plan is terminated in accordance with its terms. Future fees under
the 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 redeem 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
In order to provide shareholders with liquidity and the ability to
receive net asset value on a disposition of shares, the Fund will make quarterly
offers to repurchase a percentage of outstanding shares at net asset value
("Repurchase Offers"). The first Repurchase Offer will commence in August 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, each quarterly "Repurchase Request
Deadline" will be the _____ business day in the months February, May, August and
November. The Fund may determine the net asset value applicable to repurchases
no later than 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 7 calendar days after Pricing Date.
Shareholders will be sent notification of the each Repurchase Offer 21 to 42
days prior to the Repurchase Request Deadline with respect to such offer. It is
unlikely that a secondary market for the Fund's shares will develop, and neither
the Distributor nor the selected dealers 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% and 25% of shares outstanding on the
Repurchase Request Deadline.
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. Shareholders 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.
Shareholders who wish to tender shares for repurchase must notify the
Fund on or before the Repurchase Request Deadline in a manner designated by the
Fund, as discussed below. THE REPURCHASE REQUEST DEADLINE IS A DEADLINE THAT
WILL BE STRICTLY OBSERVED. Shareholders that fail to submit Repurchase Requests
in good order by this deadline will be unable to liquidate shares until a
subsequent repurchase offer.
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)).
A shareholder may withdraw or change a Repurchase Request at any point before
the Repurchase Request Deadline, but not after that date.
For more information on repurchase requests, see "Repurchase of Shares"
below.
Determination of Repurchase Price. The Fund will establish the
Repurchase Price at a share's net asset value normally as determined no later
than 14 calendar days (or the next business day if the 14th calendar day is not
a business day after the Repurchase Request Deadline (the "Pricing Date")). The
Fund will compute net asset value daily (as described under "Net Asset Value" in
the SAI), and shareholders may obtain daily net
asset value by calling 800-621-1048.
The Fund does not presently intend to deduct any repurchase fees from
this amount (other than any applicable CDSC). However, in the future, the Board
of Trustees may determine to charge a repurchase fee payable to the Fund
reasonably to compensate it for its 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,
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 7
calendar days after the Pricing Date. Repurchase proceeds will be paid by wire
transfer or check.
Contingent Deferred Sales Charge. Class B Shares are subject to a CDSC
of 3.0% during the first year after purchase, 2.5% during the second year, 2.0%
during the year, and 1.5% during the fourth year.
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
tendered on a pro rata basis.
In the event of an Oversubscribed Repurchase Offer, shareholders may be
unable to liquidate some or all of their investment 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.
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 3 months between Repurchase Request Deadlines, such
Repurchase Request Deadlines to be the ___ business day in the months of
February, May, August and November, that the Pricing Date will be no later than
14 calendar days after the Repurchase Request Deadline (or the next business day
if the 14th calendar day is not a business day), and that the Repurchase Payment
Deadline will not be later than 7 calendar days after the Pricing Date. Under
the Repurchase Policy, the Repurchase Amount may be from 5% to 25% of the Fund's
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.
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. The Fund will ensure that a percentage
of its net assets equal to at least 100 percent of the Repurchase Amount
consists of 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 investment
within the time period between the Repurchase Request Deadline and the
Repurchase Payment Deadline; or (b) that mature by the Repurchase Payment
Deadline.
The Board has adopted procedures that are reasonably designed to ensure
that the Fund's assets are sufficiently liquid so that the Fund can comply with
the Repurchase Policy and the liquidity requirements described in the previous
paragraph. 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 fund 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 independent
Trustees. These circumstances are limited and 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
Internal Revenue 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;
(c) for any other periods that the Securities and Exchange
Commission permits by order for the protection of
shareholders;
(d) if the shares are listed on a national securities exchange or
quoted in an inter-dealer quotation system of a national
securities association (e.g., Nasdaq) and the Repurchase would
cause the shares to lose that status; or
(e) 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 after
the expiration of the Initial Offering Period, which may alleviate these
potential consequences, although there is no assurance that the Fund will be
able to secure new investments.
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.
General. The Fund will mail a Notification to shareholders of record in
connection with each quarterly repurchase offer. Any shareholder 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 redeem such shares 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.
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. The repurchase of Class B shares within four years of purchase may be
subject to a CDSC (see "Offering of Shares" above).
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.
Wire Transfer of Repurchase Proceeds. If the account holder has given
authorization, proceeds of repurchases can be sent by federal wire transfer to a
single previously designated account. 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
(including any CDSC). 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. During periods when it is difficult to
contact the Shareholder Service Agent by telephone, it may be difficult to use
the expedited wire transfer privilege. The Fund reserves the right to terminate
or modify this privilege at any time.
SPECIAL FEATURES
Exchanges. In conjunction with each quarterly repurchase, Class B
shares of the Fund may be exchanged for the Class B shares of any of the
following funds at their relative net asset values: 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 Adjustable Rate U.S. Government Fund, Kemper Blue Chip Fund, Kemper
Global Income Fund, Kemper Target Equity Fund (series are subject to a limited
offering period), Kemper Intermediate Municipal Bond Fund, Kemper Cash Reserves
Fund, Kemper U.S. Mortgage Fund, Kemper Short-Intermediate Government Fund,
Kemper Value Plus Growth Fund, Kemper Value Series, Inc., Kemper Quantitative
Equity Fund, Kemper Horizon Fund, Kemper 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"). Class B
shares of the Fund may be exchanged without a CDSC being imposed at the time of
exchange. For purposes of calculating the CDSC that may be imposed upon the
redemption of the Class B shares of a Kemper Fund received in exchange for Class
B shares of the Fund, shares exchanged retain their original cost and purchase
date, but the 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 shares received in an exchange than you would have if you
had held the Class B 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.
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"). Effective June 1, 1999, 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
the fund and, therefore, may be subject to the 15-Day Hold Policy. For purposes
of determining whether the 15-Day Hold Policy applies to a particular exchange,
the value of the shares to be exchanged shall be computed by aggregating the
value of shares being exchanged for all accounts under common control,
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 on the Repurchase Payment Date with the proceeds. A change by a shareholder
from an exchange election to an election to receive repurchase proceeds in cash
must be received by the Fund _________ business days before the Repurchase
Payment Date. 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
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 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 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 to
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 $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 adjust 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, except rollovers made for
1998, which may be included in taxable income over a four year period.
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 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 continuously-offered,
non-diversified, closed-end management investment company that makes quarterly
repurchase offers for its securities, subject to certain conditions. The Fund's
Declaration of Trust, a copy of which is on file in the office of the Secretary
of State of the State of Massachusetts, authorizes the issuance of an unlimited
number of shares of beneficial interest without par value. The Declaration of
Trust provides that the Trustees may authorize separate classes of shares of
beneficial interest and any 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.
Dividends, Voting and Liquidation Rights
Each common share 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. The Fund may issue preferred shares, which may have preferences
with respect to dividends and distributions, and which may have special voting
rights, relative to the common shares.
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 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 B
shares, as of the date of this Prospectus. As of that date Class B shares are
the only shares authorized by the Fund.
<TABLE>
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<CAPTION>
(1) (2) (3) (4)
Amount Outstanding
Amount Held By Registrant Exclusive of
or for its Account Amount Shown
Title of Class Amount Authorized Under (3)
<S> <C> <C> <C> <C>
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Class B _____ Shares None _____ Shares*
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
* Held by _____________.
Fundamental and Non-Fundamental Policies of the Fund
Certain policies of the Fund specified herein as "fundamental" and the
investment restrictions of the Fund described in the SAI are fundamental
policies of the Fund and may not be changed without a "Majority Vote" of the
shareholders of the Fund. The term "Majority Vote" 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. All other policies of the Fund 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 and 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 of beneficial
interest.
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 each class of common shares outstanding. However, if such conversion is
unanimously recommended by the Trustees, the vote of the holders of a majority
of the outstanding voting securities of the Fund (as defined in the 1940 Act),
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 Fund does
not currently have any issued and outstanding shares of preferred stock.
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 SEC for the full text of these provisions.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Adviser
The Fund retains the investment management firm of Scudder Kemper
Investments, Inc., a Delaware corporation, to manage the Fund's daily investment
and business affairs subject to the policies established Fund's Board of
Trustees. The Trustees have overall responsibility for the Fund under
Massachusetts law.
Under the Investment Management Agreement with the Adviser, dated March
31, 1999, the Fund is responsible for all of its expenses, including fees and
expenses incurred in connection with its organization and initial offering,
which will recognized by the Fund and charged against the Fund's income in its
first fiscal period; 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:______________________________
__________________________________________________________________ of average
daily net assets. 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 is headquartered at 345 Park Avenue, New York, New York.
Scudder Kemper Investments, Inc., an investment counsel firm, acts as
investment adviser to the Fund. This organization, the predecessor of which is
Scudder, Stevens & Clark, Inc. ("Scudder"), is one of the most experienced
investment counsel firms in the U.S. It was established as a partnership in 1919
and pioneered the practice of providing investment counsel to individual clients
on a fee basis. The predecessor firm reorganized from a partnership to a
corporation on June 28, 1985. On June 26, 1997, the Adviser's predecessor
entered into an agreement with Zurich acquired a majority interest in Scudder,
and Zurich made its subsidiary Zurich Kemper Investments, Inc., a part of the
predecessor organization. The predecessor's name has been changed to Scudder
Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group").
On September 7, 1998, the financial services businesses of Zurich
(including Zurich's 70% interest in the Adviser) and the financial services
businesses of B.A.T. Industries p.l.c. ("B.A.T.") formed a new global insurance
and financial services group known as Zurich Financial Services. By way of a
dual holding company structure, current Zurich shareholders own approximately
57% of the new organization, with the balance owned by B.A.T's shareholders.
Portfolio Management. The Fund's portfolio is managed by a portfolio
management team consisting of a 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. 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 co-managers of the
Fund since its inception.
Custodian, Transfer Agent, Shareholder Service Agent Dividend
Disbursing Agent and Registrar
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. 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 value 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
agreement"). The Distributor may enter into related arrangements with
broker-dealer firms or other service or administrative firms ("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 agreement, including the payment of any service
fees. For services under the administrative agreements, 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 firm a service fee
at an annual rate of up to 0.25% of net assets of the Fund maintained and
serviced by the firm.
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 agreement not paid to
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 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 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 firm
of record. In addition, the Distributor may, from time to time, from its own
resources pay certain firms additional amounts for ongoing administrative
services and assistance provided to their customers and clients who are
shareholders of the Fund.
Year 2000 Readiness. Like other investment companies and financial and
business organizations worldwide, the Fund could be adversely affected if
computer systems on which the Fund relies, which primarily include those used by
the Adviser, its affiliates or other service providers, are unable to process
correctly date-related information on and after January 1, 2000. This risk is
commonly called the Year 2000 Issue. Failure to address successfully the Year
2000 Issue could result in interruptions to and other material adverse effects
on the Fund's business and operations. The Adviser has commenced a review of the
Year 2000 Issue as it may affect the Fund and is taking steps it believes are
reasonably designed to address the Year 2000 Issue, although there can be no
assurances that these steps will be sufficient. In addition, there can be no
assurances that the Year 2000 Issue will not have an adverse effect on the
companies whose securities are held by the Fund or on global markets or
economies generally.
DIVIDENDS AND DISTRIBUTIONS
Distribution Policy. The Fund's present policy is to declare daily and
pay monthly distributions to holders of Class B shares of substantially all net
investment income of the Fund. 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.
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. Income dividends are
calculated monthly under guidelines approved by the Trustees. Each dividend is
payable to Shareholders of record at the time of declaration. Any fees or
commissions paid to facilitate the sale of portfolio Senior Loans in connection
with quarterly tender offers or other portfolio transactions may reduce the
dividend yield. The Fund may make one or more annual payments from any net
realized capital gains, if any.
Dividend Reinvestment. 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.
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 into 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 numbers 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 Internal Revenue Code of 1986, as amended. 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 gains 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.
If a Shareholder sells or otherwise disposes of his or her Shares of
the Fund, he or she may realize a capital gain or loss which will be long-term
or short-term, generally depending on the holding period for the Shares.
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
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 nonresident 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.
The following table is intended to provide investors with a comparison
of short-term money market rates. This comparison should not be considered a
representation of future money market rates, nor what an investment in the Fund
may earn or what an investor's yield or total return may be in the future. These
comparisons may be used in advertisements and information furnished to present
or prospective shareholders.
[To be provided]
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 Commission, Washington, D.C., a
Registration Statement under the Securities Act, relating to the Shares offered
hereby. For further information with respect to the Fund and its Common 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.
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
Page
Additional Information about Investments and Investment Techniques........
Investment Restrictions...................................................
Trustees and Officers.....................................................
Investment Management and Other Services..................................
Portfolio Transactions....................................................
Net Asset Value...........................................................
Shareholder Investment Program............................................
Tax Matters...............................................................
Advertising and Performance Data..........................................
Financial Statements......................................................
<PAGE>
Shares of Beneficial Interest Kemper Funds
KEMPER FLOATING RATE FUND
40 North Central Avenue
222 South Riverside Plaza
Chicago, Illinois
(800) ___-____
- -------------------------------------------------------------------------------
FUND ADVISERS AND AGENTS
- -------------------------------------------------------------------------------
ADVISER DISTRIBUTOR
Scudder Kemper Investments, Inc. Kemper Distributors, Inc.
345 Park Avenue 222 South Riverside Plaza
New York, New York 10154 Chicago, IL 60606
ADMINISTRATIVE SERVICE PROVIDER TRANSFER AGENT
Kemper Distributors, Inc. Kemper Service Company
222 South Riverside Plaza 811 Main Street
Chicago, IL 60606 Kansas City, Missouri 64105
CUSTODIAN LEGAL COUNSEL
State Street Bank and Trust Company Dechert Price & Rhoads
225 Franklin Street 1775 Eye Street, N.W.
Boston, Massachusetts 02110 Washington, D.C. 20006
INDEPENDENT AUDITORS
[ ]
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
<PAGE>
[KEMPER FUND LOGO]
SUBJECT TO COMPLETION
Dated March 23, 1999
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor offers
to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation or offer to buy nor shall there be any sale of these securities in
any State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
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.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
<PAGE>
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION...........................................................3
INVESTMENT RESTRICTIONS AND FUNDAMENTAL POLICIES..............................3
REPURCHASE OFFER FUNDAMENTAL POLICY...........................................4
ADDITIONAL INFORMATION ABOUT INVESTMENTS AND INVESTMENT TECHNIQUES............5
MANAGEMENT...................................................................13
PORTFOLIO TRANSACTIONS.......................................................21
LIQUIDITY REQUIREMENTS.......................................................23
NET ASSET VALUE..............................................................24
TAXATION.....................................................................25
FINANCIAL STATEMENTS.........................................................32
<PAGE>
GENERAL INFORMATION
Kemper Floating Rate Fund (the "Fund") is a newly organized, closed-end
non-diversified management investment company registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), that
continuously offers its shares to the public. The Fund will conduct quarterly
repurchase offers for its shares. The Fund's investment manager is Scudder
Kemper Investments, Inc. (the "Adviser"). The Fund's primary 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 Investment Company 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, to the extent that a Fund may be deemed to be an
underwriter in connection with the disposition of portfolio
securities.
The Fund has adopted the following nonfundamental investment policies
which may be changed by the Fund's Board of Trustees without
shareholder approval. As a matter of nonfundamental policy, the Fund
may not:
1. Invest for the purpose of exercising control over management of
any company.
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 above 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").
The Repurchase Offer Fundamental Policy sets the interval between each
Repurchase Offer at three months and provides that the Fund shall conduct a
Repurchase Offer each quarter (unless suspended in accordance with regulatory
requirements). The Repurchase Request Deadline will be the ____ business day of
February, May, August and November. The Repurchase Offer Fundamental Policy
also provides that the Pricing Date shall occur not later than 14 calendar days
after the Repurchase Request Deadline (or, if not a business day, the first
business day after the 14th calendar day) and that the Repurchase Payment Date
shall occur not later than 7 calendar days after the Pricing Date.
The Repurchase Offer Fundamental Policy may be changed by a majority of
the Fund's outstanding voting securities. In accordance with the requirements of
the Investment Company 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.
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, the Fund may acquire (and subsequently sell) equity securities or
exercise warrants that it receives. The Fund will acquire such interests only as
an incident to the intended purchase or ownership of Senior Loans or if, in
connection with a reorganization of a borrower, the Fund receives an equity
interest in a reorganized corporation or other form of business entity or
warrants to acquire such an equity interest. The Fund normally will not hold
more than 20% of its total assets in 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 net 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.
Lease Participations
The credit quality standards and general requirements that the Fund
applies to Lease Participations including collateral quality, the credit quality
of the borrower and the likelihood of payback are substantially the same as
those applied to conventional Senior Loans. A Lease Participation is also
required to have a floating interest rate that is indexed to the federal funds
rate, LIBOR, or Prime Rate in order to be eligible for investment.
The Office of the Comptroller of the Currency has established
regulations which set forth circumstances under which national banks may engage
in lease financings. Among other things, the regulation requires that a lease be
a net-full payout lease representing the noncancelable obligation of the lessee,
and that the bank make certain determinations with respect to any estimated
residual value of leased property relied upon by the bank to yield a full return
on the lease. The Fund may invest in lease financings only if the Lease
Participation meets these banking law requirements.
Repurchase Agreements
In general, the Fund does not engage, nor does it intend to engage in
the foreseeable future, 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 Investment Company
Act, repurchase agreements are deemed to be collateralized loans of money by the
Fund to the seller. 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, nor does it intend to engage in
the foreseeable future, 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 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 total Fund 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.
The Fund may seek to increase its income by lending financial
instruments in its portfolio in accordance with present regulatory policies,
including those of the Board of Governors of the Federal Reserve System and the
Commission. 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 Investment Company 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
Investment Company 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 objectives and policies, to
engage in certain hedging transactions including interest rate swaps and the
purchase or sale of interest rate caps and floors. 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 will
determine whether and in what circumstances the Fund would employ any of the
hedging techniques described below.
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 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 NAV 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.
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. The Fund
will incur brokerage and other costs in connection with its hedging
transactions.
Borrowing
Under the Investment Company 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 Investment Company 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.
Originating Senior Loans
Although the Fund does not act, nor does it intend to act in the
foreseeable future, as an "agent" in originating and administering a loan on
behalf of all lenders or as one of a group of "co-agents" in originating Senior
Loans, it does have the ability to do so. Senior Loans are typically arranged
through private negotiations between a borrower and several financial
institutions ("lenders") represented in each case by one or more such lenders
acting as agent of the several lenders. On behalf of the several lenders, the
agent, which is frequently the entity that originates the Senior Loan and
invites the other parties to join the lending syndicate, will be primarily
responsible for negotiating the Senior Loan agreements that establish the
relative terms, conditions and rights of the borrower and the several lenders.
The co-agents, on the other hand, are not responsible for administration of a
Senior Loan, but are part of the initial group of lenders that commit to
providing funding for a Senior Loan. In large transactions, it is common to have
several agents; however, one such agent typically has primary responsibility for
documentation and administration of the Senior Loan. The agent is required to
administer and manage the Senior Loan and to service or monitor the collateral.
The agent is also responsible for the collection of principal and interest and
fee payments from the borrower and the apportionment of these payments to the
credit of all lenders which are parties to the loan agreement. The agent is
charged with the responsibility of monitoring compliance by the borrower with
the restrictive covenants in the loan agreement and of notifying the lenders of
any adverse change in the borrower's financial condition. In addition, the agent
generally is responsible for determining that the lenders have obtained a
perfected security interest in the collateral securing the Senior Loan.
Lenders generally rely on the agent to collect their portion of the
payments on the Senior Loan and to use appropriate creditor remedies against the
borrower. Typically under loan agreements, the agent is given broad discretion
in enforcing the loan agreement and is obligated to use the same care it would
use in the management of its own property. The borrower compensates the agent
for these services. Such compensation may include special fees paid on
structuring and funding the Senior Loan and other fees paid on a continuing
basis.
The precise duties and rights of an agent are defined in the loan agreement.
When the Fund is an agent, it has, as a party to the loan agreement, a
direct contractual relationship with the borrower and, prior to allocating
portions of the Senior Loan to the lenders, if any, assumes all risks associated
with the Senior Loan. The agent may enforce compliance by the borrower with the
terms of the loan agreement. Agents also have voting and consent rights under
the applicable loan agreement. Action subject to agent 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, which percentage varies
depending on the relevant loan agreement. 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.
Pursuant to the terms of a loan agreement, the Fund as agent typically
has sole responsibility for servicing and administering a loan on behalf of the
other lenders. Each lender in a Senior Loan is generally responsible for
performing their own credit analysis and their own investigation of the
financial condition of the borrower. Generally, loan agreements will hold the
Fund liable for any action taken or omitted that amounts to gross negligence or
willful misconduct. In the event of a borrower's default on a loan, the loan
agreements provide that the lenders do not have recourse against the Fund for
its activities as agent. Instead, lenders will be required to look to the
borrower for recourse.
Acting in the capacity of an agent in a Senior Loan may subject the
Fund to certain risks in addition to those associated with the Fund's current
role as a lender. An agent is charged with the above described duties and
responsibilities to lenders and borrowers subject to the terms of the loan
agreement. Failure to adequately discharge such responsibilities in accordance
with the standard of care set forth in the loan agreement may expose the Fund to
liability for breach of contract. If a relationship of Fund is found between the
agent and the lenders, the agent will be held to a higher standard of conduct in
administering the loan. In consideration of such risks, the Fund will invest no
more than [10%] of its total assets in Senior Loans in which it acts as agent or
co-agent and the size of any individual loan will not exceed [5%] of the Fund's
total assets.
Additional Information on Senior Loans
Senior Loans are direct obligations of corporations or other business
entities and are 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 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. In this regard, if the lenders have a
long-term debt rating, the long-term debt of all such Participants is rated BBB
or better by Standard & Poor's Ratings Services or Baa or better by Moody's
Investors Service, Inc., or has received a comparable rating by another
nationally recognized rating service. In the absence of rated long-term debt,
the lenders or, with respect to a bank, the holding company of such lenders have
commercial paper outstanding which is rated at least A-1 by Standard & Poor's
Ratings Services or P-1 by Moody's Investors Service, Inc. In the absence of
such rated long-term debt or rated commercial paper by a bank, the Fund may
acquire participations in Senior Loans from lenders whose long-term debt and
commercial paper is of comparable quality to the foregoing rating standards as
determined by the Manager under the supervision of the Trustees. The Fund also
diversifies its portfolio with respect to lenders from which the Fund acquires
Senior Loans. See "Investment Restrictions."
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 shareholder tender 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. In many cases this will 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 market value of the assets serving as collateral will, at the
time of investment, in the opinion of the Investment Manager, 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 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.
In order to allow national banks to purchase shares of the Fund for
their own accounts without limitation, the Fund invests only in obligations
which are eligible for purchase by national banks for their own accounts
pursuant to the provisions of paragraph seven of Section 24 of U.S. Code Title
12. National banks which are contemplating purchasing shares of the Fund for
their own accounts should refer to Banking Circular 220, issued by the U.S.
Comptroller of the Currency on November 21, 1986, for a description of certain
considerations applicable to such purchases.
MANAGEMENT
Investment Adviser
Scudder Kemper Investments, Inc., the global investment management
business of Zurich Financial Services Group, is one of the largest and most
experienced investment management organization in the world, managing more than
$280 billion in assets for institutional and corporate clients, retirement and
pension plans, insurance companies, mutual fund investors, and individuals.
Scudder Kemper investments 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 the 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 SEC and other regulatory and
self-regulatory organizations, including but not limited to, preliminary and
definitive proxy materials, post-effective amendments to the Registration
Statement and semi-annual reports on Form N-SAR; overseeing the 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 Investment Company 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
Investment Company 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. During the Fund's most
recent fiscal year, no compensation, direct or otherwise (other than through
fees paid to the Adviser, was paid or became payable by the Fund to any of its
officers or Trustees who were affiliated with the Adviser.
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 an management fee which is payable monthly, investment
at the annual rate, expressed as a percentage of average daily net assets, of
___% average daily net assets in excess of $10 billion. The Adviser has
voluntarily agreed to waive a minimum of ____% of its investment management fee
through November 30, 1999.
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"), a subsidiary of the
Adviser, is responsible for determining the net asset value for 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 will
increase 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.
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.
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 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 Investment Company 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 between the Distributor and the Fund,
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 Distributor enters into related arrangements with various
broker-dealer firms and other service or administrative firms ("firms") that
provide services and facilities for their customers or clients who are investors
in the Fund. The firms provide such office space and equipment, telephone
facilities and personnel as is necessary or beneficial for providing information
and services to their clients. Such services and assistance may include, but are
not limited to, establishing and maintaining accounts and records, processing
purchase and redemption transactions, answering routine inquiries regarding the
Fund, assistance to clients in changing dividend and investment options, account
designations and addresses and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. With respect to Class B shares, the Distributor currently advances
to firms the first-year service fee at a rate of up to 0.25% of the purchase
price of such shares. For periods after the first year, the Distributor
currently intends to pay firms a service fee at a rate of up to 0.25%
(calculated monthly and paid quarterly) of the net assets attributable to Class
B shares maintained and serviced by the firm. After the first year, a firm
becomes eligible for the quarterly service fee and the fee continues until
terminated by the Distributor or the Fund. Firms 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
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 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
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 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 firms additional amounts for ongoing administrative
services and assistance provided to their customers and clients who are
shareholders of the Fund.
Certain directors or officers of the Fund are also directors or
officers of the Adviser or the Distributor, as indicated under "Officers and
Trustees."
Custodian
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"), a subsidiary of the Adviser, is the
Fund's transfer agent and dividend-paying agent and, as such, generally serves
as "Shareholder Service Agent" of the Fund.. KSvC receives as transfer agent the
following: annual account fees of $14.00 ($23.00 for retirement accounts per
account, per account plus set up charges, annual fees associated with the, an
asset-based fee of 0.05% and out-of-pocket reimbursement. CDSC for Class B
shares.
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
2904 Garfield Terrace, N.W. Economic Affairs; formerly a career United
Washington, DC 20008 States Foreign Service Officer, Energy Advisor
Date of birth: 10/15/26 for the White House, and United States
Ambassador to Saudi Arabia.
<PAGE>
Arthur R. Gottschalk Trustee Retired; formerly, President, Illinois
10642 Brookridge Drive Manufacturers Association; Trustee, Illinois
Frankfort, IL Masonic Medical Center; formerly, Illinois
Date of birth: 2/13/25 State Senator; formerly, Vice President, The
Reuben H. Donnelly Corporation.
*Daniel Pierce Trustee Chairman of the Board and Managing Director,
Two International Place Chairman of the Scudder Kemper Investments; Director, Fiduciary
Boston, MA 02110 Board Fund Company; Director, Fiduciary Company
Date of birth: 3/18/34 Incorporated; formerly, attorney.
*Thomas W. Littauer Trustee Managing Director, Scudder Kemper Investments,
Two International Place Vice President Inc.; formerly, Head of Broker Dealer Division
Boston, MA 02110 of an unaffiliated investment management firm
Date of birth: 4/26/55 during 1997; prior thereto, President of Client
Management Services of an affiliated investment
management firm from 1991 to 1996.
Frederick T. Kelsey Trustee Retired; formerly, consultant to Goldman, Sachs
4010 Arbor Lane & Co.; formerly, President, Treasurer and
Unit 102 Trustee of Institutional Liquid Assets and its
Northfield, IL 60093 affiliated mutual funds; Trustee of the
Date of birth: 4/25/27 Northern Institutional Funds; formerly Trustee
of the Pilot Funds.
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, Inc.
Two International Place
Boston, MA 02110
Date of birth: 9/21/60
Philip J. Collora Vice President Senior Vice President,
222 South Riverside Plaza and Secretary Scudder Kemper 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
345 Park Avenue Scudder Kemper Investments, 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: 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:
</TABLE>
The Board has an audit and governance committee that is composed of
Messrs. Akins, Gottschalk, Kelsey, Renwick, Tingleff, 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 paid or accrued to those trustees who are not designated "interested
persons" from ___________, 1999 through the end of the Fund's 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.
Aggregate Total Compensation
Compensation from Fund and Fund
from Fund Complex(2) Paid to
Name Trustees
- ---- ---- --------
James E. Akins................ $___ $130,000
Arthur R.
Gottschalk(1)................. $___ $133,200
Frederick T.
Kelsey(1)..................... $___ $130,500
Fred B.
Renwick....................... $___ $130,500
John G. Weithers.............. $___ $134,800
- -----------------------
(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
53 fund portfolios. Each trustee currently serves as trustee of 15
Kemper Funds with 53 funds portfolios.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Trustees of the Fund
the Adviser is primarily responsible for overseeing the execution of the Fund's
portfolio transactions. In executing such transactions, the Adviser seeks to
obtain the best results for the Fund, taking into account such factors as price
(including the applicable fee, commission or spread), size of order difficulty
of execution and operational facilities of the firm involved and the firm's risk
in positioning a block of securities. While the Adviser generally seeks
reasonably competitive fee or commission rates, the Fund does not necessarily
pay the lowest commission or spread available.
The Fund will 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 Loans. The Fund has no obligation to deal with any bank, broker
or dealer in execution of transactions in portfolio securities.
Other securities in which the Fund may invest are traded primarily in
the over-the-counter markets, and the Fund intends to deal directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and better execution are available elsewhere.
These dealers attempt to profit from transactions by buying at the bid price and
selling at the higher asked price in the market for the obligations (the
difference between the bid and asked price customarily is referred to as the
"spread"). The Fund may also purchase fixed-income and other securities from
underwriters, the cost of which may include fees and commissions to the
underwriters.
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. In executing all transactions, the Adviser
seeks to obtain the best results for the Fund.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place orders with
broker/dealers who supply research, market and statistical information to the
Fund. The term "research, market and statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Adviser is 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. 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.
In selecting among firms believed to meet the criteria for handling a
particular transaction, the Adviser may give consideration to those firms that
have sold or are selling shares of a fund and managed by the Adviser.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through Scudder Investor Services, Inc.
("SIS"), a corporation registered as a broker-dealer and subsidiary of the
Adviser. SIS will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. SIS will not receive any commission fee or other
remuneration from the Fund for this service.
Although certain research, market and statistical information from
broker-dealers may be useful to the Fund and to the Adviser, it is the opinion
of the Adviser that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Fund and not all such information is used by
the Adviser in connection with the Fund. Conversely, such information provided
to the Adviser by broker-dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Fund.
The Board of Trustees reviews from time to time whether the recapture
for the benefit of the Fund of some portion of the brokerage commissions or
similar fees paid by the Fund on portfolio transactions is legally permissible
and advisable.
The Fund's average portfolio turnover rate is the ratio of the lesser
of sales or purchases to the monthly average value of the portfolio securities
owned during the year, excluding all securities with maturities or expiration
dates at the time of acquisition of one year or less. A higher rate involves
greater brokerage transaction expenses to the Fund and may result in the
realization of net capital gains, which would be taxable to shareholders when
distributed. Purchases and sales are made for the Fund's portfolio whenever
necessary, in management's opinion, to meet the Fund's objective. It is
anticipated that the Fund's turnover rate will be between 50% and 100%. The
Fund's turnover rate is not expected to exceed 100%, but may vary from year to
year and will not be a limiting factor when the Adviser deems portfolio changes
appropriate.
At times investment decisions may be made to purchase or sell the same
investment security for the Fund and for one or more of the other clients
advised by the Adviser. When two or more of such clients are simultaneously
engaged in the purchase or sale of the same security, the transactions are
allocated as to amount and price in a manner considered equitable to each so
that each receives to the extent practicable the average price of such
transactions.
The Fund will not purchase securities from its affiliates in principal
transactions.
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: (a) assets that can
be sold or disposed of in the ordinary course of business at approximately the
price at which the Fund has valued the investment within a period equal to the
period between the Repurchase Request Deadline and the next Repurchase Payment
Deadline; or (b) assets 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.
In supervising the Fund's operations and the actions of Scudder Kemper,
the Board has adopted written procedures (the "Liquidity Procedures") reasonably
designed, taking into account current market conditions and the Fund's
investment objectives, to ensure that the Fund's assets are sufficiently liquid
so that the Fund can comply with the Repurchase Offer Fundamental Policy and
with the liquidity requirements described above.
From time to time, the Board reviews the Fund's portfolio composition
and makes and approves such changes to the Liquidity Procedures as the Board
deems necessary.
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.
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 ("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 investment manager 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 to 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.
Generally, Senior Loans are valued at fair value in the absence of
readily ascertainable market values believed to be reliable. Fair value is
determined by the Adviser under procedures established and monitored by the
Fund's Board of Trustees. In valuing a loan, the Adviser considers, among other
factors: (i) the creditworthiness of the issuer and any interpositioned bank;
(ii) the current interest rate, period until next interest rate reset and
maturity date of the Senior Loan; (iii) recent market prices for similar loans,
if any; and (iv) recent prices in the market for instruments with similar
quality, rate, period until next interest rate reset, maturity, terms and
conditions, if any. The Adviser may also consider prices or quotations, if any,
provided by banks, dealers or pricing services which may represent the prices at
which secondary market transactions in the loans held by the Fund have or could
have occurred. However, because the secondary market in Senior Loans has not yet
fully developed, the Adviser will not currently rely solely on such prices or
quotations. Securities for which the primary market is a national securities
exchange or the NASDAQ National Market System are stated at the last reported
sale price on the day of valuation.
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 (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) 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 (3) 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.
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.
Foreign Taxes
The Fund may be subject to certain taxes imposed by the countries in
which it invests or operates. If the Fund qualifies as a regulated investment
company and if more than 50% of the value of the Fund's total assets at the
close of any taxable year consists of stocks or securities of foreign
corporations, the Fund may elect, for U.S. federal income tax purposes, to treat
any foreign taxes paid by the Fund that qualify as income or similar taxes under
U.S. income tax principles as having been paid by the Fund's shareholders. For
any year for which the Fund makes such an election, each shareholder will be
required to include in its gross income an amount equal to its allocable share
of such taxes paid by the Fund and the shareholders will be entitled, subject to
certain limitations, to credit their portions of these amounts against their
U.S. federal income tax liability, if any, or to deduct their portions from
their U.S. taxable income, if any. No deduction for foreign taxes may be claimed
by individuals who do not itemize deductions. In any year in which it elects to
"pass through" foreign taxes to shareholders, the Fund will notify shareholders
within 60 days after the close of the Fund's taxable year of the amount of such
taxes and the sources of its income.
Generally, a credit for foreign taxes paid or accrued is subject to the
limitation that it may not exceed the shareholder's U.S. tax attributable to his
or her total foreign source taxable income. For this purpose, the source of the
Fund's income flows through to its shareholders. With respect to the Fund, gains
from the sale of securities may have to be treated as derived from U.S. sources
and certain currency fluctuation gains, including Section 988 gains (defined
below), may have to be treated as derived from U.S. sources. The limitation of
the foreign tax credit is applied separately to foreign source passive income,
including foreign source passive income received from the Fund. Shareholders may
be unable to claim a credit for the full amount of their proportionate share of
the foreign taxes paid by the Fund. The foreign tax credit can be applied to
offset no more than 90% of the alternative minimum tax imposed on corporations
and individuals.
The foregoing is only a general description of the foreign tax credit.
Because application of the credit depends on the particular circumstances of
each shareholder, shareholders are advised to consult their own tax advisers.
Tax-Exempt Income
The Fund intends to invest a sufficient amount of its assets in
municipal securities to qualify to distribute "exempt-interest dividends" (as
defined in the Code) to shareholders. The Fund's dividends payable from net
tax-exempt interest earned from municipal securities will qualify as
exempt-interest dividends if, at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its total assets consists of securities the
interest on which is exempt from the regular federal income tax under Code
section 103. Exempt-interest dividends distributed to shareholders are not
included in shareholders' gross income for regular federal income tax purposes.
The Fund will determine periodically which distributions will be designated as
exempt-interest dividends. If the Fund earns income which is not eligible to be
so designated, the Fund intends to distribute such income. Such distributions
will be subject to federal, state and local taxes, as applicable, in the hands
of shareholders.
Interest on certain types of private activity bonds is not exempt from
federal income tax when received by "substantial users" (as defined in the
Code). A "substantial user" includes any "nonexempt person" who regularly uses
in trade or business part of a facility financed from the proceeds of private
activity bonds. The Fund may invest periodically in private activity bonds and,
therefore, may not be an appropriate investment for entities that are
substantial users of facilities financed by private activity bonds or "related
persons' of substantial users. Generally, an individual will not be a related
person of a substantial user under the Code unless he/she or his/her immediate
family owns indirectly in aggregate more than 50% of the equity value of the
substantial user.
Opinions relating to the tax status of interest derived from individual
municipal securities are rendered by bond counsel to the issuer. Although the
Fund's adviser attempts to determine that any security it contemplates
purchasing on behalf of the Fund is issued with an opinion indicating that
interest payments will be exempt from federal and (as applicable) state tax,
neither the Adviser nor the Fund's counsel makes any review of proceedings
relating to the issuance of municipal securities or the bases of such opinions.
From time to time, proposals have been introduced in Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities, and similar proposals may be introduced in the
future. If such a proposal were enacted, the availability of municipal
securities for investment by the Fund could be adversely affected. Under these
circumstances, Fund management would re-evaluate the Fund's investment
objectives and policies and would consider either changes in the structure of
the Fund or its dissolution.
Dispositions
Upon a 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 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.
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 (1) the shareholder fails to furnish the Fund with the
shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the shareholder or the Fund that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) 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 (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) 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.
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.
Passive Foreign Investment Companies. The Fund may invest in shares of
foreign corporations that may be classified under the Code as passive foreign
investment companies ("PFICs"). In general, a foreign corporation is classified
as a PFIC if at least one-half of its assets constitute investment-type assets,
or 75% or more of its gross income is investment-type income. If the Fund
receives a so-called "excess distribution" with respect to PFIC stock, the Fund
itself may be subject to a tax on a portion of the excess distribution, whether
or not the corresponding income is distributed by the Fund to shareholders. In
general, under the PFIC rules, an excess distribution is treated as having been
realized ratably over the period during which the Fund held the PFIC shares. The
Fund will itself be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior Fund taxable years and an interest
factor will be added to the tax, as if the tax had been payable in such prior
taxable years. Certain distributions from a PFIC as well as gain from the sale
of PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, the Fund would be required to include in its gross income its
share of the earnings of a PFIC on a current basis, regardless of whether
distributions were received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election would involve
marking to market the Fund's PFIC shares at the end of each taxable year, with
the result that unrealized gains would be treated as though they were realized
and reported as ordinary income. Any mark-to-market losses and any loss from an
actual disposition of PFIC shares would be deductible as ordinary losses to the
extent of any net mark-to-market gains included in income in prior years.
FINANCIAL STATEMENTS
Independent Accountants
_______________________ are the Fund's independent accounts providing
audit and tax return preparation services and assistance and consultation in
connection with the review of various SEC filings. The address of
_______________________ is ____________________________.
Reports
When available, the Fund will furnish, without charge, a copy of its
Report upon request to the Fund, 222 South Riverside Plaza, Chicago, Illinois
60606 or call 1-800-621-1048.
<PAGE>
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 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.
* Messrs. Pierce and Littauer are "interested persons" of the Fund (as
that term is defined in the 1940 Act).
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
1. Financial Statements: Not applicable
2. Exhibits
(a) Declaration of Trust of the Registrant.*
(b) By-Laws of the Registrant.*
(c) Not Applicable
(d) (1) Not Applicable
(d) (2) Form of Subscription Certificate.*
(e) Dividend Reinvestment and Cash Purchase Plan of the
Registrant.*
(f) Not Applicable
(g) Investment Management Agreement between the Registrant
and Scudder Kemper Investments, Inc.*
(h) Form of Distribution Agreement between the Registrant
and Kemper Distributors, Inc.*
(i) Not Applicable
(j) Custody Agreement between the Registrant and State
Street Bank and Trust Company.*
(k) (1) Form of Subscription Agreement with Kemper
Financial Services, Inc.*
(2) Plan of Distribution for Class B shares.*
(l) Opinion and Consent of Dechert Price & Rhoads.*
(m) Not Applicable
(n) Consent of ______________.*
(o) Not Applicable.
(p) Subscription Agreement for Initial Capital.*
(q) Not Applicable.
(r) Not Applicable.
(s) Not Applicable.
- ----------
* To be filed by amendment.
Item 25. Marketing Agreements
See Form of Distribution Agreement to be filed as Exhibit (h) to this
Registration Statement.
Item 26. Other Expenses of Issuance and Distribution*
Registration Fees..............................................._____________
Printing and Engraving Expenses................................._____________
Rating Agency Fees and Expenses................................._____________
Legal Fees and Expenses........................................._____________
National Association of Securities Dealers, Inc. Fees..........._____________
Accounting Fees and Expenses...................................._____________
Distributor Expense Reimbursement..............................._____________
Miscellaneous Expenses.........................................._____________
Total.................................................._____________
- ----------
* To be completed by amendment.
Item 27. Person Controlled by or Under Common Control
Not Applicable.
Item 28. Number of Holders of Securities
Not Applicable
Item 29. Indemnification
A policy of insurance covering Scudder Kemper Investment , 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 "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 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. 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. 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 securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
c. 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>
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 Boston, Massachusetts on this 23rd day of March, 1999.
KEMPER FLOATING RATE FUND
By: /s/ Maureen Kane
--------------------
Maureen Kane
President and Trustee
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:
/s/ Maureen Kane President and Trustee March 23, 1999
- -------------------- (Principal Executive Officer)
Maureen Kane
/s/ John R. Hebble Treasurer (Principal Financial March 23, 1999
- --------------------- and Accounting Officer)
John R. Hebble
