<PAGE> 1
As filed with the Securities and Exchange Commission on November 1, 1999
1933 Act File No. 333-
1940 Act File No. 811-09269
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
[X] Amendment No. 4
KEMPER FLOATING RATE FUND
Exact Name of Registrant Specified in Charter
222 South Riverside Plaza
Chicago, Illinois 60606
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(312) 537-7000
Registrant's Telephone Number, Including Area Code
PHILIP J. COLLORA, ESQ.
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.
Washington, D.C. 20006-2401
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [X]
It is proposed that this filing will become effective (check appropriate
box):
[ ] when declared effective pursuant to Section 8(c);
[ ] immediately upon filing pursuant to paragraph (b);
[X] on November 1, 1999 pursuant to paragraph (b);
[ ] 60 days after filing pursuant to paragraph (a); or
[ ] on , pursuant to paragraph (a) of Rule 486.
This Registration Statement includes a combined prospectus pursuant to Rule
429 which relates to an earlier registration statement filed by the Registrant
on May 25, 1999, as amended to date (File No. 333-74911), which registered
80,000,000 Class B Common Shares of Beneficial Interest (par value $.01 per
share) (the "Class B Shares"). As of September 30, 1999, 15,599,384.184 Class B
Shares had been issued pursuant to such registration statement. The registration
of the Class B Shares, for which $111,200 in registration fees were previously
paid, is being carried forward in this Registration Statement.
------------------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT PROPOSED PROPOSED AMOUNT OF
BEING MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION
TITLE OF SECURITIES BEING REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE FEE(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Shares of Beneficial
Interest (par value $.01 per
share)(2)............................. 80,000,000 $5.00 $400,000,000 $111,200
Class B Common Shares of Beneficial
Interest (par value $.01 per
share)(3)........................... 80,000,000 $5.00 $400,000,000 $111,200
Class C Common Shares of Beneficial
Interest (par value $.01 per
share)(2)........................... 80,000,000 $5.00 $400,000,000 $111,200
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933, based on net asset value per
share at the commencement of offering.
(2) Registration fees of $278 previously paid.
(3) Previously registered. Registration fees previously paid.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
KEMPER FLOATING RATE FUND
CROSS-REFERENCE SHEET
PART A
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN PROSPECTUS
- -------- ------- ----------------------
<C> <S> <C>
1. Outside Front Cover........................ Front Cover Page
2. Inside Front and Outside Back Cover Page... Front Cover Page
3. Fee Table and Synopsis..................... Fund Expenses
4. Financial Highlights....................... Financial Highlights
5. Plan of Distribution....................... Front Cover Page; Prospectus Summary;
Purchase of Shares; Dividends and
Distributions
6. Selling Shareholders....................... Not Applicable
7. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
8. General Description of the Registrant...... Front Cover Page; Prospectus Summary;
Investment Objective and Policies; Risk
Summary; 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>
PART B
<TABLE>
<CAPTION>
LOCATION IN STATEMENT OF ADDITIONAL
ITEM NO. CAPTION INFORMATION
- -------- ------- -----------------------------------
<C> <S> <C>
14. Cover Page................................. Cover Page
15. Table of Contents.......................... Table of Contents
16. General Information and History............ General Information
17. Investment Objective and Policies.......... Investment Restrictions and Fundamental
Policies; Repurchase Offer Fundamental
Policy; Additional Information about
Investments and Investment Techniques
18. Management................................. Management
19. Control Persons and Principal Holders of
Securities................................. Control Persons and Principal Holders of
Securities
20. Investment Advisory and Other Services..... Management; Portfolio Transactions
21. Brokerage Allocation and Other Practices... Portfolio Transactions; Liquidity
Requirements
22. Tax Status................................. Taxation
23. Financial Statements....................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE> 3
[KEMPER FUNDS LOGO]
KEMPER FLOATING RATE FUND
Kemper Floating Rate Fund (the "Fund") is a non-diversified, closed-end
management investment company that is continuously offered. The Fund's
investment objective is to seek as high a level of current income as is
consistent with the preservation of capital. The Fund seeks to achieve its
objective primarily by investing in interests in adjustable rate loans that have
a senior right to payment ("Senior Loans"). There can be no assurance that the
Fund will achieve its objective. Senior Loans are often secured by specific
assets, although the Fund may also invest in Senior Loans that are unsecured.
The Fund believes that investing in Senior Loans should limit fluctuations in
net asset value caused by changes in interest rates. You should, however, expect
the Fund's net asset value to fluctuate as a result of changes in borrower
credit quality and other factors. To provide liquidity to shareholders, the Fund
will make repurchase offers for 5% to 25% of its outstanding shares at net asset
value, beginning in November 1999, at three month intervals between repurchase
request deadlines. Proceeds will be paid no later than 24 calendar days after a
repurchase request deadline. See "Repurchase of Shares."
INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS AND SPECIAL CONSIDERATIONS,
INCLUDING THE POSSIBLE LOSS OF SOME OR ALL OF THE PRINCIPAL INVESTMENT, RISKS
ASSOCIATED WITH THE FUND'S USE OF BORROWING, AND RISKS ASSOCIATED WITH
INVESTMENT IN SECURITIES THAT ARE RATED BELOW INVESTMENT GRADE ("HIGH RISK
SECURITIES"), WHICH MAY INCLUDE THE SENIOR LOANS HELD BY THE FUND. THE FUND MAY
INVEST AN UNLIMITED PERCENTAGE OF ITS ASSETS IN SUCH HIGH-RISK SECURITIES. SEE
"RISK FACTORS AND SPECIAL CONSIDERATIONS" BEGINNING ON PAGE [ ]. THE FUND WILL
NOT ENGAGE IN BORROWING TO FINANCE LONG-TERM PORTFOLIO INVESTMENT, BUT MAY
BORROW IF NECESSARY TO SATISFY REPURCHASES, TO FUND COMMITMENTS TO PURCHASE
SENIOR LOANS AND TO MANAGE CASH FLOW.
NO MARKET PRESENTLY EXISTS FOR THE FUND'S SHARES AND IT IS NOT CURRENTLY
ANTICIPATED THAT A SECONDARY MARKET WILL DEVELOP FOR THE FUND'S SHARES. FUND
SHARES MAY NOT BE CONSIDERED TO BE READILY MARKETABLE.
THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE. This Prospectus sets forth concisely the information about the Fund
that a prospective investor
(Continued on next page)
------------------
<TABLE>
<CAPTION>
PRICE TO PUBLIC(1) SALES LOAD(2) PROCEEDS TO FUND(3)
------------------ ------------- -------------------
<S> <C> <C> <C>
Per Class A Share......... $ 5.00 None $ 5.00
Total................... $400,000,000 None $400,000,000
Per Class B Share......... $ 5.00 None $ 5.00
Total................... $400,000,000 None $400,000,000
Per Class C Share......... $ 5.00 None $ 5.00
Total................... $400,000,000 None $400,000,000
</TABLE>
(1) The shares are offered on a best efforts basis at net asset value. The net
asset value of the Class B shares as of October 27, 1999 was $4.99. Net
asset value and, accordingly, proceeds to the Fund, will fluctuate over the
course of the offering.
(2) Class B and Class C shares are subject to early withdrawal charges and
distribution fees. All shares are subject to an administrative services fee.
(3) Assumes sale of all shares currently registered at the net asset value
indicated. Organizational and offering expenses with respect to a class will
be borne by that class, subject to any expense waivers or reimbursements.
See "Use of Proceeds."
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1999
<PAGE> 4
ought to know before investing. A Statement of Additional Information dated
November 1, 1999 (the "SAI") containing additional information about the Fund
has been filed with the Commission and is incorporated by reference in its
entirety into this Prospectus. A copy of the SAI, the table of contents of which
appears on page 45 of this Prospectus, may be obtained without charge by
contacting the Fund toll-free at 1-800-621-1048. The SAI and other information
about the Fund are also available at the Commission's website (www.sec.gov).
The Fund's investment adviser is Scudder Kemper Investments, Inc. (the
"Adviser"). The address of the Fund is 222 South Riverside Plaza, Chicago,
Illinois 60606.
This Prospectus applies to the offering of Class A, Class B and Class C shares
of beneficial interest of the Fund, which may be continuously issued and sold
from time to time by the Fund through Kemper Distributors, Inc. (the
"Distributor"), as distributor and principal underwriter, and through
broker-dealers and other financial services firms who have entered into dealer
agreements with the Distributor ("firms"). See "Purchase of Shares." The Fund
began offering its Class B shares on May 25, 1999.
Shares of the Fund are offered at a price equal to the next determined net asset
value per share, plus any applicable sales charge. The Fund's Class A shares
will not be subject to a front-end sales commission, an early withdrawal charge
("EWC") or a distribution fee, but will be subject to other expenses. As
described more fully herein, Class A shares are available only to investors
participating in a fee based investment advisory or agency commission program
and upon conversion from Class B and Class C shares. The Fund's Class B shares
will not be subject to a front-end sales commission, but will be subject to a
declining EWC over a four year period and a distribution fee, as well as other
expenses. The Fund's Class C shares will not be subject to a front-end sales
commission, but will be subject to an EWC over a one year period and a
distribution fee, as well as other expenses. Other expenses include
organizational and offering expenses, brokers' commissions or other costs of
acquiring or disposing of any portfolio securities, legal, auditing and
accounting expenses, taxes and governmental fees, the fees and expenses of the
Fund's transfer agent, custodian, subcustodians, accounting agent, and dividend
disbursing agent, and the administrative services fee. Although the Fund
currently offers only Class A, Class B and Class C shares, the Fund may in the
future offer other classes of shares, which may be subject to a front-end sales
commission, an EWC, or a distribution fee, as well as other expenses. The Fund
has registered 80,000,000 Class A shares and 80,000,000 Class C shares for sale
under the Registration Statement to which this Prospectus relates. The Fund
previously registered 80,000,000 Class B shares for sale.
The minimum initial investment is $1,000 ($250 for individual retirement
accounts).
THE FUND HAS RECEIVED AN EXEMPTIVE ORDER FROM THE COMMISSION WITH RESPECT TO THE
FUND'S DISTRIBUTION FEE ARRANGEMENTS, EWC, AND MULTI-CLASS STRUCTURE. AS A
CONDITION OF SUCH ORDER, THE FUND IS REQUIRED TO COMPLY WITH CERTAIN REGULATIONS
THAT WOULD NOT OTHERWISE BE APPLICABLE TO THE FUND.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY.
<PAGE> 5
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Prospectus Summary
- ----------------------------------------------------------------
Risk Summary
- ----------------------------------------------------------------
Fund Expenses
- ----------------------------------------------------------------
Financial Highlights
- ----------------------------------------------------------------
Use Of Proceeds
- ----------------------------------------------------------------
Investment Objective And Policies
- ----------------------------------------------------------------
General Information On Senior Loans
- ----------------------------------------------------------------
Risk Factors And Special Considerations
- ----------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------
Purchase Of Shares
- ----------------------------------------------------------------
Repurchase Of Shares
- ----------------------------------------------------------------
Special Features
- ----------------------------------------------------------------
Description Of The Fund
- ----------------------------------------------------------------
Investment Management And Other Services
- ----------------------------------------------------------------
Dividends And Distributions
- ----------------------------------------------------------------
Tax Matters
- ----------------------------------------------------------------
Performance Information
- ----------------------------------------------------------------
Legal Matters
- ----------------------------------------------------------------
Registration Statement
- ----------------------------------------------------------------
Shareholder Reports
- ----------------------------------------------------------------
Financial Statements
- ----------------------------------------------------------------
Table of Contents of Statement of Additional Information
- ----------------------------------------------------------------
</TABLE>
<PAGE> 6
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 primarily by acquiring interests in
adjustable rate loans that have a senior right
to payment ("Senior Loans"). The interest rates
of Senior Loans adjust periodically based on a
benchmark indicator of prevailing interest
rates, such as the prime rate offered by one or
more major U.S. banks ("Prime Rate"), or the
London Inter-Bank Offered Rate ("LIBOR"). The
Senior Loan interests held by the Fund may
include assignments and participations. The
Fund believes that investing in Senior Loans
should limit fluctuations in its net asset
value caused by changes in interest rates. The
Fund may invest an unlimited percentage of its
assets in Senior Loans that are rated below
investment grade or that are unrated but of
comparable quality ("high risk securities").
The Fund invests in Senior Loans that are
generally fully collateralized with assets
and/or cash flow that the Adviser believes have
market value at the time of acquisition that
equals or exceeds the principal amount of the
Senior Loan. The Fund may also employ
techniques such as borrowing, if necessary to
accommodate cash flow, to fund commitments to
purchase Senior Loans, or to finance repurchase
offers, but will not borrow to finance
long-term investment. Accordingly, the Fund
will not purchase additional portfolio
securities at any time that borrowings,
including the Fund's commitments pursuant to
reverse repurchase agreements, exceed 5% of the
Fund's total assets (which includes the amount
borrowed).
1
<PAGE> 7
Continuous Offering....... The Fund intends to offer its shares
continuously through the Distributor, as
principal underwriter, at a price equal to the
net asset value per share. Class A shares are
available only to investors participating in a
fee based investment advisory or agency
commission program and upon conversion from
Class B and Class C shares. Minimum initial
investment is $1,000 ($250 for individual
retirement accounts) and minimum subsequent
investment is $100 ($50 for individual
retirement accounts). The Fund reserves the
right to waive any minimum investment
requirements and to refuse any order for the
purchase of shares. The Fund does not intend to
list the shares on any national securities
exchange.
General Investment
Guidelines................ Under normal circumstances, the Fund will
invest at least 80% of its total assets in
interests in Senior Loans. Up to 20% of the
Fund's total assets may be held in cash and
other investments, including fixed-rate debt
obligations, short- to medium-term notes,
high-yield securities, equity securities,
hybrid and synthetic loans, collateralized loan
obligations, and asset-backed securities.
A maximum of 25% of the Fund's total assets may
be invested in Senior Loans to borrowers and
securities of other issuers in any one
industry. However, selling lenders and other
persons positioned between the Fund and the
borrower in the Senior Loan process will likely
conduct their activities in the banking,
finance, and financial services industries.
Accordingly, the Fund may be more at risk to
any single economic, political or regulatory
occurrence affecting such industries.
The Fund will invest at least 90% of its total
assets in Senior Loans to borrowers and other
investments issued by entities that are
organized under U.S. law or domiciled in Canada
or U.S. territories or possessions. These
Senior Loans and other investments must be
denominated in U.S. dollars. The Fund may
invest up to 10% of its total assets in U.S.
dollar denominated Senior Loans to borrowers
and other investments issued by entities that
are organized or domiciled
2
<PAGE> 8
in countries other than the United States or
Canada.
Repurchase Offers......... As a matter of fundamental policy, the Fund
will offer to repurchase from 5% to 25% of its
common shares at net asset value on a quarterly
basis. These repurchase offers are scheduled to
occur in the months of February, May, August
and November. The first repurchase offer is
scheduled to occur in November 1999.
Distributions............. Income dividends are normally declared daily
and paid monthly. Income dividends may be
distributed in cash or reinvested in additional
full and fractional shares through the Fund's
dividend reinvestment program. Distributions of
net realized capital gains will normally be
made annually.
Investment Adviser........ Scudder Kemper Investments, Inc.
Distributor and
Administrative Services
Provider.................. Kemper Distributors, Inc.
3
<PAGE> 9
RISK SUMMARY
The following is a summary of certain matters discussed 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. Lenders may have difficulty liquidating
the collateral, if any, securing the Senior
Loans or enforcing their rights under the terms
of the Senior Loans. The Fund is dependent upon
the abilities of the Adviser to analyze credit
risk.
Non-diversification....... The Fund is not subject to the general
limitation under the Investment Company Act of
1940 that, with respect to 75% of its total
assets, it will not invest more than 5% of its
total assets in the securities of a single
issuer. As a result, because the Fund is
permitted greater flexibility to invest its
assets in the obligations of a single issuer,
it is exposed to increased risk of loss if such
an investment underperforms expectations.
However, the Fund intends to limit its
investments so as to comply with the
diversification requirements imposed by the
Internal Revenue Code of 1986, as amended, for
qualification as a "regulated investment
company."
Borrowing................. The Fund is authorized to borrow money in an
amount up to 33 1/3% of the Fund's total assets
(including the amount borrowed). The Fund will
borrow if necessary only for the purposes of
obtaining short-term credit in connection with
repurchase offers, to manage cash flow, or to
fund commitments to purchase Senior Loans. The
rights of any lenders to the Fund to receive
payments of interest on and repayments of
principal of such borrowings will be senior to
those of the holders of the Fund's common
shares and the terms of any such borrowings may
contain provisions which limit certain
activities of the Fund, including the payment
of dividends to holders of common shares in
certain circumstances. The terms of such
borrowings also may grant lenders certain
voting rights in the event of default in the
payment of interest or the repayment of
principal. The interest expense associated with
such borrowings will reduce or eliminate the
amount of net income available for
4
<PAGE> 10
payment to the holders of common shares. The
Fund will not borrow 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 (including the amount borrowed).
Limited Secondary Market
for Senior Loans.......... Because of a limited secondary market for
Senior Loans, the Fund may be limited in its
ability to sell portfolio holdings at the price
at which they are valued by the Fund to
generate gains, avoid losses, or to meet
repurchase requests.
Demand for Senior Loans... An increase in demand for Senior Loans may
adversely affect the rate of interest payable
on Senior Loans acquired by the Fund.
High-Yield/High Risk
Securities................ The Fund may purchase interests in Senior Loans
and other securities that are rated below
investment grade or are unrated but considered
by the Adviser to be of comparable quality. The
purchase of such securities exposes the Fund to
financial, market and interest-rate risks and
greater credit risks than would the purchase of
higher quality securities. Such investments are
also likely to result in increased fluctuation
in the Fund's net asset value, particularly in
response to economic downturns.
Foreign Securities........ The Fund may invest up to 10% of its total
assets in U.S. dollar-denominated Senior Loans
to borrowers and securities of other issuers
that are that are organized or located in
countries other than the United States, Canada,
or in the U.S. territories and/or possessions.
Although such Senior Loans will require payment
of interest and principal in U.S. dollars,
these borrowers and issuers may have
significant non-U.S. dollar revenues.
Investment in non-U.S. entities involves
special risks, including that non-U.S. entities
may be subject to less rigorous accounting and
reporting requirements than U.S. entities, less
rigorous regulatory requirements, differing
legal systems and laws relating to creditors'
rights, the potential inability to enforce
legal judgments, fluctuations in currency
values
5
<PAGE> 11
and the potential for political, social and
economic adversity.
No Trading Market for
Shares.................... The Fund is a closed-end investment company
designed primarily for long-term investors and
not as a trading vehicle. The Fund does not
intend to list the shares for trading on any
national securities exchange. There is no
secondary trading market for Fund shares. The
Fund's shares are therefore not readily
marketable. The Fund, as a fundamental policy,
will make quarterly repurchases for 5% to 25%
of its outstanding common shares at net asset
value. See "Repurchase of Shares" below for
more information. However, the Fund's shares
are less liquid than shares of funds that trade
on a stock exchange, and shareholders of Class
B and Class C shares who tender Fund shares
held for less than four years in the case of
Class B or one year in the case of Class C will
pay an EWC. See "Purchase of Shares." In
addition, there is no guarantee that
shareholders will be able to sell the desired
number of Fund shares.
6
<PAGE> 12
FUND EXPENSES
The following table is intended to assist the Fund's shareholders in
understanding the various costs and expenses associated with investing in Class
A, Class B and Class C shares of the Fund. This information is based on
estimated amounts for "Other Expenses" and "Interest Payments on Borrowed Funds"
for the fiscal year ending August 31, 2000. Actual expenses may vary.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES(1)
Maximum Sales Charge (Load) Imposed
on Purchases (as a percentage of
offering price)................. NONE(2) NONE NONE
Maximum Sales Charge on Reinvested
Dividends....................... NONE NONE NONE
Maximum Early Withdrawal Charge.... NONE 3.00% 1.00%
Exchange Fee....................... NONE NONE NONE
ANNUAL EXPENSES (as a percentage of
average net assets attributable to
common shares)
Management Fees(3)................. .50% .50% .50%
Administrative Services Fee(4)..... .25% .25% .25%
Distribution Fee(5)................ NONE .60%(6) .60%(7)
Interest Payments on Borrowed
Funds(8)........................ .02% .02% .02%
Other Expenses(9).................. .26% .21% .22%
Total Annual Expenses................ 1.03% 1.58% 1.59%
</TABLE>
- ---------------
(1) The firms and other financial services firms may independently charge
additional fees for shareholder transactions or for advisory services.
Please see their materials for details.
(2) Class A shares are available only to investors participating in a fee based
investment advisory or agency commission programs and upon conversion from
Class B and Class C shares.
(3) Pursuant to an Investment Management Agreement with the Fund, the Adviser is
entitled to receive an investment management fee of 0.50% of the average
daily net assets of the Fund, with graduated fee reductions based on
increased asset levels. See "Investment Management and Other Services." This
amount does not take into account any fee waivers.
(4) Pursuant to an Administrative Services Agreement with the Fund, the
Distributor is entitled to receive an annual fee of up to 0.25% of the
average daily net assets of the Fund. This amount does not take into account
any fee waivers.
(5) Class A shares are not subject to any distribution fees. Pursuant to the
Class B share Distribution Plan, the Class B shares pay a maximum annual
distribution fee of 0.60% of average daily net assets. Class B shares will
automatically convert to Class A shares six years after purchase. Pursuant
to the Class C share Distribution Plan, the Class C shares pay a maximum
annual distribution fee of 0.60% of average daily net assets. Class C shares
will automatically convert to Class A shares ten years after purchase.
(6) Long-term Class B shareholders of the Fund may, as a result of the Fund's
distribution fees, pay more than the economic equivalent of the maximum
initial sales charges permitted by the National Association of Securities
Dealers, Inc., although the Fund's distributor believes this is
7
<PAGE> 13
unlikely because of the automatic conversion feature described under
"Purchase of Shares--Purchase of Class B Shares--Automatic Conversion
Feature."
(7) Long-term Class C shareholders of the Fund may, as a result of the Fund's
distribution fees, pay more than the economic equivalent of the maximum
initial sales charges permitted by the National Association of Securities
Dealers, Inc., although the Fund's distributor believes this is unlikely
because of the automatic conversion feature described under "Purchase of
Shares--Purchase of Class C Shares--Automatic Conversion Feature."
(8) Assumes borrowing outstanding for 1/6 of the current fiscal year, an annual
interest rate of 5 1/2%, a borrowing level of 2 1/2% of total assets and a
$100,000,000 total asset level.
(9) "Other Expenses" are based on estimated amounts for the current fiscal year,
including the organizational and initial offering expenses borne by the
Fund.
This following hypothetical example assumes that all dividends and other
distributions are reinvested at net asset value and that the percentage amounts
listed under Annual Expenses remain the same in the years shown. The tables and
the assumption in the hypothetical example of a 5% annual return are required by
regulation of the Commission applicable to all investment companies; the assumed
5% annual return is not a prediction of, and does not represent, the projected
or actual performance of the Fund's shares. For more complete descriptions of
certain of the Fund's costs and expenses, see "Investment Management and Other
Services."
THE FOLLOWING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
EXAMPLE
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Based on the estimated level of total
operating expenses listed above, you
would pay the following expenses on a
$1,000 investment, assuming a 5%
annual return and repurchase at the
end of each time period.............. $11 $33 $57 $126
You would pay the following expenses
on the same investment, assuming no
repurchase........................... $11 $33 $57 $126
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES(1) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Based on the estimated level of total
operating expenses listed above, you
would pay the following expenses on a
$1,000 investment, assuming a 5%
annual return and repurchase at the
end of each time period.............. $46 $70 $86 $160
You would pay the following expenses
on the same investment, assuming no
repurchase........................... $16 $50 $86 $160
</TABLE>
8
<PAGE> 14
<TABLE>
<CAPTION>
CLASS C SHARES(2) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Based on the estimated level of total
operating expenses listed above, you
would pay the following expenses on a
$1,000 investment, assuming a 5%
annual return and repurchase at the
end of each time period.............. $26 $50 $87 $189
You would pay the following expenses
on the same investment, assuming no
repurchase........................... $16 $50 $87 $189
</TABLE>
- ---------------
(1) Assumes that the shareholder was an owner of the shares on the first day of
the first year and the EWC was applied as follows: 1 year (3.0%), 3 years
(2.0%), and five years (0%). Class B shares convert to Class A shares six
years after issuance. Accordingly, the expenses in years seven through ten
of this example reflect the annual Class A expenses.
(2) Assumes that the shareholder purchased shares on the first day of the first
year and the EWC was applied as follows: 1 year (1.0%), and 3 years through
10 years (0%). Class C shares convert to Class A shares ten years after
issuance.
FINANCIAL HIGHLIGHTS
The following table includes selected data for a Class B share outstanding for
the period indicated. The Financial Highlights are part of the Fund's financial
statements, which are included in its annual report to shareholders for the
period from May 25, 1999 to August 31, 1999. As of the date of this Prospectus,
the Fund had not issued any Class A or Class C shares.
<TABLE>
<CAPTION>
CLASS B
FOR THE PERIOD FROM
MAY 25, 1999
(COMMENCEMENT OF
OPERATIONS) TO
PER SHARE OPERATING PERFORMANCE AUGUST 31, 1999(A)
- ------------------------------- -------------------
<S> <C>
Net asset value, beginning of period................ $ 5.00
Income from investment operations:
Net investment income............................. 0.09
Net realized and unrealized gain (loss)........... (0.03)
Total from investment operations.................... 0.06
Less distribution from net investment income........ (0.07)
Net asset value, end of period...................... $ 4.99
Total return (not annualized)(b).................... 1.23%
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses absorbed by the fund....................... 0.38%
Net investment income............................... 6.53%
</TABLE>
9
<PAGE> 15
<TABLE>
<CAPTION>
CLASS B
FOR THE PERIOD FROM
MAY 25, 1999
(COMMENCEMENT OF
OPERATIONS) TO
PER SHARE OPERATING PERFORMANCE AUGUST 31, 1999(A)
- ------------------------------- -------------------
<S> <C>
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses............................................ 3.48%
Net investment income............................... 3.43%
SUPPLEMENTAL DATE
Net assets at end of period (in millions)........... $67.00
Portfolio turnover rate (annualized)................ 2.2%
</TABLE>
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive its management fee and
absorb certain operating expenses of the fund. The other ratios to average net
assets are computed without this expense waiver or absorption.
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been waived.
USE OF PROCEEDS
Proceeds of the Fund's continuous offering will be invested in accordance with
the Fund's investment objective and policies over the course of the offering.
The initial offering and organizational expenses of the Fund with respect to the
Class B shares were charged against the Fund during the fiscal period ended
August 31, 1999. The estimated offering expenses in connection with this
Registration Statement are $282,000. These offering expenses will be amortized
over the fiscal period ending August 31, 2000.
10
<PAGE> 16
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide as high a level of current income
as is consistent with the preservation of capital. This objective is not
fundamental and may be changed by the Fund's Board of Trustees without
shareholder approval. Similarly, unless otherwise stated in this Prospectus or
the SAI, the Fund's investment policies and restrictions are non-fundamental.
There can be no assurance that the Fund will achieve its investment objective.
The Fund seeks to achieve its objective primarily by investing in interests in
adjustable rate loans that have a senior right to payment ("Senior Loans"),
which, in most circumstances, are fully collateralized by assets of a
corporation, partnership, limited liability company, or other business entity
that is organized or domiciled in the United States, Canada or in U.S.
territories and/or possessions (a "U.S. entity"). The Senior Loans are often
issued in connection with recapitalizations, acquisitions, leveraged buy-outs,
and refinancings. The Fund primarily invests in Senior Loans that have interest
rates that adjust periodically based upon a benchmark indicator of prevailing
interest rates, such as the Prime Rate or LIBOR, and invests only in Senior
Loans and other investments that are U.S. dollar denominated. Under normal
circumstances, at least 80% of the Fund's total assets will be invested in
Senior Loans. The Fund may also purchase other types of instruments in seeking
to achieve its investment objective, including high-yield securities. The Fund
may invest up to 10% of its total assets in Senior Loans and other investments
that are issued by non-U.S. entities, although such investments will be U.S.
dollar denominated. All percentage limitations in this Prospectus and the SAI
are applied as of the time of investment.
Senior Loans are considered to be loans that hold a senior position in the
capital structure of the borrower. These may include loans that hold the most
senior position, that hold an equal ranking with other senior debt, or loans
that are, in the judgment of the Adviser, in the category of senior debt of the
borrower. This capital structure position generally gives the holders of Senior
Loans a priority claim on some or all of the borrower's assets in the event of
default. The Senior Loans in which the Fund invests are generally fully
collateralized with assets and/or cash flow that the Adviser believes have a
market value at the time of acquisition that equals or exceeds the principal
amount of the Senior Loan. The loan agreement may or may not require the
borrower to pledge additional collateral to secure the Senior Loan if the value
of the initial collateral declines. The Fund may invest up to 20% of its total
assets in Senior Loans that are not secured by collateral. Such unsecured Senior
Loans involve a greater risk of loss. The Fund also only purchases interests in
Senior Loans of borrowers that the Adviser believes can meet debt service
requirements from cash flow or other sources, including the sale of assets.
Because of their protective features, the Adviser believes that Senior Loans of
borrowers that either are experiencing, or are more likely to experience,
financial difficulty may represent attractive investment opportunities. Senior
Loans vary in yield according to their terms and conditions, how often they pay
interest, and when rates are reset. The Fund generally does not invest in Senior
11
<PAGE> 17
Loans of U.S. entities with interest rates that are tied to non-domestic
interest rates other than LIBOR. The Fund may invest up to 10% of its total
assets in Senior Loans of non-U.S. entities with interest rates tied to other
non-domestic interest rates, including, but not limited to, the Paris Inter-Bank
Offered Rate, the EURO LIBOR, or the EURO Area Inter-Bank Offered Rate.
The Fund may acquire Senior Loans to borrowers engaged in any industry. The Fund
will invest no more than 25% of its total assets in Senior Loans to borrowers
and securities of other issuers in any one industry. Selling lenders and other
persons positioned between the Fund and the borrower will likely conduct their
principal business activities in the banking, finance and financial services
industries. The Fund may be more at risk to any single economic, political or
regulatory occurrence affecting such industries. Persons engaged in such
industries may be more susceptible to, among other things, fluctuations in
interest rates, changes in the Federal Open Market Committee's monetary policy,
governmental regulations concerning such industries and concerning capital
raising activities generally and fluctuations in the financial markets
generally.
Investors should recognize that there can be no assurance that the investment
objective of the Fund will be realized. Moreover, substantial increases in
interest rates may cause an increase in Senior Loan defaults as borrowers may
lack resources to meet higher debt service requirements. The value of the Fund's
assets may also be affected by other uncertainties, such as economic
developments affecting the market for Senior Loans or affecting borrowers
generally. For additional information on Senior Loans, see "General Information
on Senior Loans."
Investment in the Fund's shares is intended to offer several benefits. The Fund
offers investors the opportunity to seek a high level of current income by
investing in a professionally-managed portfolio comprised primarily of Senior
Loans, a type of investment typically not available directly to individual
investors. Other benefits are the professional credit analysis provided to the
Fund by the Adviser and portfolio diversification.
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
of comparable quality and maturity (other than money market funds and some
short-term bond funds). Generally, the net asset value of the shares of an
investment company which invests primarily in fixed-income securities changes as
interest rates fluctuate. When interest rates rise, the value of a fixed income
portfolio normally can be expected to decline. When interest rates decline, the
value of a fixed-income portfolio normally can be expected to increase. The
Adviser expects the Fund's net asset value to be relatively stable during normal
market conditions, because the Senior Loans in which the Fund primarily invests
adjust periodically in response to changes in interest rates. However, because
the interest rates only reset periodically, the Fund's net asset value may
fluctuate from time to time in the event of an imperfect correlation between the
interest rates on the Fund's Senior Loans and prevailing interest rates. Also, a
default on a Senior Loan in which the Fund has invested or a sudden and
12
<PAGE> 18
extreme increase in prevailing interest rates may cause a decline in the Fund's
net asset value. Further, investment in securities other than Senior Loans,
including high yield securities, may contribute to the fluctuation of the Fund's
net asset value. Changes in interest rates can be expected to affect the
dividends paid by the Fund, so that the distribution rate on an investment in
the Fund's shares will likely fluctuate as a result of changes in prevailing
interest rates.
INVESTMENT IN NON-U.S. ISSUERS
The Fund may invest up to 10% of its total assets in U.S. dollar denominated
Senior Loans to borrowers and securities of other issuers that are organized or
located in countries other than the United States, Canada, or in U.S.
territories and/or possessions ("non U.S. entities"). Although such Senior Loans
will require payment of interest and principal in U.S. dollars, these borrowers
and issuers may have significant non-U.S. dollar revenues. Investment in non-
U.S. entities involves special risks, including that non-U.S. entities may be
subject to less rigorous accounting and reporting requirements than U.S.
entities, less rigorous regulatory requirements, differing legal systems and
laws relating to creditors' rights, the potential inability to enforce legal
judgments, fluctuations in currency values and the potential for political,
social and economic adversity. Such Senior Loans may include certain foreign
senior debt that is in the form of notes and note loan agreements.
INTEREST RATES AND PORTFOLIO MATURITY
Interest rates on Senior Loans adjust periodically. The interest rates are
adjusted based on a base rate plus a premium or spread over the base rate. The
base rate usually is LIBOR, the Federal Reserve federal funds rate, the Prime
Rate or the certificate of deposit ("CD") rate or other base lending rates used
by commercial lenders. LIBOR, as provided for in loan agreements, usually is an
average of the interest rates quoted by several designated banks as the rates at
which they pay interest to major depositors in the London interbank market on
U.S. dollar denominated deposits. The Adviser believes that changes in
short-term LIBOR rates are closely related to changes in the Federal Reserve
federal funds rate, although the two are not technically linked. The Prime Rate
quoted by a major U.S. bank is generally the interest rate at which that bank is
willing to lend U.S. dollars to its most creditworthy borrowers, although it may
not be the bank's lowest available rate. The CD rate, as provided for in loan
agreements, usually is the average rate paid on large certificates of deposit
traded in the secondary market.
The Fund is not subject to any restrictions with respect to the maturity of
Senior Loans held in its portfolio. Interest rates on Senior Loans may adjust
periodically, including daily, monthly, quarterly, semi-annually, or annually.
The Fund will not invest more than 5% of its total assets in Senior Loans with
interest rates that adjust less often than semi-annually, provided, however,
that the Fund will not invest in Senior Loans which permit the borrower to
select an interest rate redetermination period in excess of one year. Investment
in Senior Loans with longer interest rate redetermination periods may increase
fluctua-
13
<PAGE> 19
tions in the Fund's net asset value as a result of changes in interest rates.
The Fund may use interest rate swaps and other investment practices to shorten
the effective interest rate adjustment period of Senior Loans. If the Fund does
so, it will consider the shortened period to be the adjustment period of the
Senior Loan. The Fund's portfolio of Senior Loans will generally have a dollar-
weighted average time until the next interest rate adjustment of 90 days or
less, although the time may exceed 90 days. As short-term interest rates rise,
interest payable to the Fund should increase. As short-term interest rates
decline, interest payable to the Fund should decrease. The amount of time that
will pass before the Fund experiences the effects of changing short-term
interest rates will depend on the dollar-weighted average time until the next
interest rate adjustment on the Fund's portfolio of Senior Loans.
Although the Fund has no restrictions on portfolio maturity, normally at least
80% of the Fund's total assets invested in Senior Loans will be composed of
Senior Loans with maturities of one to ten years with rates of interest which
typically reset either daily, monthly, quarterly or semi-annually. Senior Loans
usually have mandatory and optional prepayment provisions. Because of
prepayments, the actual remaining maturity of Senior Loans may be considerably
less than their stated maturity. If a Senior Loan is prepaid, the Fund will have
to reinvest the proceeds in other Senior Loans or securities which may pay lower
interest rates. However, because the interest rates on Senior Loans adjust
periodically, the Adviser believes that the reinvestment by the Fund in Senior
Loans after prepayment generally should not result in a significant reduction in
the interest payable to the Fund.
In the event of a change in the benchmark interest rate on a Senior Loan, the
rate payable to lenders under the Senior Loan will, in turn, change at the next
scheduled reset date. If the benchmark rate goes up, the Fund as lender would
earn interest at a higher rate, but only on and after the reset date. If the
benchmark rate goes down, the Fund as lender would earn interest at a lower
rate, but only on and after the reset date.
When interest rates rise, the values of fixed income securities generally
decline. When interest rates fall, the values of fixed income securities
generally increase. The Fund believes that investing in Senior Loans should
limit fluctuations in the Fund's net asset value caused by changes in interest
rates. The Fund expects the values of its Senior Loan investments to fluctuate
less than the values of fixed rate, longer-term debt securities in response to
changes in interest rates. Changes in interest rates can, however, cause some
fluctuation in the Fund's net asset value.
CREDIT ANALYSIS
When evaluating a borrower under a Senior Loan the Adviser considers many
factors, including the borrower's past and future projected financial
performance. The Adviser also considers a borrower's management, collateral,
cash flow, industry and tangible assets. There is no assurance that the
liquidation value of collateral, if any, for a Senior Loan would satisfy the
borrower's
14
<PAGE> 20
obligations. The Fund does not impose any minimum rating or other independent
evaluation of a borrower or its securities.
The capital structure of a borrower may include Senior Loans, senior and junior
subordinated debt, preferred stock and common stock. Senior Loans typically have
the most senior claim on the borrower's assets and common stock the most junior
claim. The proceeds of Senior Loans that the Fund will purchase usually will be
used by borrowers to finance leveraged buyouts, recapitalizations, mergers,
acquisitions, stock repurchases, debt refinancings and, to a lesser extent, for
general operating and other purposes.
The Adviser performs its own independent credit analysis of the borrower. In so
doing, the Adviser may utilize information and credit analyses from the agents
that originate or administer Senior Loans, other lenders investing in a Senior
Loan, and other sources. These analyses will continue on a periodic basis for
any Senior Loan purchased by the Fund. There is less readily available, reliable
information about most Senior Loans than is the case for many other types of
securities. As a result, the Fund is particularly dependent on the analytical
abilities of the Adviser. See "Risk Factors and Special Considerations--Credit
Risks and Realization of Investment Objective."
OTHER INVESTMENTS
Assets not invested in Senior Loans will generally consist of other instruments,
including Hybrid and Synthetic Loans (as defined below), unsecured and
subordinated loans, short-term debt instruments with remaining maturities of 120
days or less (which may have yields tied to the Prime Rate, commercial paper
rates, federal funds rate or LIBOR), longer-term debt securities, equity
securities and warrants acquired in connection with investment in or
restructuring of a Senior Loan or a collateralized loan obligation, and other
instruments as described under "Additional Information About Investments and
Investment Techniques" in the SAI. Short-term debt instruments may include (i)
commercial paper rated A-1 by Standard & Poor's Ratings Services or P-1 by
Moody's Investors Service, Inc., or of comparable quality as determined by the
Adviser, (ii) certificates of deposit, bankers' acceptances, and other bank
deposits and obligations, and (iii) securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. During periods when, in the
judgment of the Adviser, a temporary defensive posture in the market is
appropriate, the Fund may hold up to 100% of its assets in cash, or in the
instruments described above. These "Other Investments" are described below. All
such investments normally will not exceed 20% of the Fund's total assets.
Securities that, in the judgment of the Adviser, are Senior Loans are not
included in the 20% portion of the Fund's portfolio described under this
heading.
HYBRID AND SYNTHETIC LOANS. Subject to the aggregate 20% limit on other
investments, the Fund may invest up to 20% of its total assets in Hybrid and
Synthetic Loans. The growth of the syndicated loan market has produced loan
structures with characteristics similar to Senior Loans but which resemble
15
<PAGE> 21
bonds in some respects, and generally offer less covenant or other protections
than traditional Senior Loans while still being collateralized ("Hybrid Loans").
The Fund may invest in Hybrid Loans that are subordinated or unsecured debt of
the borrower. Hybrid Loans also may not include covenants that are typical of
Senior Loans, such as covenants requiring the maintenance of minimum interest
coverage ratios. As a result, Hybrid Loans present additional risks besides
those associated with traditional Senior Loans, although they may provide a
relatively higher yield. Because the lenders in Hybrid Loans waive or forego, or
the loan agreements for Hybrid Loans do not contain, certain loan covenants,
there may be fewer protections in the event of default and therefore a higher
risk of loss. In addition, because the Fund's security interest in some of the
collateral may be subordinate to other creditors, the risk of nonpayment of
interest or loss of principal may be greater than would be the case with
conventional Senior Loans. The Fund will invest only in Hybrid Loans that meet
credit standards established by the Adviser with respect to Hybrid Loans and
nonetheless provide certain protections to the lender such as collateral
maintenance (if secured) or call protection.
In addition, under certain circumstances, the Fund may wish to attempt to obtain
the economic performance of an investment in a Senior Loan in circumstances
where it is not possible or, in the Adviser's judgment, desirable, to purchase
an interest in the Senior Loan. These circumstances may include instances where
the interest in the Senior Loan is illiquid or is unavailable for direct
investment, or is available only on less attractive terms. In such
circumstances, the Fund may wish to invest in synthetic alternative loans
("Synthetic Loans") that are based upon or otherwise relate to the economic
performance of the Senior Loan upon which the Synthetic Loan is based (the
"underlying loan"). Synthetic Loans may include swap transactions, notes or
units with variable redemption amounts, and other similar instruments and
contracts. Synthetic Loans typically do not involve beneficial ownership of the
underlying loan, usually are not collateralized or otherwise secured by the
counterparty, and may or may not have any credit enhancements attached to them.
Accordingly, Synthetic Loans are generally unsecured and involve exposure to the
creditworthiness and legal standing of the issuer of the Synthetic Loan, which
may be a bank. In addition, Synthetic Loans are typically illiquid.
COLLATERALIZED LOAN OBLIGATIONS. Subject to the aggregate 20% limit on other
investments, the Fund may invest up to 10% of its total assets in collateralized
loan obligations or other structured products that in the judgment of the
Adviser are substantially similar to collateralized loan obligations ("CLOs").
CLOs are asset-backed securities issued by a trust or other entity that are
collateralized by a pool of loans, which may include, among others, domestic and
foreign senior secured loans, senior unsecured loans, and subordinate corporate
loans, including loans that may be rated below investment grade or equivalent
unrated loans. Neither the Fund nor the Adviser selects the borrowers of the
loans that comprise the CLO pool (a "CLO borrower") or the collateral backing
those loans. CLOs are subject to credit and prepayment risk. In addition, the
collection of collateral on a defaulted loan, if achieved, may be subject to
significant delays. Further, the Fund may be subject to the credit risk
16
<PAGE> 22
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. Subject to the aggregate 20% limit on other
investments, the Fund may invest up to 20% of its total assets in subordinated
and unsecured loans that, in the judgment of the Adviser, are not Senior Loans.
The primary risk arising from a holder's subordination is the potential loss in
the event of default by the issuer of the loans. Subordinated loans in an
insolvency bear an increased share, relative to senior secured lenders, of the
ultimate risk that the borrower's assets are insufficient to meet its
obligations to its creditors. Unsecured loans are not secured by any collateral
of the borrower. They do not enjoy the security associated with
collateralization and may pose a greater risk of nonpayment of interest or loss
of principal than do secured loans.
EQUITY SECURITIES. Subject to the aggregate 20% limit on other investments, the
Fund may invest up to 20% of its total assets in equity securities acquired in
connection with investments in or restructuring of a Senior Loan, CLO,
subordinated and unsecured loan, high-yield security, or other investment of the
Fund, including common stocks, preferred stocks, convertible securities and
warrants (which may be converted into the underlying security). Common stocks
and preferred stocks represent shares of ownership in a corporation or other
business organization. Preferred stocks usually have specific dividends and rank
after bonds and before common stock in claims on assets of the corporation
should it be dissolved. Increases and decreases in earnings are usually
reflected in a corporation's stock price. Convertible securities are debt or
preferred equity securities convertible into common stock. Usually, convertible
securities pay dividends or interest at rates higher than common stock, but
lower than other securities. Convertible securities usually participate to some
extent in the appreciation or depreciation of the underlying stock into which
they are convertible. Warrants are options to buy a stated number of shares of
common stock at a specified price any time during the life of the warrants.
To the extent the Fund invests in such equity securities, the value of the
Fund's portfolio will be affected by changes in the stock markets, which may be
the result of domestic or international political or economic news, changes in
interest rates or changing investor sentiment. At times, the stock markets can
be volatile and stock prices can change substantially. The equity securities of
smaller companies are more sensitive to these changes than those of larger
companies. This market risk will affect the Fund's net asset value per share,
which will fluctuate as the value of the securities held by the Fund changes.
Not all stock prices change uniformly or at the same time and not all stock
markets move in the same direction at the same time. Other factors affect a
particular stock's prices, such as poor earnings reports by an issuer, loss of
major customers, major litigation against an issuer, or changes in governmental
regulations affecting an industry. Adverse news affecting one company can
17
<PAGE> 23
sometimes depress the stock prices of all companies in the same industry. Not
all factors can be predicted.
OTHER INVESTMENT COMPANIES. Securities of other investment companies may be
acquired by the Fund to the extent permitted under the Investment Company Act of
1940 ("1940 Act"). The Fund may make indirect investments in Senior Loans
through investments in other investment companies. Under applicable
restrictions, the Fund may not acquire more than 3% of the total outstanding
voting stock of another investment company, may invest no more than 5% of its
total assets in the securities of any one investment company, and may invest
overall no more than 10% of its total assets in other investment companies.
Investment companies, including the Fund, incur certain expenses such as
management, custodian, and transfer agency fees, and, therefore, any investment
by the Fund in shares of other investment companies may be subject to such
duplicate expenses.
HIGH-YIELD/HIGH-RISK SECURITIES. The Fund may invest up to 5% of its total
assets in high-yield securities (which do not include Senior Loans that may be
rated below investment grade or comparable unrated Senior Loans). High-yield
securities are debt securities that are rated lower than Baa by Moody's or BBB
by S&P, or if not rated by Moody's or S&P, of equivalent quality. High-yield
securities often are referred to as "junk bonds" and include certain corporate
debt obligations, higher-yielding preferred stock and mortgage-related
securities, and securities convertible into those types of instruments.
Investments in high-yield securities generally provide greater income and
increased opportunity for capital appreciation than investments in
higher-quality debt securities, but they also typically entail greater potential
price volatility and principal and income risk.
High-yield securities are not considered to be investment grade. They are
regarded as predominantly speculative with respect to the issuing company's
continuing ability to meet principal and interest payments. The prices of high-
yield securities have been found to be less sensitive to interest-rate changes
than higher-rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. A projection of an economic downturn or of
a period of rising interest rates, for example, could cause a decline in the
prices of high-yield securities. In the case of high-yield securities structured
as zero-coupon or pay-in-kind securities, their market prices are affected to a
greater extent by interest-rate changes, and therefore tend to be more volatile
than securities that pay interest periodically and in cash.
The secondary market in which high-yield securities are traded is generally less
liquid than the market for higher-grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which the Fund could sell a
high-yield security, and could adversely affect the net asset value of the
Fund's shares. At times of less liquidity, it may be more difficult to value
high-yield securities because this valuation may require more research, and
elements of judgment may play a greater role in the valuation since there is
less reliable, objective data available. In pursuing the Fund's objectives, the
Adviser seeks to
18
<PAGE> 24
identify situations in which the rating agencies have not fully perceived the
value of the security.
Investments in high-yield securities by the Fund may result in greater net asset
value fluctuation than if the Fund did not make such investments.
There is no limit on the percentage of the Fund's assets that may be invested in
Senior Loans that are rated below investment grade or that are unrated but of
comparable quality.
USE OF HEDGING TECHNIQUES
The Fund may enter into various interest rate hedging and risk management
transactions, subject to the availability of such instruments and the Adviser's
discretion, which includes the discretion not to pursue a hedging or risk
management strategy, even when doing so might have been advantageous to the
Fund. Certain of these transactions may be considered to involve derivative
instruments. A derivative is a financial instrument whose performance is derived
at least in part from the performance of an underlying index, security or asset.
The values of certain derivatives can be affected dramatically by even small
market movements, sometimes in ways that are difficult to predict. There are
many different types of derivatives, with many different uses. The Fund expects
to enter into these transactions primarily to seek to preserve a return on or
value of a particular investment or portion of its portfolio, and may also enter
into such transactions to seek to protect against decreases in the anticipated
rate of return on adjustable rate financial instruments the Fund owns or
anticipates purchasing at a later date, or for other risk management strategies
such as managing the effective dollar-weighted average duration of the Fund's
portfolio. In addition, the Fund may also engage in hedging transactions to seek
to protect the value of its portfolio against declines in net asset value
resulting from changes in interest rates or other market changes. The Fund does
not intend to engage in such transactions to enhance the yield on its portfolio
to increase income available for distributions. Market conditions will determine
whether and in what circumstances the Fund would employ any hedging or risk
management techniques. The Fund will not engage in any of the transactions for
speculative purposes and will use them only as a means to hedge or manage the
risks associated with assets held in, or anticipated to be purchased for, the
Fund's portfolio or obligations incurred by the Fund. The successful utilization
of hedging and risk management transactions requires skills different from those
needed in the selection of the Fund's portfolio securities. The Fund believes
that the Adviser possesses the skills necessary for the successful utilization
of hedging and risk management transactions. There can be no assurance that an
appropriate hedging or risk management instrument will be available to the Fund
when the Adviser seeks such instrument for use by the Fund, or that the Adviser
will in its discretion utilize a hedging or risk management instrument when it
might have been advantageous for the Fund to do so. The Fund will incur
brokerage and other costs in connection with its hedging and risk management
transactions. See "Interest Rate Hedging Transactions" in the SAI.
19
<PAGE> 25
USE OF BORROWING
The Fund may borrow money in amounts up to 33 1/3% of the value of its total
assets if necessary to finance repurchase offers (as described below under
"Repurchase Offers"), to fund commitments to purchase Senior Loans, or for other
temporary, extraordinary or emergency purposes. The Fund may also borrow in
anticipation of cash flows into and out of the Fund and to attempt to
efficiently manage the Fund's investment portfolio. The Fund does not intend to
issue securities representing indebtedness other than short-term borrowings or
to issue preferred shares. The Fund will not borrow 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
(including the amount borrowed).
Capital raised through borrowing will be subject to interest costs. The Fund may
be required to maintain minimum average balances in connection with borrowings
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements will increase the cost of borrowing over the stated interest
rate.
The Fund may enter into an agreement with a financial institution providing for
an unsecured, discretionary credit facility (the "Facility"), the proceeds of
which may be used to finance, in part, share repurchases. The Facility may
provide for the borrowing by the Fund to the extent permitted under the 1940
Act, on an unsecured, uncommitted basis. Loans made under the Facility will bear
interest at an adjustable rate.
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of 300% of the
aggregate outstanding principal balance of indebtedness. Additionally, under the
1940 Act the Fund may not declare any dividend or other distribution upon any
class of its capital stock, or purchase any such capital stock, unless the
aggregate indebtedness of the Fund has at the time of the declaration of any
such dividend or distribution or at the time of any such purchase an asset
coverage of at least 300%, after deducting the amount of such dividend,
distribution, or purchase price, as the case may be. The Fund's inability to
make distributions as a result of these requirements could cause the Fund to
fail to qualify as a regulated investment company and/or subject the Fund to
income or excise taxes. The Fund may be required to dispose of portfolio
investments on unfavorable terms if market fluctuations or other factors reduce
the required asset coverage to less than the prescribed amount.
Any indebtedness issued by the Fund or borrowing by the Fund either (a) will
mature by the next Repurchase Request Deadline (as defined below under
"Repurchase Offers") or (b) will provide for its redemption, call, or repayment
by the Fund by the next Repurchase Request Deadline without penalty or premium,
as necessary to permit the Fund to repurchase shares in the amount set by the
Board of Trustees in compliance with the asset coverage requirements of the 1940
Act.
20
<PAGE> 26
GENERAL INFORMATION ON SENIOR LOANS
Senior Loans differ from other types of debt in that they generally hold the
most senior position in the capital structure of a borrower. Priority liens are
obtained by the lenders that typically provide the first right to cash flows or
proceeds from the sale of a borrower's collateral, if any, if the borrower
becomes insolvent (subject to the limitations of bankruptcy law, which may
provide higher priority to certain claims such as, for example, employee
salaries, employee pensions and taxes). Thus, Senior Loans are generally repaid
before unsecured bank loans, corporate bonds, subordinated debt, trade
creditors, and preferred or common stockholders.
Senior Loans have contractual terms designed to protect lenders. Loan agreements
often include restrictive covenants that limit the activities of the borrower.
These covenants may include mandatory prepayment out of excess cash flows,
restrictions on dividend payments, the maintenance of minimum financial ratios,
limits on indebtedness and other financial tests. Breach of these covenants
generally is an event of default and, if not waived by the lenders, may give
lenders the right to accelerate principal and interest payments.
Senior Loans are typically secured by pledges of collateral from the borrower in
the form of tangible assets such as cash, accounts receivable, inventory,
property, plant and equipment, common and/or preferred stock of subsidiaries,
and intangible assets including trademarks, copyrights, patent rights and
franchise value. The Fund may also receive guarantees or other credit support as
a form of collateral. In some instances, the Fund may invest in Senior Loans
that are secured only by stock of the borrower or its subsidiaries or
affiliates. Generally, as discussed below, the agent with respect to a Senior
Loan is responsible for monitoring collateral and for exercising remedies
available to the lenders such as foreclosure upon collateral. In certain
circumstances, the loan agreement may authorize the agent to liquidate the
collateral and to distribute the liquidation proceeds pro rata among the
lenders. The Fund may also invest in Senior Loans that are not secured by
collateral. Such unsecured Senior Loans involve additional risk.
Senior Loans generally are arranged through private negotiations between a
borrower and several financial institutions ("lenders") represented in each case
by an agent ("agent"), which usually is one or more of the lenders. The Fund
generally will acquire Senior Loans from and sell Senior Loans to the following
lenders: money center banks, selected regional banks and selected non-banks,
investment banks, insurance companies, finance companies, other investment
companies, private investment funds, and lending companies. The Fund may also
acquire Senior Loans from and sell Senior Loans to U.S. branches of foreign
banks which are regulated by the Federal Reserve System or appropriate state
regulatory authorities. On behalf of the lenders, the agent generally is
primarily responsible for negotiating the loan agreement ("loan agreement"),
which establishes the terms and conditions of the Senior Loan and the rights of
the borrower and the lenders. The agent is typically paid a fee by the borrower
for its services. The agent and the other original lenders typically have the
right
21
<PAGE> 27
to sell interests ("participations") in their share of the Senior Loan to other
participants. The agent and the other original lenders also may assign all or a
portion of their interests in the Senior Loan to other participants.
The agent generally is required to administer and manage the Senior Loan on
behalf of other lenders. When evaluating Senior Loans, the Adviser may consider,
and may rely in part, on analysis performed by the agent and other lenders. This
analysis may include an evaluation of the value and sufficiency of any
collateral securing Senior Loans. As to collateralized Senior Loans, the agent
usually is required to monitor the collateral. The agent may rely on independent
appraisals of collateral. The agent need not, however, obtain an independent
appraisal of assets pledged as collateral in all cases. The agent generally is
also responsible for determining that the lenders have obtained a perfected
security interest in the collateral (if any) securing a Senior Loan.
The Fund normally relies on the agent to collect principal of and interest on a
Senior Loan. Furthermore, the Fund also relies in part on the agent to monitor
compliance by the borrower with the restrictive covenants in the loan agreement
and to notify the Fund (or the lender from whom the Fund has purchased a
participation) of any adverse change in the borrower's financial condition.
Insolvency of the agent or other persons positioned between the Fund and the
borrower could result in losses for the Fund.
The Fund may be required to pay and may receive various fees and commissions in
connection with purchasing, selling and holding interests in Senior Loans. The
fees normally paid by borrowers include three primary types: facility fees,
commitment fees and prepayment penalties. Facility fees are paid to lenders when
a Senior Loan is originated. Commitment fees are paid to lenders on an ongoing
basis based on the unused portion of a Senior Loan commitment. Lenders may
receive prepayment penalties when a borrower prepays a Senior Loan. The Fund
receives these fees directly from the borrower if the Fund is an original lender
or, in the case of commitment fees and prepayment penalties, if the Fund
acquires an assignment. Whether the Fund receives a facility fee in the case of
an assignment, or any fees in the case of a participation, depends on
negotiations between the Fund and the lender selling such interests. When the
Fund buys an assignment, it may be required to pay a fee, or forgo a portion of
interest and fees payable to it, to the lender selling the assignment.
Occasionally, the assignor pays a fee to the assignee. A person selling a
participation to the Fund may deduct a portion of the interest and any fees
payable to the Fund as an administrative fee. The Fund may be required to pass
along to a person that buys a Senior Loan from the Fund a portion of any fees
that the Fund is entitled to.
The Fund may have obligations under a loan agreement, including the obligation
to make additional loans in certain circumstances. The Fund intends to reserve
against such contingent obligations by segregating cash, liquid securities and
liquid Senior Loans as a reserve. The Fund will not purchase a Senior Loan that
would require the Fund to make additional loans if as a result of such purchase
all of the Fund's additional loan commitments in the aggregate would exceed 20%
of the Fund's total assets or would cause the Fund to fail to meet
22
<PAGE> 28
the asset composition requirements set forth under the heading "Investment
Restrictions and Fundamental Policies" in the SAI.
The Fund's investment in Senior Loans generally may take one or a combination of
the following forms including: purchase of an assignment ("assignment") or a
portion of a Senior Loan from a third party, or acquiring a participation in a
Senior Loan. The Fund may pay a fee or forego a portion of interest payments to
the lender selling a participation or assignment under the terms of such
participation or assignment.
The agent that arranges a Senior Loan is frequently a commercial or investment
bank or other entity that originates a Senior Loan and the entity that invites
other parties to join the lending syndicate. In larger transactions, it is
common to have several agents; however, generally only one such agent has
primary responsibility for documentation and administration of the Senior Loan.
Agents are typically paid fees by the borrower for their services.
When the Fund acquires an assignment, it will have a direct contractual
relationship with the borrower, may enforce compliance by the borrower with the
terms of the loan agreement, and may have rights with respect to any funds
acquired by other lenders through set-off. Lenders also have certain voting and
consent rights under the applicable Senior Loan agreement. Action subject to
lender vote or consent generally requires the vote or consent of the holders of
some specified percentage of the outstanding principal amount of the Senior
Loan. Certain decisions, such as reducing the amount or increasing the time for
payment of interest on or repayment of principal of a Senior Loan, or releasing
collateral therefor, frequently require the unanimous vote or consent of all
lenders affected.
When the Fund is a purchaser of an assignment it typically succeeds to all the
rights and obligations under the loan agreement of the assigning lender and
becomes a lender under the loan agreement with the same rights and obligations
as the assigning lender. Assignments are, however, arranged through private
negotiations between potential assignees and potential assignors, and the rights
and obligations acquired by the purchaser of an assignment may be more limited
than those held by the assigning lender. The Fund will purchase an assignment or
act as lender with respect to a syndicated Senior Loan only where the agent with
respect to such Senior Loan is determined by the Adviser to be creditworthy at
the time of acquisition.
The Fund may also invest in participations in Senior Loans. With respect to any
given Senior Loan, the rights of the Fund when it acquires a participation may
be more limited than the rights of original lenders or of investors who acquire
an assignment. Participations may entail certain risks relating to the
creditworthiness of the parties from which the participations are obtained.
Participation by the Fund in a lender's portion of a Senior Loan typically
results in the Fund having a contractual relationship only with the lender, not
with the borrower. The Fund has the right to receive payments of principal,
interest and any fees to which it is entitled only from the lender selling the
participation and only upon receipt by such lender of such payments from the
borrower. In
23
<PAGE> 29
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.
Should an agent become insolvent, or enter Federal Deposit Insurance Corporation
("FDIC") receivership or bankruptcy, any interest in the Senior Loan transferred
by such person and any Senior Loan repayment held by the agent for the benefit
of participants may be included in the agent's estate where the Fund acquires a
participation interest from an original lender. Should that original lender
become insolvent, or enter FDIC receivership or bankruptcy, any interest in the
Senior Loan transferred by the original lender may be included in its estate. In
either such event, the Fund might incur certain costs and delays in realizing
payment or may suffer a loss of principal and interest.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following discussion summarizes additional risks that should be taken into
account when considering an investment in the Fund. For additional information
about the risks associated with the instruments or investment techniques that
may be used by the Fund, see "Additional Information About Investments and
Investment Techniques" in the SAI.
CREDIT RISKS AND REALIZATION OF INVESTMENT OBJECTIVE
Senior Loans, like most other debt obligations, are subject to the risk of
default. While all investments involve some amount of risk, Senior Loans
generally involve less risk than equity instruments of the same issuer because
the payment of principal of and interest on debt instruments is a contractual
obligation of the issuer that, in most instances, takes precedence over the
payment of dividends, or the return of capital, to the issuer's shareholders.
Although the Fund will generally invest in Senior Loans that will be fully
collateralized with assets with a market value that, at the time of acquisition,
equals or exceeds the principal amount of the Senior Loan, the value of the
24
<PAGE> 30
collateral may decline below the principal amount of the Senior Loan subsequent
to the Fund's investment in such Senior Loan. In addition, to the extent that
collateral consists of stock of the borrower or its subsidiaries or affiliates,
the Fund will be subject to the risk that this stock may decline in value, be
relatively illiquid, or may lose all or substantially all of its value, causing
the Senior Loan to be undercollateralized. Senior Loans are also subject to the
risk of default of scheduled interest or principal payments. In the event of a
failure to pay scheduled interest or principal payments on Senior Loans held by
the Fund, the Fund could experience a reduction in its income, and would
experience a decline in the market value of the particular Senior Loan so
affected, and may experience a decline in the net asset value of Fund shares or
the amount of its dividends. The risk of default will increase in the event of
an economic downturn or a substantial increase in interest rates. To the extent
that the Fund's investment is in a Senior Loan acquired from another lender, the
Fund may be subject to certain credit risks with respect to that lender.
Further, there is no assurance that the liquidation of the collateral (if any)
underlying a Senior Loan would satisfy the issuer's obligation to the Fund in
the event of non-payment of scheduled interest or principal, or that collateral
could be readily liquidated. The risk of non-payment of interest and principal
also applies to other debt instruments in which the Fund may invest. Because of
the protective terms of Senior Loans, the Adviser believes that the Fund is more
likely to recover more of its investment in a defaulted Senior Loan than would
be the case for most other types of defaulted debt securities. Nevertheless,
even in the case of collateralized Senior Loans, there is no assurance that the
sale of collateral would raise enough cash to satisfy the borrower's payment
obligation or that the collateral can or will be liquidated. The Fund may invest
up to 20% of its total assets in Senior Loans that are not secured by any
collateral, and such Senior Loans entail greater risk than secured Senior Loans.
The Fund may acquire Senior Loans of borrowers that are experiencing, or are
more likely to experience, financial difficulty, including Senior Loans issued
in highly leveraged transactions. The Fund may even acquire and retain in its
portfolio Senior Loans of borrowers that have filed for bankruptcy protection or
that have had involuntary bankruptcy petitions filed against them by creditors.
In the case of bankruptcy, liquidation of collateral may not occur and the court
may not give lenders the full benefit of their senior position.
If the terms of a collateralized Senior Loan do not require the borrower to
pledge additional collateral in the event of a decline in the value of the
original collateral, the Fund will be exposed to the risk that the value of the
collateral will not at all times equal or exceed the amount of the borrower's
obligations under a Senior Loan. To the extent that a Senior Loan is
collateralized by stock in the borrower or its subsidiaries, such stock may lose
all of its value in the event of bankruptcy of the borrower. Uncollateralized
Senior Loans involve a greater risk of loss.
In the event of the bankruptcy, receivership, or other insolvency proceeding of
a borrower, the Fund could experience delays or limitations with respect to its
ability to collect the principal of and interest on the Senior Loan and with
25
<PAGE> 31
respect to its ability to realize the benefits of the collateral securing the
Senior Loan, if any. Among the credit risks involved in such a proceeding are
the avoidance of the Senior Loan as a fraudulent conveyance, the restructuring
of the payment obligations under the Senior Loan (including, without limitation,
the reduction of the principal amount, the extension of the maturity, and the
reduction of the interest rate thereof), the avoidance of the pledge of
collateral securing the Senior Loan as a fraudulent conveyance or preferential
transfer, the discharge of the obligation to repay that portion of the Senior
Loan that exceeds the value of the collateral, and the subordination of the
Fund's rights to the rights of other creditors of the borrower under applicable
law. Similar delays or limitations of the Fund's ability to collect the
principal of and interest on the Senior Loan and with respect to its ability to
realize the benefits of the collateral securing the Senior Loan may arise in the
event of the bankruptcy, receivership, or other insolvency proceeding of an
original lender or an agent.
Investment decisions will be based largely on the credit analysis performed by
the Adviser's investment personnel and not on analyses prepared by rating
agencies or other independent parties, and such analysis may be difficult to
perform for many borrowers and issuers. The Adviser may also utilize information
prepared and supplied by the agent or other lenders. Information about interests
in Senior Loans generally will not be in the public domain, and interests are
often not currently rated by any nationally recognized rating service. Many
borrowers have not issued securities to the public and are not subject to
reporting requirements under federal securities laws. Generally, borrowers are
required to provide financial information to lenders, including the Fund, and
information may be available from other Senior Loan participants or agents that
originate or administer Senior Loans. There can be no assurance that the
Adviser's analysis will disclose factors that may impair the value of a Senior
Loan. A serious deterioration in the credit quality of a borrower could cause a
permanent decrease in the Fund's net asset value.
There is no minimum rating or other independent evaluation of a borrower or its
securities limiting the Fund's investments. Although a Senior Loan often is not
rated by any rating agency at the time the Fund purchases the Senior Loan,
rating agencies have become more active in rating an increasing number of Senior
Loans and at any given time a substantial portion of the Senior Loans in the
Fund's portfolio may be rated. Although the Adviser may consider such ratings
when evaluating a Senior Loan, it does not view such ratings as a determinative
factor in its investments decisions. The lack of a rating does not necessarily
imply that a Senior Loan is of lesser investment quality. There is no limit on
the percentage of the Fund's assets that may be invested in Senior Loans that
are rated below investment grade or that are unrated but of comparable quality,
and the Fund may invest a substantial portion of its assets in such Senior
Loans. Debt securities rated below investment grade and comparable unrated
securities are viewed by the ratings agencies as speculative and are commonly
known as "junk bonds."
While debt instruments generally are subject to the risk of changes in interest
rates, the interest rates of the Senior Loans in which the Fund will invest will
26
<PAGE> 32
adjust with a specified interest rate. Thus the risk that changes in interest
rates will affect the market value of such Senior Loans is significantly
decreased, but is not eliminated.
NON-DIVERSIFICATION
The Fund may invest a greater proportion of its assets in the securities of a
small number of issuers than would be required if the Fund were a diversified
investment company. In this regard, the Fund is not subject to the general
limitation that, with respect to 75% of its total assets, it may not invest more
than 5% of its total assets in the securities of a single issuer. As a result,
because the Fund is permitted greater flexibility to invest its assets in the
obligations of a single issuer it is exposed to increased risk of loss if such
an investment underperforms expectations. However, the Fund intends to limit its
investments so as to comply with diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
"regulated investment company."
LIMITED SECONDARY MARKET FOR SENIOR LOANS
Although it is growing, the secondary market for Senior Loans is currently
limited. There is no organized exchange or board of trade on which Senior Loans
may be traded; instead, the secondary market for Senior Loans is an unregulated
inter-dealer or inter-bank market. Accordingly, some or many of the Senior Loans
in which the Fund invests will be relatively illiquid. This means that the Fund
may not be able to sell its Senior Loans quickly at a fair price. The market for
illiquid securities is more volatile than the market for liquid securities. The
market could be disrupted in the event of an economic downturn or a substantial
increase or decrease in interest rates. In addition, Senior Loans in which the
Fund invests generally require the consent of the borrower prior to sale or
assignment. This consent requirement may delay or impede the Fund's ability to
sell Senior Loans. The Fund may have difficulty disposing of its Senior Loans if
it needs cash to repay debt, to pay dividends, to pay expenses or to take
advantage of new investment opportunities. Limitations of a secondary market may
result in difficulty raising cash to purchase shares tendered pursuant to a
repurchase offer. These events may cause the Fund to sell securities at lower
prices than it would otherwise consider to meet cash needs and may cause the
Fund to maintain a greater portion of its assets in cash or cash equivalents
than it would otherwise, which could negatively impact performance. If the Fund
purchases a relatively large Senior Loan to generate income, the limitations of
the secondary market may inhibit the Fund from selling a portion of the Senior
Loan and reducing its exposure to the borrower when the Adviser deems it
advisable to do so.
In addition, because the secondary market for Senior Loans may be limited, it
may be difficult to value Senior Loans. Market quotations may not be available
and valuation may require more research than for liquid securities. In addition,
elements of judgment may play a greater role in the valuation, because there is
less reliable, objective data available. To the extent that a secondary market
27
<PAGE> 33
does exist for Senior Loans, the market may be subject to irregular trading
activity, wide bid/ask spreads, and extended trade settlement periods.
The Fund must maintain liquid assets in accordance with the regulatory
requirements under the 1940 Act for operation as an interval fund. These
requirements are set forth under "Repurchase of Shares--Liquidity Requirements."
DEMAND FOR SENIOR LOANS
Although the volume of Senior Loans has increased in recent years, demand for
Senior Loans has also grown. An increase in demand may benefit the Fund by
providing increased liquidity for Senior Loans, but may also adversely affect
the rate of interest payable on Senior Loans acquired by the Fund and the rights
provided to the Fund under the terms of the Senior Loan. Senior Loans are not
listed on any national securities exchange or automated quotation system and no
active trading market exists for many Senior Loans. As a result, many Senior
Loans are illiquid, meaning that the Fund may not be able to sell them quickly
at a fair price. The market for illiquid securities is more volatile than the
market for liquid securities. However, many Senior Loans are of a large
principal amount and are held by a large number of owners. In the Adviser's
judgment, this should enhance their liquidity.
NO TRADING MARKET FOR SHARES
The Fund is a closed-end investment company designed primarily for long-term
investors and not as a trading vehicle. The Fund does not intend to list the
shares for trading on any national securities exchange. There is no secondary
trading market for Fund shares. The Fund's shares are therefore not readily
marketable. The Fund, as a fundamental policy, will make quarterly repurchases
for 5% to 25% of its outstanding common shares at net asset value. See
"Repurchase of Shares" below for more information. However, the Fund's shares
are less liquid than shares of funds that trade on a stock exchange, and Class B
shareholders who tender Fund shares held for less than four years and Class C
shareholders who tender Fund shares held for less than one year will pay an EWC.
See "Purchase of Shares." In addition, there is no guarantee that shareholders
will be able to liquidate all of their Fund shares that they tender.
NET ASSET VALUE
The net asset value per share of the Fund is the value of one share and is
determined separately for each class by dividing the value of the Fund's net
assets attributable to that class by the number of shares of that class
outstanding. The net asset value of shares of the Fund is computed as of the
close of regular trading on the New York Stock Exchange (the "Exchange") on each
day the Exchange is open for trading. The Exchange is scheduled to be closed on
the following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day,
28
<PAGE> 34
Thanksgiving and Christmas. Portfolio securities for which market quotations are
readily available are generally valued at market value. All other securities may
be valued at fair value as determined in good faith by or under the direction of
the Board of Trustees.
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of the Fund may be purchased
at net asset value through certain investment advisers registered under the
Investment Advisers Act and other financial service firms, acting solely as
agents for their clients, that adhere to certain standards established by the
Distributor, including a requirement that such shares be purchased for the
benefit of their clients participating in a fee based investment advisory
program or agency commission program under which such clients pay a fee to the
investment adviser or other firm for portfolio management or agency brokerage
services. Class B shares are sold without an initial sales charge but are
subject to higher ongoing expenses than Class A shares and an EWC payable upon
certain repurchases. Class B shares automatically convert to Class A shares six
years after issuance. Class C shares are sold without an initial sales charge
but are subject to higher ongoing expenses than Class A shares and are subject
to an EWC payable upon certain repurchases within the first year following
purchase. Class C shares automatically convert to Class C shares ten years after
issuance. When placing purchase orders, investors must specify whether the order
is for Class A, Class B or Class C shares.
29
<PAGE> 35
The primary distinctions among the classes of the Fund's shares lie in their
initial sales charge and EWC structures and in their ongoing expenses, including
asset-based sales charges in the form of distribution fees. These differences
are summarized in the table below. See also, "Fund Expenses." Each class has
distinct advantages and disadvantages for different investors, and investors may
choose the class that best suits their circumstances and objectives.
<TABLE>
<CAPTION>
MAXIMUM
ANNUAL
DISTRIBUTION FEES
(AS A % OF
AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
------------ ----------------- ------------------------
<S> <C> <C> <C>
Class A None None Sold in connection with
an investment advisory
program or agency
commission program under
which clients pay a fee
to the investment
adviser or other firm
for portfolio management
or agency brokerage
services.
Class B Maximum EWC of 3% of 0.60% Shares convert to Class
repurchase proceeds; A shares six years after
declines to zero after issuance.
four years.
Class C EWC of 1% of repurchase 0.60% Shares convert to Class
proceeds for repurchases A shares ten years after
made during first year issuance.
after purchase.
</TABLE>
The minimum initial investment for each Class of shares of the Fund is $1,000
and the minimum subsequent investment is $100. The minimum initial investment
for an Individual Retirement Account is $250 and the minimum subsequent
investment is $50. Under an automatic investment plan, such as Bank Direct
Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum
initial and subsequent investment is $50. These minimum amounts may be changed
at any time in management's discretion.
PURCHASE OF CLASS A SHARES. Class A shares of the Fund may be purchased at net
asset value through certain investment advisers registered under the Investment
Advisers Act and other financial services firms, acting solely as agents for
their clients, that adhere to certain standards established by the Distributor,
including a requirement that such shares be purchased for the benefit of their
clients participating in an investment advisory program or agency commission
program under which such clients pay a fee to the investment adviser or other
firm for portfolio management or agency brokerage services. Such shares are sold
for investment purposes and on the condition that they will not be resold except
through repurchase by the Fund.
30
<PAGE> 36
The Fund may also issue Class A shares at net asset value in connection with the
acquisition of the assets of or merger or consolidation with another investment
company, or to Class A shareholders in connection with the investment or
reinvestment of income and capital gain dividends or upon conversion from Class
B shares or Class C shares as provided below.
PURCHASE OF CLASS B SHARES. Investors choosing the EWC alternative may purchase
Class B shares at net asset value per share without any sales charge at the time
of purchase. Since Class B shares are being sold without an initial sales
charge, the full amount of the investor's purchase payment will be invested in
Class B shares for his or her account. An EWC may be imposed upon repurchase of
Class B shares. See "Repurchase of Shares--Early Withdrawal Charges-Class B
Shares."
The Distributor is compensated by the Fund for services as distributor and
principal underwriter for Class B shares. See "Distribution Arrangements" and
"Distribution Expenses."
AUTOMATIC CONVERSION FEATURE. Class B shares will automatically convert to Class
A shares six years after the end of the calendar month in which the
shareholder's order to purchase was accepted and after that date will no longer
be subject to the distribution fees applicable to Class B shares. Conversion
will be on the basis of the relative net asset values per share, without the
imposition of any sales charge, fee or other charge. The purpose of the
conversion feature is to relieve the holders of Class B shares from the asset
based distribution expenses applicable to such shares at such time as the Class
B shares have been outstanding for a duration sufficient for the Distributor to
have been substantially compensated for distribution-related expenses incurred
in connection with those shares.
For purposes of the conversion of Class B shares to Class A shares, shares
purchased through the reinvestment of dividends and distributions paid on Class
B shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B shares in the shareholder's account (other
than those in the sub-account) convert to Class A shares, a pro rata portion of
the Class B shares in the sub-account will also convert to Class A shares.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. An EWC may be imposed upon the repurchase of Class C shares
if they are repurchased within one year of purchase. See "Repurchase of
Shares--Early Withdrawal-Class C Shares."
The Distributor compensates firms for sales of Class C shares at the time of
sale at a commission rate of 0.25% of the amount of Class C shares purchased
(0.50% during the initial 60-day offering period). In addition, the Distributor
currently advances to firms the first year distribution fee at a rate of 0.50%
of
31
<PAGE> 37
the purchase price of such shares. For periods after the first year, the
Distributor currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.50% of net assets
attributable to Class C shares maintained and serviced by the firm. The
Distributor is compensated by the Fund for services as distributor and principal
underwriter for Class C shares. See "Distribution Arrangements" and
"Distribution Expenses."
AUTOMATIC CONVERSION FEATURE Class C shares will automatically convert to Class
A shares ten years after the end of the calendar month in which the
shareholder's order to purchase was accepted and after that date will no longer
be subject to the distribution fees applicable to Class C shares. Conversion
will be on the basis of the relative net asset values per share, without the
imposition of any sales charge, fee or other charge. The purpose of the
conversion feature is to relieve the holders of Class C shares from the asset
based distribution expenses applicable to such shares at such time as the Class
C shares have been outstanding for a duration sufficient for the Distributor to
have been substantially compensated for distribution-related expenses incurred
in connection with those shares.
For purposes of the conversion of Class C shares to Class A shares, shares
purchased through the reinvestment of dividends and distributions paid on Class
C shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class C shares in the shareholder's account (other
than those in the sub-account) convert to Class A shares, a pro rata portion of
the Class C shares in the sub-account will also convert to Class A shares.
WHICH ARRANGEMENT IS BEST FOR YOU? The decision as to which class of shares
provides the most suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
who prefer not to pay an initial sales charge and who plan to hold their
investment for a longer period might consider Class B shares. Investors who
prefer not to pay an initial sales charge but who plan to redeem their shares
within a relatively short period might consider Class C shares. For more
information about the three sales arrangements, consult your financial
representative or the Distributor. Firms may receive different compensation
depending upon which class of shares they sell.
DISTRIBUTION ARRANGEMENTS
The Fund has entered into an Underwriting and Distribution Services Agreement
with the Distributor (the "Distribution Agreement"), which has been filed as an
exhibit to the Fund's Registration Statement with the Commission. The summary of
the Distribution Agreement contained herein is qualified by reference to the
Distribution Agreement. Subject to the terms and conditions of the Distribution
Agreement, the Fund may issue and sell shares of the Fund from time to time
through the Distributor, which is the principal underwriter of
32
<PAGE> 38
the shares, and through firms. The Class A, Class B and Class C shares will be
offered on a continuous basis as described above, at net asset value per share.
Shareholders will have the option of submitting shares for repurchase quarterly,
subject to the terms and conditions described below under "Repurchase of
Shares."
The Distributor is the principal underwriter and distributor of the Fund's
shares and acts as agent of the Fund in the continuous offering of the Fund's
shares. The Fund and the Distributor reserve the right to withdraw, cancel or
modify the offering of shares and the Fund reserves the right to refuse any
order for shares in whole or in part.
Firms that submit orders for Class B shares will be compensated at a rate of
3.0% of the aggregate sales price of the Class B shares purchased from the Fund
by or through such firms. The Distributor compensates firms for sales of Class C
shares at the time of sale at a commission rate of 0.25% of the amount of Class
C shares purchased (0.50% during the initial 60-day offering period). In
addition, the Distributor currently advances to firms the first year
distribution fee at a rate of 0.50% of the purchase price of such shares. For
periods after the first year, the Distributor currently intends to pay firms for
sales of Class C shares a distribution fee, payable quarterly, at an annual rate
of 0.50% of net assets attributable to Class C shares maintained and serviced by
the firm. The Distributor would receive the distribution fee from the Fund and
any EWC.
In addition, the Distributor may, from time to time, pay or allow additional
discounts, commissions or promotional incentives, in the form of cash
compensation, to firms that sell shares of the Fund. In some instances, such
discounts, commissions or other incentives will be offered only to certain firms
that sell or are expected to sell during specified time periods certain minimum
amounts of shares of the Fund, or other funds underwritten by the Distributor.
Settlements of sales of shares will normally occur on the third business day
following the date on which any such sales are made.
The Fund anticipates that from time to time certain of the firms may act as
brokers or dealers in connection with the execution of its portfolio
transactions.
In connection with the sale of the shares on behalf of the Fund, the Distributor
may be deemed to be an underwriter within the meaning of the Securities Act of
1933.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
Delays may be experienced in the share repurchase procedure, described below, if
share certificates have been issued. A lost or destroyed certificate is
difficult to replace and can be expensive to the shareholder (a bond value of 2%
or more of the certificate value is normally required).
33
<PAGE> 39
Brokers, banks and other financial service providers may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and the Distributor may pay them a
transaction fee up to the level of the discount or commission allowable or
payable to the firms, as described above. Banks are currently prohibited under
the Glass-Steagall Act from providing certain underwriting or distribution
services, although proposed legislation could eliminate or modify these
prohibitions. Brokers, banks or other financial service providers may be subject
to various state laws regarding the services described above and may be required
to register as dealers pursuant to state law. If banking firms were prohibited
from acting in any capacity or providing any of the described services,
management would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund.
Orders for the purchase of shares in a continuous offering will be confirmed at
a price based on the net asset value per share of the Fund next determined after
receipt in good order by the Distributor of the order accompanied by payment.
However, orders received by firms prior to the determination of net asset value
and received in good order by the Distributor prior to the close of its business
day will be confirmed at a price based on the net asset value per share
effective on that day. The Fund reserves the right to determine its net asset
value more frequently than once a day if deemed desirable. Firms are obligated
to transmit orders promptly. Collection may take significantly longer for a
check drawn on a foreign bank than for a check drawn on a domestic bank.
Therefore, if an order is accompanied by a check drawn on a foreign bank, funds
must normally be collected before shares will be purchased.
Firms provide varying arrangements for their clients to purchase and submit to
the Fund for repurchase the Fund's shares. Some may establish higher minimum
investment requirements than set forth above. Firms may arrange with their
clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Distributor or Shareholder Service Agent for
recordkeeping and other expenses relating to these nominee accounts. In
addition, certain privileges with respect to the purchase and repurchase of
shares or the reinvestment of dividends may not be available through such firms.
Some firms may participate in a program allowing them access to their clients'
accounts for servicing, including, without limitation, transfers or registration
and dividend payee changes; and may perform functions such as generation of
confirmation statements and disbursement of cash dividends. Such firms,
including affiliates of the Distributor, may receive compensation from the Fund
through the Shareholder Service Agent for these services. This
34
<PAGE> 40
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.
During the period of such suspension, persons who are already shareholders of
the Fund normally will be permitted to continue to purchase additional shares of
the Fund and to have dividends reinvested.
An order for the purchase of shares that is accompanied by a check drawn on a
foreign bank (other than a check drawn on a Canadian bank in U.S. Dollars) will
not be considered in proper form and will not be processed unless and until the
Fund determines that it has received payment of the proceeds of the check. The
time required for such a determination will vary and cannot be determined in
advance.
The Distributor is headquartered at 222 South Riverside Plaza, Chicago, Illinois
60606.
DISTRIBUTION EXPENSES
Pursuant to the Distribution Agreement, the Distributor bears all of its
expenses of providing services pursuant to the Distribution Agreement, including
the payment of any commissions. The Distributor provides for the preparation of
advertising or sales literature and bears the cost of printing and mailing
prospectuses to persons other than existing shareholders. The Fund bears the
cost of printing and mailing prospectuses and reports to existing shareholders.
The Fund bears the expense of registering its shares with the Commission and,
after January 1, 2000, the cost of qualifying and maintaining the qualification
of Fund shares for sale under the securities laws of the various states ("Blue
Sky expenses"). Prior to January 1, 2000, The Distributor will bear the Blue Sky
expenses. The Distributor may enter into related selling group agreements with
various broker-dealers, including affiliates of the Distributor, that provide
distribution services to investors. The Distributor also may provide some of the
distribution services.
Distribution plans have been adopted by the Fund with respect to the Class B
(the "Class B Plan") and Class C (the "Class C Plan") shares that comply with
the terms of Rule 12b-1 under the 1940 Act (collectively, the "Plans"). The
Plans provide for fees payable as an expense of the Class B and Class C shares,
that are used by the Distributor to pay for distribution services for that
class. The Plans are approved and reviewed in accordance with Rule 12b-1 under
the 1940 Act, which regulates the manner in which an open-end investment company
may, directly or indirectly, bear the expenses of distributing its shares.
Although the Fund is not an open-end investment company, it has undertaken to
comply with the terms of Rule 12b-1 as a condition of an exemptive order under
the 1940 Act.
35
<PAGE> 41
For its services under the Class B Plan, the Distributor receives a fee from the
Fund, payable monthly, at the annual rate of 0.60% of average daily net assets
of the Fund attributable to the Class B shares. For its services under the Class
C Plan, the Distributor receives a fee from the Fund, payable monthly, at an
annual rate of 0.60% of the average daily net assets of the Fund attributable to
the Class C shares. These fees are accrued daily as an expense of the Class B
and Class C shares. The Distributor also receives any EWC, as discussed above.
Under the Plans, the Distributor may compensate various financial services firms
for sales of Fund shares and may pay other commissions, fees and concessions to
such firms. The distribution fee compensates the Distributor for expenses
incurred in connection with activities primarily intended to result in the sale
of the Fund's Class B and Class C shares, including the payment of compensation
to firms, the printing of prospectuses and reports for persons other than
existing shareholders and the preparation, printing and distribution of sales
literature and advertising materials.
Among other things, the Plans provide that the Distributor will prepare reports
for the Board of Trustees on a quarterly basis showing amounts paid to the
various financial services firms and such other information as the Board may
reasonably request. The Plans will continue in effect indefinitely, provided
that such continuance is approved at least annually by vote of a majority of the
Board of Trustees, and a majority of the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Fund and who have no direct or
indirect financial interest in the operation of the Plans ("Qualified Board
Members"), cast at an in-person meeting called for such purpose. The Class B
Plan will also continue in effect indefinitely by a vote of at least a majority
of the outstanding voting securities of the Class B shares and the Class C Plan
will continue in effect indefinitely by a vote of at least a majority of the
outstanding voting securities if the Class C shares. Any material amendment to
the Plans must be approved by vote of a majority of the Board of Trustees and of
the Qualified Board Members. An amendment to the Class B Plan to increase
materially the amount to be paid to the Distributor by the Fund for distribution
services must be approved by a majority of the outstanding Class B shares and an
amendment to the Class C Plan to increase materially the amount to be paid to
the Distributor by the Fund for distribution services must be approved by a
majority of the outstanding Class C shares. While the Plans are in effect, the
selection and nomination of Trustees who are not interested persons of the Fund
will be committed to the discretion of the Trustees who are not themselves
interested persons of the Fund.
If a Plan is terminated in accordance with its terms, the obligation of the Fund
to make payments to the Distributor pursuant to a Plan will cease and the Fund
will not be required to make any payments past the termination date. Thus, there
is no legal obligation for the Fund to pay any expenses incurred by the
Distributor in excess of its fees under a Plan, if for any reason a Plan is
terminated in accordance with its terms. Future fees under a Plan may or may not
be sufficient to reimburse the Distributor for its expenses incurred.
36
<PAGE> 42
TAX IDENTIFICATION NUMBER
Be sure to complete the Tax Identification Number section of the Fund's
application when you open an account. Federal tax law requires the Fund to
withhold 31% of taxable dividends, capital gains distributions and repurchases
and exchange proceeds from accounts (other than those of certain exempt payees)
without a correct certified Social Security or tax identification number and
certain other certified information or upon notification from the IRS or a
broker that withholding is required. The Fund reserves the right to reject new
account applications without a correct certified Social Security or tax
identification number. The Fund also reserves the right, following 30 days'
notice, to repurchase all shares in accounts without a correct certified Social
Security or tax identification number. A shareholder may avoid involuntary
repurchase by providing the Fund with a tax identification number during the
30-day notice period. Shareholders should direct their inquiries to Kemper
Service Company, 811 Main Street, Kansas City, Missouri 64105-2005 or to the
firm from which they received this Prospectus.
REPURCHASE OF SHARES
To provide shareholders with liquidity and the ability to receive net asset
value on a disposition of shares, the Fund, pursuant to a fundamental policy
that may only be changed by the vote of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act, will make quarterly offers to
repurchase a percentage of its outstanding shares at net asset value (each, a
"Repurchase Offer"). The first Repurchase Offer will take place in November
1999. Because the Fund is a closed-end investment company, shareholders will not
be able to redeem their shares on a daily basis.
As explained in more detail below, it is anticipated that each quarterly
"Repurchase Request Deadline" will be 5:00 p.m. Central time on the 10th
business day in the months February, May, August and November. The Fund may
determine the net asset value applicable to repurchases no later than the 14th
calendar day (or, if not a business day, the next business day) after the
Repurchase Request Deadline (the "Pricing Date"). The Fund will distribute
payment to shareholders on or before the "Repurchase Payment Deadline", which
will be no later than seven calendar days after Pricing Date. Shareholders of
record of the Fund will be sent notification of each Repurchase Offer 21 to 42
days prior to the Repurchase Request Deadline with respect to such Repurchase
Offer. It is unlikely that a secondary market for the Fund's shares will
develop, and neither the Distributor nor the firms will engage in any efforts to
develop a secondary market.
REPURCHASE AMOUNT
Each quarter, the Fund's Board of Trustees will determine the percentage of
shares to be repurchased ("Repurchase Amount"). The Repurchase Amount may vary
from 5% to 25% of shares outstanding on the Repurchase Request Deadline. The
Fund also may offer to repurchase its shares on a discretionary
37
<PAGE> 43
basis, not pursuant to its fundamental policy, not more frequently than once
every two years, or more frequently if an exemption is obtained from this
limitation.
There is no minimum number of shares that must be tendered before the Fund will
honor repurchase requests. In other words, if, in the aggregate, only one share
is tendered in a given quarter, the Fund must repurchase it. However, there is a
maximum Repurchase Amount, so shareholders should be aware of the risk that the
Fund may not be able to repurchase all shares tendered in any given quarter. See
"Oversubscribed Repurchase Offers; Pro Rata Allocation."
REPURCHASE REQUESTS
Shareholders of record will be sent a Notification of Repurchase Offer
("Notification") 21 to 42 days before the next Repurchase Request Deadline. The
Notification will provide information about the Repurchase Offer, including the
Repurchase Amount, the Repurchase Request Deadline, the manner of submitting a
Repurchase Request, and the means by which shareholders may obtain the Fund's
net asset value. It is anticipated that each Repurchase Request Deadline will be
3:00 p.m. Central time on the 10th business day in the months of February, May,
August and November.
Shareholders who wish to tender shares for repurchase must notify the Fund on or
before the Repurchase Request Deadline in the manner designated by the Fund in
the Notification. THE REPURCHASE REQUEST DEADLINE IS A DEADLINE THAT WILL BE
STRICTLY OBSERVED. Repurchase requests may not be revoked after the Repurchase
Request Deadline. Shareholders that fail to submit Repurchase requests in good
order by this deadline will be unable to liquidate shares until a subsequent
Repurchase Offer. Repurchase requests will be considered to be in good order if
they meet the requirements set forth below under "Repurchase of
Shares--General." It is anticipated that the Fund will implement a telephone
repurchase procedure beginning with the February 2000 repurchase.
A shareholder may tender all or a portion of his or her holdings (although the
Fund may not be able to repurchase the shareholder's entire tender if aggregate
tenders exceed the Repurchase Amount (as discussed further below)). However, a
shareholder's tax results may differ depending on whether the shareholder has
tendered all or only a portion of his or her shares. See "Tax Matters."
DETERMINATION OF REPURCHASE PRICE
The Fund will establish the Repurchase Price at a share's net asset value on the
Pricing Date. The Fund will compute net asset value daily (as described under
"Net Asset Value"), and shareholders may obtain daily net asset values by
calling 1-800-621-1048.
The Fund does not presently intend to deduct any repurchase fees from repurchase
proceeds (other than any applicable EWC). However, in the future,
38
<PAGE> 44
the Board of Trustees may determine to charge a repurchase fee payable to the
Fund to compensate the Fund for its reasonable expenses directly related to the
repurchase. These fees could be used to compensate the Fund for, among other
things, its costs incurred in disposing of securities or in borrowing in order
to make payment for repurchased shares. Any repurchase fee will not exceed two
percent of the proceeds of the repurchase, unless permitted by applicable
regulation or exemption therefrom, and will be charged to all repurchased shares
on a pro rata basis. The Board may implement repurchase fees without a
shareholder vote.
PAYMENT
The Fund expects to distribute payment no later than seven calendar days after
the Pricing Date. Repurchase proceeds will be paid by wire transfer or check.
EARLY WITHDRAWAL CHARGES
CLASS B SHARES. Repurchases of Class B shares are subject to an EWC of 3.0%
during the first year after purchase, 2.5% during the second year, 2.0% during
the third year, and 1.0% during the fourth year. The EWC will be waived: (a) in
the event of the total disability (as evidenced by a determination by the
federal Social Security Administration) of the shareholder (including a
registered joint owner) occurring after the purchase of the shares being
repurchased; (b) in the event of the death of the shareholder (including a
registered joint owner); (c) for repurchases in a calendar year that do not
exceed 10% of the net asset value of a shareholder's account, provided such
shareholder participates in the Fund's dividend reinvestment program; (d) for
repurchases made pursuant to any IRA systematic withdrawal based on the
shareholder's life expectancy including, but not limited to, substantially equal
periodic payments described in Code Section 72(t)(2)(A)(iv) prior to age 59 1/2;
(e) for repurchases to satisfy required minimum distributions after age 70 1/2
from an IRA account (with the maximum amount subject to this waiver being based
only upon the shareholder's Kemper IRA accounts); (f) for repurchases of shares
held by shareholders whose broker or other financial service provider has waived
receipt of its commission on the sale of the shares repurchased; and (g) to the
extent necessary to comply with regulatory limitations. The EWC will also be
waived in connection with the following repurchases of shares held by employer
sponsored employee benefit plans maintained on the subaccount "Shareholder
Service Agent") or its affiliate: (a) repurchases to satisfy participant loan
advances (note that loan repayments constitute new purchases for purposes of the
EWC and the conversion privilege); (b) repurchases in connection with retirement
distributions (limited at any one time to 10% of the total value of plan assets
invested in the Fund); (c) repurchases in connection with distributions
qualifying under the hardship provisions of the Code; (d) repurchases
representing returns of excess contributions to such plans; and (e) repurchases
of shares held by shareholders whose broker or other financial service provider
has waived receipt of its commission on the sale of shares repurchased.
39
<PAGE> 45
CLASS C SHARES. An EWC of 1% may be imposed upon repurchase of Class C shares
if they are repurchased within one year of purchase. The charge will not be
imposed upon repurchase of reinvested dividends or share appreciation. The
charge is applied to the value of the shares repurchased excluding amounts not
subject to the charge. The EWC will be waived: (a) in the event of the total
disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed; (b) in the event of
the death of the shareholder (including a registered joint owner); (c) for
repurchases made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year; (d) for repurchases made
pursuant to any IRA systematic withdrawal based on the shareholder's life
expectancy including, but not limited to, substantially equal periodic payments
described in Code Section 72(t)(2)(A)(iv) prior to age 59 1/2; (e) for
repurchases to satisfy required minimum distributions after age 70 1/2 from an
IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's Kemper IRA accounts); (f) for any participant-directed
repurchase of shares held by employer sponsored employee benefit plans
maintained on the subaccount record keeping system made available by the
Shareholder Service Agent; (g) for repurchase of shares by an employer sponsored
employee benefit plan that (i) offers funds in addition to Kemper Funds (i.e.,
"multi-manager"), and (ii) whose dealer of record has waived the advance of the
first year administrative service and distribution fees applicable to such
shares and agrees to receive such fees quarterly; and (h) to the extent
necessary to comply with regulatory limitations. The EWC will also be waived in
connection with the following repurchases of shares held by employer sponsored
employee benefit plans maintained on the subaccount recordkeeping system made
available by the Shareholder Service Agent or its affiliate: (a) repurchases to
satisfy participant loan advances (note that loan repayments constitute new
purchases for purposes of the EWC and the conversion privilege); (b) repurchases
in connection with retirement distributions (limited at any one time to 10% of
the total value of plan assets invested in the Fund); (c) repurchases in
connection with distributions qualifying under the hardship provisions of the
Code; and (d) repurchases representing returns of excess contributions to such
plans.
EXAMPLE OF EWC. The following example will illustrate the operation of the EWC
(assuming no waiver is applicable). Assume that an investor makes a single
purchase of $10,000 of the Fund's Class B shares and that 16 months later the
value of the shares has grown by $1,000 through reinvested dividends and by an
additional $1,000 of share appreciation to a total of $12,000. If the investor
then tendered, and the Fund accepted for repurchase, the entire $12,000 in share
value, the EWC would be payable only with respect to $10,000 because neither the
$1,000 of reinvested dividends nor the $1,000 of share appreciation is subject
to the charge. The charge would be at the rate of 2.5% ($250) because it was in
the second year after the purchase was made.
The rate of the EWC is determined by the length of the period of ownership.
Investments are tracked on a monthly basis. The period of ownership for this
40
<PAGE> 46
purpose begins the first day of the month in which the order for the investment
is received. For example, an investment made in December 1999 will be eligible
for the second year's EWC if repurchased on or after December 1, 2000. In the
event no specific order is requested when shares subject to an EWC are
repurchased, the repurchase will be made first from shares representing
reinvested dividends and then from the earliest purchase of shares. The
Distributor receives any EWC directly.
OVERSUBSCRIBED REPURCHASE OFFERS; PRO RATA ALLOCATION
In any given quarter shareholders may tender a number of shares that exceeds the
Repurchase Offer Amount (this Prospectus refers to this situation as an
"Oversubscribed Repurchase Offer"). In the event of an Oversubscribed Repurchase
Offer, the Fund may, but is not required to, repurchase additional shares up to
a maximum aggregate of two percent of the shares outstanding on the Repurchase
Request Deadline ("Additional Repurchase Amount"). If the Fund determines not to
repurchase the Additional Repurchase Amount, or if shareholders tender an amount
exceeding the Repurchase Offer Amount, the Fund will repurchase the shares on a
pro rata basis.
In the event of an Oversubscribed Repurchase Offer, shareholders may be unable
to liquidate some or all of their Fund shares during that quarterly Repurchase
Offer. A shareholder may have to wait until a later quarter to tender shares
that the Fund is unable to repurchase, and would be subject to the risk of net
asset value fluctuations during this time period. Some shareholders may tender
more shares than they wish to have repurchased in order to attempt to ensure the
repurchase of a specific minimum number of shares.
ADOPTION OF REPURCHASE POLICY
The Board has adopted a resolution setting forth the Fund's fundamental policy
to conduct Repurchase Offers ("Repurchase Policy"). The Repurchase Policy may be
changed only by a majority vote of the Fund's outstanding voting securities, as
defined in the 1940 Act. The Repurchase Policy states that the Fund will make
Repurchase Offers at periodic intervals of three months between Repurchase
Request Deadlines, such Repurchase Request Deadlines to be on a business day and
time in the months of February, May, August and November to be determined by the
Board. The Repurchase Policy also provides that the Pricing Date will be no
later than 14 calendar days after each Repurchase Request Deadline (or the next
business day if the 14th calendar day is not a business day).
LIQUIDITY REQUIREMENTS
The Fund must maintain liquid assets equal to the Repurchase Offer Amount from
the time that the Notification is sent to shareholders until the Repurchase
Date. In connection with this requirement, the Fund will maintain a percentage
of its net assets equal to at least 100 percent of the Repurchase Amount in
assets: (a) that can be sold or disposed of in the ordinary course of business
at
41
<PAGE> 47
approximately the price at which the Fund has valued the asset within the time
period between the Repurchase Request Deadline and the Repurchase Payment
Deadline; or (b) that mature by the Repurchase Payment Deadline.
If, at any time, the Fund falls out of compliance with these liquidity
requirements, the Board will take whatever action it deems appropriate to ensure
compliance.
The Fund intends to finance Repurchase Offers with cash on hand, cash raised
through borrowings, or the liquidation of portfolio securities. There is some
risk that the need to sell Senior Loans to fund Repurchase Offers may affect the
market for those Senior Loans. In turn, this could diminish the Fund's net asset
value.
SUSPENSION OR POSTPONEMENT OF A REPURCHASE OFFER
The Fund may suspend or postpone a Repurchase Offer in limited circumstances,
and only by vote of a majority of the Board of Trustees, including a majority of
the Fund's Trustees who are not interested persons of the Fund. These
circumstances include the following:
(a) if the repurchase would cause the Fund to lose its status as a regulated
investment company under Subchapter M of the Code;
(b) for any period during which an emergency exists as a result of which it is
not reasonably practicable for the Fund to dispose of securities it owns or
to determine the value of the Fund's net assets; or
(c) for any other periods that the Commission permits by order for the
protection of shareholders.
In addition, although the Fund currently does not intend to list its shares on a
national securities exchange or provide for share quotations on an inter-dealer
quotation system of a national securities association (e.g., Nasdaq), if it does
so in the future, the Fund may suspend or postpone a Repurchase Offer in the
event that:
(a) the repurchase would cause the shares to lose their status on such exchange
or inter-dealer quotation system; or
(b) during any period in which any market on which the shares are principally
traded is closed, or during any period in which trading on the market is
restricted.
CONSEQUENCES OF REPURCHASE OFFERS
Although the Board believes that Repurchase Offers generally will be beneficial
to the Fund's shareholders, repurchases will decrease the Fund's total assets
and therefore have the possible effect of increasing the Fund's expense ratio.
Furthermore, if the Fund borrows to finance repurchases, interest on that
borrowing may reduce the Fund's net investment income. The Fund intends to offer
new shares continuously, which may alleviate these potential conse-
42
<PAGE> 48
quences, 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.
For a discussion of the Federal income tax aspects of a repurchase, see "Tax
Matters."
GENERAL
The Fund will mail a Notification to shareholders of record in connection with
each quarterly Repurchase Offer. Any shareholder of record may request that the
Fund repurchase his or her shares pursuant to the terms and conditions described
above. When shares are held for the account of a shareholder by the Fund's
transfer agent, the shareholder may submit such shares for repurchase by sending
a written request with signatures guaranteed to Kemper Funds, Attention:
Redemption Department, P.O. Box 419557, Kansas City, Missouri 64141-6557. When
certificates for shares have been issued, they must be mailed to or deposited
with the Shareholder Service Agent, along with a duly endorsed stock power and
accompanied by a written request for repurchase. Repurchase requests and a stock
power must be endorsed by the account holder with signatures guaranteed by a
commercial bank, trust company, savings and loan association, federal savings
bank, member firm of a national securities exchange or other eligible financial
institution. The repurchase request and stock power must be signed exactly as
the account is registered including any special capacity of the registered
owner. Additional documentation may be requested, and a signature guarantee is
normally required, from institutional and fiduciary account holders, such as
corporations, custodians (e.g., under the Uniform Transfers to Minors Act),
executors, administrators, trustees or guardians.
If the proceeds of the repurchase (prior to the imposition of any EWC) are
$50,000 or less and the proceeds are payable to the shareholder of record at the
address of record, normally a written request by any one account holder without
a signature guarantee is sufficient for repurchases by individual or joint
account holders, and trust, executor, guardian and custodian account holders,
provided the trustee, executor, guardian, or custodian is named in the account
registration. Other institutional account holders may exercise this special
feature of tendering shares for repurchase by written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitation on liability described below, provided that this
privilege has been pre-authorized by the institutional account holder by written
instruction to the Shareholder Service Agent with signatures guaranteed. This
privilege of tendering shares for repurchase by written request without a
43
<PAGE> 49
signature guarantee may not be used if the shareholder's account has had an
address change within 30 days of the request.
If the account holder has given authorization, proceeds of repurchases can be
sent by federal wire transfer to a single previously designated account. Once
this authorization is on file, shares may be tendered for repurchase without
signature guarantee subject to the limitation on liability described below. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire repurchase minimum. To change the designated account to receive wire
repurchase proceeds, send a written request to the Shareholder Service Agent
with signatures guaranteed as described above or contact the firm through which
shares of the Fund were purchased. The Fund reserves the right to terminate or
modify this privilege at any time.
The Fund or its agents may be liable for any losses, expenses or costs arising
out of fraudulent or unauthorized requests pursuant to the pre-authorized
privilege for institutional account holders to tender shares for repurchase in
writing without signature guarantee and the pre-authorized privilege of sending
proceeds of repurchases by federal wire transfer unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
written instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include requiring certain identifying information before acting upon
instructions and sending written confirmations.
When the Fund is asked to repurchase shares for which it may not have yet
received good payment (i.e., purchases by check, EXPRESS-Transfer or Bank Direct
Deposit), it may delay transmittal of repurchase proceeds until it has
determined that collected funds have been received for the purchase of such
shares, which will be up to 10 days from receipt by the Fund of the purchase
amount.
Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on any account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount recordkeeping system made available through the Shareholder
Service Agent.
SPECIAL FEATURES
EXCHANGES
In conjunction with each quarterly Repurchase Offer and subject to terms and
conditions of such Repurchase Offer, Class A, Class B, and Class C shares of the
Fund may be exchanged for shares of the corresponding class of any of the
44
<PAGE> 50
Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper
Small Capitalization Equity Fund, Kemper Income and Capital Preservation Fund,
Kemper Municipal Bond Fund, Kemper Diversified Income Fund, Kemper High Yield
Series, Kemper U.S. Government Securities Fund, Kemper International Fund,
Kemper State Tax-Free Income Series, Kemper Short-Term U.S. Government Fund,
Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper Intermediate Municipal
Bond Fund, Kemper Cash Reserves Fund, Kemper U.S. Mortgage Fund, Kemper Value
Plus Growth Fund, Kemper Value Series, Inc., Kemper Horizon Fund, Kemper New
Europe Fund, Kemper Asian Growth Fund, Kemper Aggressive Growth Fund, Kemper
Global/International Series, Inc., Kemper U.S. Growth and Income Fund, Kemper
Small Cap Relative Value Fund, Kemper-Dreman Financial Services Fund, Kemper
Value Fund, Kemper Global Discovery Fund, Kemper Classic Growth Fund and Kemper
High Yield Fund II ("Kemper Funds") at their relative net asset values.
Class B and Class C shares of the Fund may be exchanged without an EWC being
imposed at the time of exchange. Fund shareholders will not be able to
participate in this exchange privilege at any time other than in connection with
a quarterly Repurchase Offer. For purposes of calculating the EWC that may be
imposed upon the repurchase of the Class B and Class C shares of a Kemper Fund
received in an exchange, the shares received in the exchange will retain the
original cost and purchase date of the Class B and Class C shares of the Fund
originally purchased by the investor, but the contingent deferred sales charge
("CDSC") schedule of the Kemper Fund shares received in the exchange will be
applicable. Accordingly, you may pay a higher CDSC upon redemption of Kemper
Fund Class B and Class C shares received in an exchange than you would have if
you had held such shares of the Fund for the same period of time and then
submitted those shares to the Fund for repurchase. You should consult the
prospectus of the applicable Kemper Fund before exchanging into a Kemper Fund.
Exchanges into the Fund from the Kemper Funds are not permitted. Therefore,
shareholders who exchange Fund shares for shares of other Kemper Funds will not
be able to exchange those shares back into shares of the Fund.
Shares of a Kemper Fund with a value in excess of $1,000,000 (except Kemper Cash
Reserves Fund) acquired by exchange through another Kemper Fund, or from a Money
Market Fund, may not be exchanged thereafter until they have been owned for 15
days (the "15-Day Hold Policy"). Each Kemper Fund reserves the right to invoke
the 15-Day Hold Policy for accounts of $1,000,000 or less if, in the investment
manager's judgement, the exchange activity may have an adverse effect on the
Kemper Fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to a fund and, therefore, may be subject to
the 15-Day Hold Policy. For purposes of determining whether the 15-Day Hold
Policy applies to a particular exchange, the value of the shares to be exchanged
shall be computed by aggregating the value of shares being exchanged for all
accounts under common control, discretion or advice, including without
limitation accounts administered by a financial services firm offering market
timing, asset allocation or similar services.
45
<PAGE> 51
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Kemper Fund into which they are being exchanged.
Exchanges are made based on relative net asset values of the shares involved in
the exchange. There is no service fee for an exchange; however, dealers or other
firms may charge for their services in effecting exchange transactions.
Exchanges will be effected by repurchase of shares of the Fund held and purchase
of shares of the Kemper Fund at net asset value of the Kemper Fund determined on
the Repurchase Payment Date (or the next net asset value determined by such
Kemper Fund if no net asset value was determined on such Repurchase Payment
Date) with the proceeds of the Repurchase Offer. Elections to participate in an
exchange may be made on a shareholder's repurchase request form contained in
each Notification. For federal income tax purposes, any such exchange
constitutes a sale upon which a gain or loss may be realized, depending upon
whether the value of the shares being exchanged is more or less than the
shareholder's adjusted cost basis of such shares. Shareholders interested in
exercising the exchange privilege may obtain prospectuses of the other Kemper
Funds from dealers, other firms or the Distributor. Exchanges may be
accomplished by a designation on the Fund's quarterly repurchase request form.
Any share certificates must be deposited prior to any exchange of such shares.
The exchange privilege is not a right and may be suspended, terminated or
modified at any time. Exchanges may only be made for funds that are available
for sale in the shareholder's state of residence. Currently, Tax-Exempt
California Money Market Fund is available for sale only in California and
Investors Municipal Cash Fund is available for sale only in certain states.
Except as otherwise permitted by applicable regulations, 60 days' prior written
notice of any termination or material change will be provided.
BANK DIRECT DEPOSIT
A shareholder may purchase additional shares of the Fund through an automatic
investment program. With the Bank Direct Deposit Purchase Plan, investments are
made automatically (maximum $50,000) from the shareholder's account at a bank,
savings and loan or credit union into the shareholder's Fund account. By
enrolling in Bank Direct Deposit, the shareholder authorizes the Fund and its
agents to either draw checks or initiate Automated Clearing House debits against
the designated account at a bank or other financial institution. This privilege
may be selected by completing the appropriate section on the Account Application
or by contacting the Shareholder Service Agent for appropriate forms. A
shareholder may terminate his or her Purchase Plan by sending written notice to
Kemper Service Company, P.O. Box 419415, Kansas City, Missouri 64141-6415.
Termination by a shareholder will become effective within thirty days after the
Shareholder Service Agent has received the request. The Fund may immediately
terminate a shareholder's Purchase Plan in the event that any item is unpaid by
the shareholder's financial institution. The Fund may terminate or modify this
privilege at any time.
46
<PAGE> 52
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT
A shareholder may invest in the Fund through Payroll Direct Deposit or
Government Direct Deposit. Under these programs, all or a portion of a
shareholder's net pay or government check is automatically invested in the Fund
account each payment period. A shareholder may terminate participation in these
programs by giving written notice to the shareholder's employer or government
agency, as appropriate. (A reasonable time to act is required). The Fund is not
responsible for the efficiency of the employer or government agency making the
payment or any financial institutions transmitting payments.
TAX-SHELTERED RETIREMENT PLANS
The Shareholder Service Agent provides retirement plan services and documents
and the Distributor can establish investor accounts in any of the following
types of retirement plans:
- - Traditional, Roth and Education Individual Retirement Accounts ("IRAs"). This
includes Simplified Employee Pension Plan ("SEP") IRA accounts and prototype
documents.
- - 403(b)(7) Custodial Accounts. This type of plan is available to employees of
most non-profit organizations.
- - Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans and materials for establishing
them are available from the Shareholder Service Agent upon request. Investors
should consult with their own tax advisers before establishing a retirement
plan.
INDIVIDUAL RETIREMENT ACCOUNTS
One of the tax-deferred retirement plan accounts that may hold Fund shares is an
individual retirement account ("IRA"). There are three kinds of IRAs that an
individual may establish: traditional IRAs, Roth IRAs and education IRAs. With a
traditional IRA, an individual may make a contribution of up to $2,000 or, if
less, the amount of the individual's earned income for any taxable year prior to
the year the individual reaches age 70 1/2. The contribution will be fully
deductible if neither the individual nor his or her spouse is an active
participant in an employer's retirement plan. If an individual is (or has a
spouse who is) an active participant in an employer-sponsored retirement plan,
the amount, if any, of IRA contributions that are deductible by such an
individual is determined by the individual's (or, if married filing jointly, the
couple's) adjusted gross income for the year. Even if an individual's
contributions to an IRA for a taxable year are not deductible, the individual
nonetheless may make nondeductible contributions up to $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
47
<PAGE> 53
earned income of less than $2,000, as long as the spouses' joint earned income
is at least equal to the combined amount of the spouses' IRA contributions for
the year. There are special rules for determining how withdrawals are to be
taxed if an IRA contains both deductible and nondeductible amounts. In general,
a proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Lump sum distributions from another qualified
retirement plan, may be rolled over into a traditional IRA, also. Of course,
withdrawals with respect to investments in the Fund may only be effected
pursuant to the Fund's quarterly repurchase feature.
With a Roth IRA, an individual may make only nondeductible contributions;
contributions can be made of up to $2,000 or, if less, the amount of the
individual's earned income for any taxable year, but only if the individual's
adjusted gross income for the year is less than $95,000 or, if married filing
jointly, the couple's adjusted gross income is less than $150,000 The maximum
contribution amount phases out and falls to zero between $95,000 and $110,000
for single persons and between $150,000 and $160,000 for married persons.
Contributions to a Roth IRA may be made even after the individual attains age
70 1/2. Distributions from a Roth IRA that satisfy certain requirements will not
be taxable when taken; other distributions of earnings will be taxable. An
individual with adjusted gross income of $100,000 or less generally may elect to
roll over amounts from a traditional IRA to a Roth IRA. The full taxable amount
held in the traditional IRA that is rolled over to a Roth IRA will be taxable in
the year of the rollover.
An education IRA provides a method for saving for the higher education expenses
of a child; it is not designed for retirement savings. Generally, amounts held
in an education IRA may be used to pay for qualified higher education expenses
at an eligible (postsecondary) educational institution. An individual may
contribute to an education IRA for the benefit of a child under 18 years old if
the individual's income does not exceed certain limits. The maximum contribution
for the benefit of any one child is $500 per year. Contributions are not
deductible, but earnings accumulate tax-free until withdrawal, and withdrawals
used to pay qualified higher education expenses of the beneficiary (or
transferred to an education IRA of a qualified family member) will not be
taxable. Other withdrawals will be subject to tax.
In addition, there are special IRA programs available for employers under which
an employer may establish IRA accounts for its employees in lieu of establishing
more complicated retirement plans, such as qualified profit sharing or 401(k)
plans. Known as SEP-IRAs (Simplified Employee Pension-IRA) and SIMPLE IRAs, they
permit employers to maintain a retirement program for their employees without
being subject to a number of the recordkeeping and testing requirements
applicable to qualified plans.
48
<PAGE> 54
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 closed-end management investment company.
The Fund's Declaration of Trust, a copy of which is on file in the
49
<PAGE> 55
office of the Secretary of State of Massachusetts and which is included in the
Fund's Registration Statement authorizes the issuance of an unlimited number of
shares of beneficial interest, par value $0.01. The Declaration of Trust
provides that the Trustees may authorize separate classes of shares of
beneficial interest and may establish separate series of shares, all without
shareholder vote.
Under Massachusetts law, shareholders of a Massachusetts business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the Fund. The Declaration of Trust contains an express disclaimer
of shareholder liability in connection with the Fund's property or the acts,
obligations or affairs of the Fund. The Declaration of Trust also provides for
indemnification out of the Fund's property of any shareholder held personally
liable for the claims and liabilities to which a shareholder may become subject
by reason of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
The Trustees have overall responsibility for the management of the Fund under
Massachusetts law.
DIVIDENDS, VOTING AND LIQUIDATION RIGHTS
Each common share of beneficial interest of the Fund has one vote and shares
equally in dividends and distributions when and if declared by the Fund and in
the Fund's net assets upon liquidation. All shares, when issued, are fully paid
and are non-assessable by the Fund. There are no preemptive or conversion rights
applicable to any of the common shares. Fund shares do not have cumulative
voting rights and, as such, holders of more than 50% of the shares voting for
Trustees can elect all Trustees and the remaining shareholders would not be able
to elect any Trustees. The Fund does not intend to hold annual meetings of
shareholders.
STATUS OF SHARES
The Board of Trustees may classify or reclassify any issued or unissued shares
of the Fund into shares of any series by redesignating such shares or by setting
or changing in any one or more respects, from time to time, prior to the
issuance of such shares, the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, or terms or
conditions of repurchase of such shares. Any such classification or
reclassification will comply with the provisions of the 1940 Act.
50
<PAGE> 56
The following table sets forth information about the Fund's Class A, Class B and
Class C shares, as of September 30, 1999. As of that date Class A, Class B and
Class C shares are the only shares authorized and issued by the Fund.
<TABLE>
<CAPTION>
(1) (2) (4)
(3) AMOUNT OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF
REGISTRANT OR FOR ITS AMOUNT SHOWN
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT UNDER(3)
-------------- ----------------- --------------------- ------------------
<S> <C> <C> <C>
Class A shares Unlimited None None
Class B shares Unlimited None 15,599,384.184 shares*
Class C shares Unlimited None None
</TABLE>
- ---------------
* 20,000 Class B shares are held by Scudder Kemper Investments, Inc.
FUNDAMENTAL AND NON-FUNDAMENTAL POLICIES OF THE FUND
Certain policies of the Fund specified herein as "fundamental" and the
investment restrictions of the Fund designated as fundamental as described in
the SAI are fundamental policies of the Fund and may not be changed without a
majority vote of the Fund's outstanding voting securities, which means the
affirmative vote of (a) more than 50% of the outstanding shares of the Fund or
(b) 67% or more of the shares present at a meeting if more than 50% of the
outstanding shares of the Fund are represented at the meeting in person or by
proxy, whichever is less (a "Majority Vote"). All other policies of the Fund,
including the Fund's investment objective, may be modified by resolution of the
Board of Trustees of the Fund.
ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST
The Fund's Declaration of Trust includes provisions that could have the effect
of limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Trustees by discouraging a
third party from seeking to obtain control of the Fund. In addition, in the
event a secondary market were to develop in the shares, such provisions could
have the effect of depriving holders of shares of an opportunity to sell their
shares at a premium over prevailing market prices.
The Declaration of Trust requires the favorable vote of the holders of at least
two-thirds of the outstanding common shares of beneficial interest of the Fund
then entitled to vote to approve, adopt or authorize certain transactions with
5%-or-greater holders of the common shares (a "Principal Shareholder") and their
associates, unless the Board of Trustees shall by resolution have approved a
memorandum of understanding with such holders, in which case normal voting
requirements would be in effect. For purposes of these provisions, a Principal
Shareholder refers to any person who, whether directly or indirectly and whether
alone or together with its affiliates or associates, beneficially owns 5% or
more of the outstanding common shares of beneficial interest of the Fund. The
transactions subject to these special approval requirements are: (i) the merger
or consolidation of the Fund or any subsidiary of the Fund with or
51
<PAGE> 57
into any Principal Shareholder; (ii) the issuance of any securities of the Fund
to any Principal Shareholder for cash; (iii) the sale, lease or exchange of all
or any substantial part of the assets of the Fund to any Principal Shareholder
(except assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purpose of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period);
or (iv) the sale, lease or exchange to the Fund or any subsidiary thereof, in
exchange for securities of the Fund, of any assets of any Principal Shareholder
(except assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period).
A Trustee may be removed from office without cause by a written instrument
signed by at least two-thirds of the remaining Trustees or by a vote of the
holders of at least two-thirds of the Fund's common shares.
Conversion of the Fund from a "closed-end company" to an "open-end company"
under the 1940 Act will require the vote of the holders of two-thirds of the
common shares outstanding. However, if such conversion is unanimously
recommended by the Trustees, the Majority Vote of the shareholders of the Fund
will be sufficient to authorize conversion.
Such votes by the holders of the Fund's common shares will be in addition to any
other vote required by law or pursuant to the terms of any preferred shares of
the Fund that may be issued and outstanding.
The Board of Trustees has determined that the voting requirements described
above, which, in some cases, are greater than the minimum requirements under
Massachusetts law or the 1940 Act, are in the best interests of shareholders
generally. Reference should be made to the Declaration of Trust on file with the
Commission for the full text of these provisions.
INVESTMENT MANAGEMENT AND OTHER SERVICES
ADVISER
Scudder Kemper Investments, Inc. is the Fund's investment adviser. The principal
address of the Adviser is 345 Park Avenue, New York, New York 10154-0010. The
Adviser, as a subsidiary of Zurich Financial Services, is one of the largest and
most experienced investment counsel firms in the world, managing assets for
institutional and corporate clients, retirement and pension plans, insurance
companies, mutual fund investors, and individuals. The Adviser offers a full
range of investment counsel and asset-management capabilities, based on a
combination of proprietary research and disciplined, long term investment
strategies. Zurich Financial Services is a financial services holding company
incorporated in Switzerland and owned 57% by Zurich Allied AG and 43% by Allied
Zurich p.l.c. The Adviser has served as investment manager to the Fund since its
inception. As of December 31, 1998, the Adviser had more than $281.1 billion in
assets under management.
52
<PAGE> 58
The Fund's portfolio is managed by a portfolio management team consisting of
Jonathan Trutter and Mark Wittnebel. Mr. Trutter is a Senior Vice President and
director of the Bank Loan Department of the Adviser and has been with the
Adviser since 1989. Mr. Trutter has been a portfolio manager at the Adviser
since May 1995. Mr. Wittnebel is a Senior Vice President in the Bank Loan
Department of the Adviser and has been with the Adviser since 1989. Messrs.
Trutter and Wittnebel have been members of the Adviser's Fixed Income Department
for the last five years. Messrs. Trutter and Wittnebel have been co-managers of
the Fund since its inception.
INVESTMENT MANAGEMENT AGREEMENT
The Investment Management Agreement (the "Management Agreement") with the
Adviser, dated March 31, 1999, provides that the Adviser acts as investment
adviser, manages the Fund's investments, administers the Fund's business
affairs, furnishes offices, necessary facilities and equipment, provides
clerical, bookkeeping and administrative services, provides shareholder and
information services and permits any of its officers or employees to serve
without compensation as Trustees or officers of the Fund if duly elected to such
positions. Under the Management Agreement, the Fund is responsible for all of
its expenses, including fees and expenses incurred in connection with its
organization and initial offering; fees and expenses incurred in connection with
membership in investment company organizations; fees and expenses of the Fund's
accounting agent; brokers' commissions; legal, auditing and accounting expenses;
taxes and governmental fees; the fees and expenses of the transfer agent; the
expenses of and the fees for registering and qualifying securities for sale; the
fees and expenses of Trustees, officers and employees of the Fund who are not
affiliated with the Adviser; the cost of printing and distributing reports and
notices to shareholders; and the fees and disbursements of custodians.
For its investment management services, the Fund pays the Adviser an investment
management fee, payable monthly, at the annual rate, expressed as a percentage
of average daily net assets, of 0.50% of the first $1 billion of average daily
net assets, 0.49% of the next $2 billion, 0.48% of the next $2 billion, 0.47% of
the next $5 billion, and 0.45% of average daily net assets over $10 billion. The
fee is payable monthly, provided that the Fund will make such interim payments
as may be requested by the Adviser not to exceed 75% of the amount of the fee
then accrued on the books of the Fund and unpaid. The Adviser has agreed to
reduce its investment management fee to 0% of the average daily net assets of
the Fund through November 30, 1999. The full investment management fee will be
reinstated during the one year period ending November 30, 2000. The effect of
this fee reduction is to reduce operating expenses of the Fund and thereby
increase investment performance.
The Management Agreement provides that the Adviser shall not be liable for any
error of judgment or of law, or for any loss suffered by the Fund in connection
with the matters to which the Management Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its obligations and duties or by
53
<PAGE> 59
reason of its reckless disregard of its obligations and duties under the
Management Agreement.
CUSTODIAN
The Fund's securities and cash are held under a custodian agreement by State
Street Bank and Trust Company, whose principal place of business is 225 Franklin
Street, Boston, Massachusetts 02110.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Kemper Service Company ("KSvC"), an affiliate of the Adviser, serves as transfer
agent, registrar and dividend disbursing agent for the Fund's shares. KSvC also
serves as Shareholder Service Agent for the Fund.
FUND ACCOUNTING AGENT
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net asset
values for the Fund.
ADMINISTRATIVE SERVICES
The Distributor provides information and administrative services for
shareholders of the Fund pursuant to an Administrative Services Agreement with
the Fund (the "Administrative Services Agreement"). The Distributor may enter
into related arrangements with broker-dealer firms or other service or
administrative firms ("service firms"), that provide services and facilities for
their customers or clients who are investors in the Fund. Such administrative
services and assistance may include, but are not limited to, establishing and
maintaining shareholder accounts and records, processing purchase and repurchase
transactions, answering routine inquiries regarding the Fund and its special
features, and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. The Distributor bears all
of its expenses of providing services pursuant to the Administrative Services
Agreement, including the payment of any service fees. For services under the
Administrative Services Agreement, the Fund pays the Distributor a fee, payable
monthly, at the annual rate of up to 0.25% of average daily net assets of the
Fund. The Distributor then pays each service firm a service fee at an annual
rate of up to 0.25% of net assets of the Fund maintained and serviced by the
service firm. Service firms to which service fees are paid may include
affiliates of the Distributor.
The Distributor also may provide some of the above services and may retain any
portion of the fee under the Administrative Services Agreement not paid to
service firms to compensate itself for administrative functions performed for
the Fund. Currently, the administrative services fee payable to the Distributor
is based only upon Fund assets in accounts for which there is a service firm
listed on the Fund's records and it is intended that the Distributor will pay
all of the administrative services fee that it receives from the Fund to service
firms in the
54
<PAGE> 60
form of service fees. The effective administrative services fee rate to be
charged against all assets of the Fund while this procedure is in effect will
depend upon the proportion of Fund assets that is in accounts for which there is
a service firm of record. In addition, the Distributor may, from time to time,
from its own resources pay certain service firms additional amounts for ongoing
administrative services and assistance provided to their customers and clients
who are shareholders of the Fund.
YEAR 2000 READINESS
Like all investment companies, this Fund could be affected by the inability of
some computer systems to recognize the year 2000. The Adviser has a year 2000
readiness program designed to address this problem, and has researched the
readiness of suppliers and business partners as well as issuers of securities
the portfolio owns. Still, there's some risk that the year 2000 problem could
materially affect the Fund's operations (such as its ability to calculate net
asset value and process purchases and redemptions), its investments, or
securities markets in general.
DIVIDENDS AND DISTRIBUTIONS
DISTRIBUTION POLICY
The Fund's present policy is to declare daily distributions on Class A, Class B
and Class C shares for which the Fund has received payment in an amount
approximating the net investment income of the Fund. Dividends paid by the Fund
with respect to each class of its shares will be calculated in the same manner,
at the same time and on the same day. The level of income of dividends per share
(as a percentage of net asset value) will be lower for Class B and Class C
shares than for Class A shares primarily as a result of the distribution
services fee applicable to Class B and Class C shares. Distributions of capital
gains, if any, will be paid in the same proportion for each class. Net
investment income of the Fund consists of all interest income, fee income, other
ordinary income earned by the Fund on its portfolio assets and net short-term
capital gains, less all expenses of the Fund. Expenses of the Fund are accrued
each day. Distributions to shareholders cannot be assured, and the amount of
each monthly distribution is likely to vary. Distributions of income will
normally be made monthly and distributions of net realized capital gains will
normally be made annually.
Income dividends may be distributed in cash or reinvested in additional full and
fractional shares pursuant to the Fund's Dividend Reinvestment Program,
discussed below. Shareholders receive statements on a periodic basis reflecting
any distributions credited or paid to their account. Any fees or commissions
paid to facilitate the sale of portfolio securities, including Senior Loans, in
connection with quarterly repurchase offers or other portfolio transactions may
reduce the dividend yield.
55
<PAGE> 61
DIVIDEND REINVESTMENT PROGRAM
The Fund's Dividend Reinvestment Program (the "Program") allows participating
shareholders to reinvest all dividends and capital gain distributions in
additional shares of the Fund. Shares purchased by participants in the Program
in connection with the reinvestment of dividends will be issued by the Fund at
net asset value. Generally for Federal income tax purposes, shareholders
receiving additional shares under the Program will be treated as having received
a distribution equal to the amount payable to them in cash as a distribution had
the shareholder not participated in the Program. All distributions to
shareholders whose shares are registered in their own names automatically will
be paid in shares, unless the shareholder elects to receive the distributions in
cash. Shareholders may elect to receive dividends and capital gain distributions
in cash by notifying KSvC, as Program Agent. Additional information about the
Program may be obtained from KSvC at 1-800-641-1048. If your shares are
registered in the name of a broker-dealer or other nominee (an "intermediary"),
you must contact the intermediary regarding its status under the Program,
including whether the intermediary will participate in the Program on your
behalf. No fees or expenses are imposed on shareholders by the Fund or KSvC for
participants in the Program.
DIVIDEND DIVERSIFICATION
A shareholder also may, upon written request by completing the appropriate
section of the application form or by calling 1-800-641-1048, elect to have all
dividends and other distributions paid on shares invested in Class A, Class B or
Class C shares of certain mutual funds advised by the Adviser or its affiliates,
so long as a pre- existing account for such shares exists for the shareholder. A
shareholder may call the phone number shown above to obtain a list of the mutual
funds available and to request current prospectuses.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the distribution payment
date.
TAX MATTERS
The Fund intends to operate as a "regulated investment company" under the Code.
To do so, the Fund must meet certain income, distribution and diversification
requirements. In any fiscal year in which the Fund so qualifies and distributes
to shareholders substantially all of its net investment income and net capital
gains, the Fund itself is generally relieved of any federal income or excise
tax.
All dividends and capital gain distributions distributed to shareholders are
taxable whether they are reinvested or received in cash, unless the shareholder
is exempt from taxation or entitled to tax deferral. Dividends paid out of the
56
<PAGE> 62
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, pursuant to an offer by the Fund to repurchase its shares, a shareholder
sells all shares of the Fund that he or she owns or is considered to own, the
shareholder may realize a taxable gain or loss. This gain or loss will be
treated as capital gain or loss if the Fund shares are held as capital assets
and will be long-term or short-term depending upon the shareholder's holding
period for the shares. If, pursuant to an offer by the Fund to repurchase its
shares, a shareholder sells less than all of the shares of the Fund that he or
she owns or is considered to own, the sale may not qualify as an exchange, and
the proceeds received may be treated as a dividend, return of capital or capital
gain, depending on the Fund's earning and profits and the shareholder's basis in
the tendered shares. If that occurs, there is a risk that non-tendering
shareholders may be considered to have received a deemed distribution as a
result of the Fund's purchase of tendered shares, and all or a portion of that
deemed distribution may be taxable as a dividend.
If a shareholder has not furnished a certified correct taxpayer identification
number (generally a Social Security number) and has not certified that
withholding does not apply, or if the Internal Revenue Service has notified the
Fund that the taxpayer identification number listed on the account is incorrect
according to their records or that the shareholder is subject to backup
withholding, federal law generally requires the Fund to withhold 31% from any
dividends and/or repurchases (including exchange repurchases). Amounts withheld
are applied to federal tax liability; a refund may be obtained from the Internal
Revenue Service if withholding results in overpayment of taxes. Federal law also
requires the Fund to withhold 30% or the applicable tax treaty rate from
ordinary income dividends paid to certain non-resident alien and other non-U.S.
shareholder accounts.
This is a brief summary of some of the federal income tax laws that affect an
investment in the Fund. Please see the SAI and a tax adviser for further
information.
57
<PAGE> 63
PERFORMANCE INFORMATION
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information may include a distribution rate and an average compounded
distribution rate of the Fund for specified periods of time. Such information
may also include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc., Business Week, Forbes or
other industry publications.
The Fund's distribution rate generally is determined on a monthly basis with
respect to the immediately preceding monthly distribution period. The
distribution rate is computed by first annualizing the Fund's distributions per
share during such a monthly distribution period and dividing the annualized
distribution by the Fund's maximum offering price per share on the last day of
such period. The Fund calculates the compounded distribution rate by adding one
to the monthly distribution rate, raising the sum to the power of 12 and
subtracting one from the product. In circumstances in which the Fund believes
that, as a result of decreases in market rates of interest, its expected monthly
distributions may be less than the distributions with respect to the immediately
preceding monthly distribution period, the Fund reserves the right to calculate
the distribution rate on the basis of a period of less than one month.
When utilized by the Fund, distribution rate and compounded distribution rate
figures are based on historical performance and are not intended to indicate
future performance. Distribution rate, compounded distribution rate and net
asset value per share can be expected to fluctuate over time.
Advertisements and other sales materials for the Fund may also include
information depicting the Fund's average annual total return and total return.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in the Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in the Fund
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter (or
if any such period has not yet elapsed, at the end of a shorter period
corresponding to the life of the Fund for performance purposes). Average annual
total return figures represent the average annual percentage change over the
period in question. Total return figures represent the aggregate percentage or
dollar value change over the period in question.
The Fund's Class A, Class B and Class C shares are sold at net asset value.
Repurchases of Class B shares within the first four years and Class C shares
within the first year after purchase may be subject to an EWC. Average annual
total return figures do, and total return figures may, include the effect of the
EWC for the Class B and Class C shares that may be imposed at the end of the
period in question. Performance figures for the Class B and Class C shares not
58
<PAGE> 64
including the effect of the applicable EWC would be reduced if it were included.
The Fund's returns and net asset value will fluctuate. Shares of a class of the
Fund may be submitted for repurchase by an investor at the class' then current
net asset value, which may be more or less than original cost. Repurchase of
Class B shares and Class C shares may be subject to an EWC as described above.
Additional information concerning the Fund's performance appears in the
Statement of Additional Information. Additional information about the Fund's
performance also appears in its Annual Report to Shareholders and Semiannual
Report to Shareholders, each of which is available without charge from the Fund.
LEGAL MATTERS
The validity of the shares offered hereby will be passed on for the Fund by
Dechert Price & Rhoads, Washington, D.C., counsel to the Fund.
REGISTRATION STATEMENT
The Fund has filed with the Securities and Exchange Commission, Washington,
D.C., a Registration Statement under the Securities Act of 1933, relating to the
shares offered hereby. For further information with respect to the Fund and its
shares, reference is made to such Registration Statement and the exhibits filed
with it.
SHAREHOLDER REPORTS
The Fund issues reports to its shareholders semi-annually that include financial
information.
FINANCIAL STATEMENTS
The Fund will furnish without charge, when available, copies of its Annual
Report and any subsequent Semi-Annual Report to Shareholders upon request to the
Fund, 222 South Riverside Plaza, Chicago, Illinois 60606, toll-free
1-800-621-1048.
59
<PAGE> 65
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
General Information
- ----------------------------------------------------------------
Investment Restrictions and Fundamental Policies
- ----------------------------------------------------------------
Repurchase Offer Fundamental Policy
- ----------------------------------------------------------------
Additional Information about Investments and Investment
Techniques
- ----------------------------------------------------------------
Management
- ----------------------------------------------------------------
Control Persons and Principle Holders of Securities
- ----------------------------------------------------------------
Portfolio Transactions
- ----------------------------------------------------------------
Liquidity Requirements
- ----------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------
Taxation
- ----------------------------------------------------------------
Financial Statements
- ----------------------------------------------------------------
Report of Independent Accountants
- ----------------------------------------------------------------
Appendix A -- Ratings of Fixed Income Investments
- ----------------------------------------------------------------
</TABLE>
60
<PAGE> 66
[KEMPER FUNDS LOGO]
KEMPER FLOATING RATE FUND
222 South Riverside Plaza, Chicago, Illinois 60606
800-621-1048
FUND INVESTMENT ADVISER AND AGENTS
INVESTMENT ADVISER
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606
DISTRIBUTOR AND
ADMINISTRATIVE SERVICES PROVIDER
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
TRANSFER AGENT
Kemper Service Company
811 Main Street
Kansas City, Missouri 64105
LEGAL COUNSEL
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND OR THE ADVISER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN
THE SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY SUCH
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. HOWEVER, IF ANY MATERIAL
CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
PROSPECTUS
NOVEMBER 1, 1999
<PAGE> 67
KEMPER FLOATING RATE FUND
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 1999
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated November 1, 1999.
This Statement of Additional Information does not include all information that a
prospective investor should consider before purchasing shares of the Fund, and
investors should obtain and read the Prospectus prior to purchasing shares. A
copy of the Prospectus may be obtained without charge, by calling
1-800-621-1048. This Statement of Additional Information incorporates by
reference the entire Prospectus.
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. The registration statement
may be obtained from the Commission upon payment of the fee prescribed, or
inspected at the Commission's office at no charge. The registration statement is
also available on the Commission's website (www.sec.gov).
The financial statements appearing in the Fund's Annual Report to
Shareholders dated August 31, 1999 are incorporated herein by reference. The
Fund's Annual Report accompanies this Statement of Additional Information and
may be obtained without charge by calling 1-800-231-8568.
<PAGE> 68
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION.........................................
INVESTMENT RESTRICTIONS AND FUNDAMENTAL POLICIES............
REPURCHASE OFFER FUNDAMENTAL POLICY.........................
ADDITIONAL INFORMATION ABOUT INVESTMENTS AND INVESTMENT
TECHNIQUES................................................
MANAGEMENT..................................................
PORTFOLIO TRANSACTIONS......................................
LIQUIDITY REQUIREMENTS......................................
NET ASSET VALUE.............................................
TAXATION....................................................
FINANCIAL STATEMENTS........................................
REPORT OF INDEPENDENT ACCOUNTANTS...........................
APPENDIX A--RATINGS OF FIXED INCOME INVESTMENTS.............
</TABLE>
2
<PAGE> 69
GENERAL INFORMATION
Kemper Floating Rate Fund (the "Fund") is a non-diversified, closed-end
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"), that continuously offers its shares to the
public. The Fund will conduct quarterly repurchase offers for its shares
beginning in November 1999. The Fund's investment manager is Scudder Kemper
Investments, Inc. (the "Adviser"). The Fund's investment objective is to seek as
high a level of current income as is consistent with the preservation of
capital. The Fund's principal office is located at 222 South Riverside Plaza,
Chicago, Illinois 60606.
Capitalized terms not defined in this Statement of Additional Information
have the same meaning as that set forth in the Prospectus.
INVESTMENT RESTRICTIONS AND FUNDAMENTAL POLICIES
The following fundamental policies cannot be changed without the approval
of the holders of a majority of the Fund's outstanding voting securities. In
accordance with the requirements of the 1940 Act a "majority of the Fund's
outstanding voting securities" means the lesser of either: (a) the vote of 67
percent or more of the voting securities present at the annual or a special
meeting of the Fund's shareholders, if the holders of more than 50 percent of
the Fund's outstanding voting securities are present or represented by proxy; or
(b) the vote of more than 50 percent of the Fund's outstanding voting
securities.
The Fund may not, as a fundamental policy:
1. Borrow money, except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time.
2. Issue senior securities, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time.
3. Concentrate its investments in a particular industry, as that term is
used in the 1940 Act, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
4. Make loans except as permitted under the 1940 Act, as amended and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time, except that the Fund may (i) acquire Senior Loans,
debt securities and other obligations in which the Fund is authorized to
invest in accordance with its investment objective and policies, (ii)
enter into repurchase agreements, and (iii) lend its portfolio
securities.
5. Purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investment secured
by real estate or interests therein, except that the Fund reserves
freedom of action to hold and to sell real estate as acquired as a
result of the Fund's ownership of securities.
6. Purchase physical commodities or contracts relating to physical
commodities.
7. Engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter in
connection with the disposition of portfolio securities or to the extent
that the Fund may be acting as an agent or co-agent in connection with
the origination of Senior Loans.
The Fund has adopted the following non-fundamental investment policies
which may be changed by the Fund's Board of Trustees without shareholder
approval. As a matter of non-fundamental policy, the Fund may not:
1. Invest for the purpose of exercising control over management of any
company.
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
3
<PAGE> 70
or reorganization, and any investments in the securities of other
investment companies, in compliance with the 1940 Act.
3. Purchase securities on margin or make short sales of securities,
provided that the Fund may enter into futures contracts and related
options and make initial and variation margin deposits in connection
therewith.
4. Mortgage, pledge, or hypothecate any assets except in connection with
borrowings in amounts not in excess of the lesser of the amount borrowed
or 10% of the value of its total assets at the time of such borrowing;
provided that the Fund may enter into futures contracts and related
options. Optioned securities are not considered to be pledged for
purposes of this limitation.
5. Invest in oil, gas or mineral exploration or development programs.
Notwithstanding the Fund's investment policies and restrictions, the Fund
may invest all or part of its investable assets in a management investment
company with substantially the same investment objective, policies and
restrictions as the Fund. This could allow creation of a "master/feeder"
structure in the future, although the Fund has no current intention to
restructure in this manner.
If a percentage restriction on investment policies or the investment or use
of assets set forth in the Prospectus and this Statement of Additional
Information is adhered to at the time a transaction is effected, later changes
in percentage resulting from changing values will not be considered a violation.
REPURCHASE OFFER FUNDAMENTAL POLICY
The Board of Trustees has adopted a resolution setting forth the Fund's
fundamental policy that it will conduct quarterly Repurchase Offers.
The Repurchase Offer Fundamental Policy states that the Fund will make
Repurchase Offers at periodic intervals of three months between Repurchase
Request Deadlines, such Repurchase Request Deadlines to be on a business day in
the months of February, May, August and November determined by the Board of
Trustees. The Repurchase Offer Fundamental Policy also provides that the Pricing
Date will be no later than 14 calendar days after each Repurchase Request
Deadline (or the next business day if the 14th calendar day is not a business
day).
The Repurchase Offer Fundamental Policy may be changed only with approval
of a majority of the Fund's outstanding voting securities.
The first Repurchase Offer is scheduled to take place in November 1999.
ADDITIONAL INFORMATION ABOUT INVESTMENTS
AND INVESTMENT TECHNIQUES
Some of the different types of securities in which the Fund may invest,
subject to its investment objective, policies and restrictions, are described in
the Prospectus under "Investment Objective and Policies." Additional information
concerning certain of the Fund's investments and investment techniques is set
forth below.
EQUITY SECURITIES
In connection with its purchase or holding of interests in Senior Loans,
CLOs, subordinated and unsecured loans, high yield securities or other
investments of the Fund, the Fund may acquire (and subsequently sell) equity
securities or exercise warrants that it receives. The Fund normally will not
hold more than 20% of its total assets in equity securities. Equity securities
will not be treated as Senior Loans; therefore, an investment in such securities
will not count toward the 80% of the Fund's total assets that normally will be
invested in Senior Loans. Equity securities are subject to financial and market
risks and can be expected to fluctuate in value.
4
<PAGE> 71
REPURCHASE AGREEMENTS
In general, the Fund does not engage in repurchase agreements. The Fund has
the ability, however, pursuant to its investment objective and policies, to
enter into repurchase agreements (a purchase of, and a simultaneous commitment
to resell, a financial instrument at an agreed upon price on an agreed upon
date) only with member banks of the Federal Reserve System, member firms of the
New York Stock Exchange ("NYSE") or other entities determined by the Adviser to
be creditworthy. When participating in repurchase agreements, the Fund buys
securities from a vendor, e.g., a bank or brokerage firm, with the agreement
that the vendor will repurchase the securities at a higher price at a later
date. The Fund may be subject to various delays and risks of loss if the vendor
is unable to meet its obligation to repurchase. Under the 1940 Act, repurchase
agreements are deemed to be collateralized loans of money by the Fund to the
vendor. In evaluating whether to enter into a repurchase agreement, the Adviser
will consider carefully the creditworthiness of the vendor. If the member bank
or member firm that is the party to the repurchase agreement petitions for
bankruptcy or otherwise becomes subject to the U.S. Bankruptcy Code, the law
regarding the rights of the Fund to enforce the terms of the repurchase
agreement is unsettled. The securities underlying a repurchase agreement will be
marked to market every business day so that the value of the collateral is at
least equal to the value of the loan, including the accrued interest thereon,
and the Adviser will monitor the value of the collateral. No specific limitation
exists as to the percentage of the Fund's assets which may be used to
participate in repurchase agreements.
REVERSE REPURCHASE AGREEMENTS
In general, the Fund does not engage in reverse repurchase agreements. The
Fund has the ability, however, pursuant to its investment objective and
policies, to enter into reverse repurchase agreements. A reverse repurchase
agreement is an instrument under which the Fund may sell an underlying debt
instrument and simultaneously obtain the commitment of the purchaser to sell the
security back to the Fund at an agreed upon price on an agreed upon date.
Reverse repurchase agreements will be considered borrowings by the Fund and as
such are subject to the Fund's restrictions on borrowing. Borrowings by the Fund
create an opportunity for greater total return, but at the same time, increase
exposure to capital risk. The Fund will maintain in a segregated account with
its custodian cash or liquid high grade portfolio securities in an amount
sufficient to cover its obligations with respect to reverse repurchase
agreements. The Fund will receive payment for such securities only upon physical
delivery or evidence of book entry transfer by its custodian. Regulations of the
Commission require either that securities sold by the Fund under a reverse
repurchase agreement be segregated pending repurchase or that the proceeds be
segregated on the Fund's books and records pending repurchase. Reverse
repurchase agreements may involve certain risks in the event of default or
insolvency of the other party, including possible loss from delays or
restrictions upon the Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them.
LENDING SENIOR LOANS AND OTHER PORTFOLIO INSTRUMENTS
To generate additional income, the Fund may lend its portfolio securities,
including an interest in a Senior Loan, in an amount up to 33 1/3% of the Fund's
total assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. No lending may be made with any companies
affiliated with the Adviser. During the time portfolio securities are on loan,
the borrower pays the Fund any dividends or interest paid on such securities,
and the Fund may invest the cash collateral and earn additional income, or it
may receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit. As with other extensions
of credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially.
The Fund may seek to increase its income by lending financial instruments
in its portfolio in accordance with present regulatory restrictions applicable
to the Fund. The lending of financial instruments is a common practice in the
securities industry. The loans are required to be secured continuously by
collateral, consistent with the requirements of the 1940 Act discussed below,
maintained on a current basis at an amount at least equal to the market value of
the portfolio instruments loaned. The Fund has the right to call a Senior Loan
and
5
<PAGE> 72
obtain the portfolio instruments loaned at any time on such notice as specified
in the transaction documents. For the duration of the Senior Loan, the Fund will
continue to receive the equivalent of the interest paid by the issuer on the
portfolio instruments loaned and may also receive compensation for the loan of
the financial instrument. Any gain or loss in the market price of the
instruments loaned that may occur during the term of the Senior Loan will be for
the account of the Fund.
The Fund may lend its portfolio instruments so long as the terms and the
structure of such loans are not inconsistent with the requirements of the 1940
Act, which currently require that (a) the borrower pledge and maintain with the
Fund collateral consisting of cash, a letter of credit issued by a domestic U.S.
bank, or securities issued or guaranteed by the U.S. government having a value
at all times not less than 100% of the value of the instruments loaned, (b) the
borrowers add to such collateral whenever the price of the instruments loaned
rises (i.e., the value of the loan is "marked to the market" on a daily basis),
(c) the loan be made subject to termination by the Fund at any time, and (d) the
Fund receive reasonable interest on the loan (which may include the Fund's
investing any cash collateral in interest bearing short-term investments), any
distributions on the loaned instruments and any increase in their market value.
The Fund may lend its portfolio instruments to member banks of the Federal
Reserve System, members of the NYSE or other entities determined by the Adviser
to be creditworthy. All relevant facts and circumstances, including the
creditworthiness of the qualified institution, will be monitored by the Adviser,
and will be considered in making decisions with respect to the lending of
portfolio instruments.
The Fund may pay reasonable negotiated fees in connection with loaned
instruments. In addition, voting rights may pass with the loaned securities, but
if a material event were to occur affecting such a loan, the Fund will retain
the right to call the loan and vote the securities. If a default occurs by the
other party to such transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transaction but such remedies may be
subject to bankruptcy and insolvency laws which could materially and adversely
affect the Fund's rights as a creditor. However, the loans will be made only to
firms deemed by the Adviser to be of good financial standing and when, in the
judgment of the Adviser, the consideration which can be earned currently from
loans of this type justifies the attendant risk.
INTEREST RATE HEDGING TRANSACTIONS
The Fund may, pursuant to its investment objective and policies, engage in
certain hedging transactions including interest rate swaps and the purchase or
sale of interest rate caps and floors. The Fund expects to engage in such
transactions with respect to no more than 20% of its total assets, which would
be that portion of the Fund's portfolio not represented by variable rate
securities. The Fund may undertake these transactions primarily for the
following reasons: to preserve a return on or value of a particular investment
or portion of the Fund's portfolio, to protect against decreases in the
anticipated rate of return on floating or variable rate financial instruments
which the Fund owns or anticipates purchasing at a later date, or for other risk
management strategies such as managing the effective dollar-weighted average
duration of the Fund's portfolio. Market conditions and the judgment of the
Adviser will determine whether and in what circumstances the Fund would employ
any of the hedging techniques described below.
Interest Rate Swaps, Caps and Floors. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest, e.g., an exchange of an obligation to make floating rate
payments on a specified dollar amount, referred to as the "notional" principal
amount, for an obligation to make fixed rate payments. For example, the Fund may
seek to shorten the effective interest rate redetermination period of a Senior
Loan in its portfolio that has an interest rate redetermination period of one
year. The Fund could 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
6
<PAGE> 73
aggregate notional principal amount with respect to such agreements exceeds the
net assets of the Fund or to the extent the purchase of swaps, caps or floors
would be inconsistent with the Fund's other investment restrictions.
The Fund will not treat swaps covered in accordance with applicable
regulatory guidance as senior securities. The Fund will usually enter into
interest rate swaps on a net basis, i.e., where the two parties make net
payments with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any, of the Fund's
obligations over its entitlement with respect to each interest rate swap will be
accrued and an amount of cash or liquid securities having an aggregate net asset
value at least equal to the accrued excess will be maintained in a segregated
account. If the Fund enters into a swap on other than a net basis, the Fund will
maintain in the segregated account the full amount of the Fund's obligations
under each such swap. The Fund may enter into swaps, caps and floors with member
banks of the Federal Reserve System, members of the NYSE or other entities
determined by the Adviser. If a default occurs by the other party to such
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction but such remedies may be subject to bankruptcy and
insolvency laws which could materially and adversely affect the Fund's rights as
a creditor.
The swap, cap and floor market has grown substantially in recent years with
a large number of banks and financial services firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, this
market has become relatively liquid. There can be no assurance, however, that
the Fund will be able to enter into interest rate swaps or to purchase interest
rate caps or floors at prices or on terms the Adviser believes are advantageous
to the Fund. In addition, although the terms of interest rate swaps, caps and
floors may provide for termination, there can be no assurance that the Fund will
be able to terminate an interest rate swap or to sell or offset interest rate
caps or floors that it has purchased.
General. The successful utilization of hedging and risk management
transactions requires skills different from those needed in the selection of the
Fund's portfolio securities and depends on the Adviser's ability to predict
correctly the direction and degree of movements in interest rates. Although the
Fund believes that use of the hedging and risk management techniques described
above will benefit the Fund, if the Adviser's judgment about the direction or
extent of the movement in interest rates is incorrect, the Fund's overall
performance would be worse than if it had not entered into any such
transactions. For example, if the Fund had purchased an interest rate swap or an
interest rate floor to hedge against its expectation that interest rates would
decline but instead interest rates rose, the Fund would lose part or all of the
benefit of the increased payments it would receive as a result of the rising
interest rates because it would have to pay amounts to its counterparty under
the swap agreement or would have paid the purchase price of the interest rate
floor. The Fund will incur brokerage and other transaction costs in connection
with its hedging transactions.
BORROWING
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of 300% of the
aggregate outstanding principal balance of indebtedness. Additionally, under the
1940 Act, the Fund may not declare any dividend or other distribution upon any
class of its capital stock, or purchase any such capital stock, unless the
aggregate indebtedness of the Fund has at the time of the declaration of any
such dividend or distribution or at the time of any such purchase an asset
coverage of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be.
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may also purchase and sell interests in Senior Loans and other
portfolio securities on a "when issued" and "delayed delivery" basis. No income
accrues to the Fund on such interests or securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
interests or securities. These transactions are subject to market fluctuation;
the value of the interests in Senior Loans and other portfolio debt securities
at delivery may be more or less than their purchase price, and yields generally
available on such interests or securities when delivery occurs may be higher or
lower than yields on
7
<PAGE> 74
the interests or securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
such interests or securities on such basis only with the intention of actually
acquiring these interests or securities, but the Fund may sell such interests or
securities prior to the settlement date if such sale is considered to be
advisable. To the extent the Fund engages in "when issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring interests or
securities for the Fund's portfolio consistent with the Fund's investment
objective and policies and not for the purpose of investment leverage. No
specific limitation exists as to the percentage of the Fund's assets which may
be used to acquire securities on a "when issued" or "delayed delivery" basis.
ADDITIONAL INFORMATION ON SENIOR LOANS
Senior Loans are direct obligations of corporations or other business
entities and are generally arranged by banks or other commercial lending
institutions and made generally to finance internal growth, mergers,
acquisitions, stock repurchases, and leveraged buyouts. Senior Loans usually
include restrictive covenants which must be maintained by the borrower. Such
covenants, in addition to the timely payment of interest and principal, may
include mandatory prepayment provisions arising from free cash flow,
restrictions on dividend payments and usually state that a borrower must
maintain specific minimum financial ratios as well as establishing limits on
total debt. A breach of a covenant, which is not waived by the agent, is
normally an event of acceleration, i.e., the agent has the right to call the
outstanding Senior Loan. In addition, loan covenants may include mandatory
prepayment provisions stemming from free cash flow. Free cash flow is cash that
is in excess of capital expenditures plus debt service requirements of principal
and interest. The free cash flow shall be applied to prepay the Senior Loan in
an order of maturity described in the loan documents. Under certain interests in
Senior Loans, the Fund may have an obligation to make additional loans upon
demand by the borrower. The Fund intends to reserve against such contingent
obligations by segregating sufficient assets in high quality short-term liquid
investments or borrowing to cover such obligations.
In a typical interest in a Senior Loan, the agent administers the loan and
has the right to monitor the collateral. The agent is also required to segregate
the principal and interest payments received from the borrower and to hold these
payments for the benefit of the lenders. The Fund normally looks to the agent to
collect and distribute principal of and interest on a Senior Loan. Furthermore,
the Fund looks to the agent to use normal credit remedies, such as to foreclose
on collateral; monitor credit loan covenants; and notify the lenders of any
adverse changes in the borrower's financial condition or declarations of
insolvency. At times the Fund may also negotiate with the agent regarding the
agent's exercise of credit remedies under a Senior Loan. The agent is
compensated for these services by the borrower as is set forth in the loan
agreement. Such compensation may take the form of a fee or other amount paid
upon the making of the Senior Loan and/or an ongoing fee or other amount.
The loan agreement in connection with Senior Loans sets forth the standard
of care to be exercised by the agents on behalf of the lenders and usually
provides for the termination of the agent's agency status in the event that it
fails to act properly, becomes insolvent, enters FDIC receivership, or if not
FDIC insured, enters into bankruptcy or if the agent resigns. In the event an
agent is unable to perform its obligations as agent, another lender would
generally serve in that capacity.
The Fund believes that the principal credit risk associated with acquiring
Senior Loans from another lender is the credit risk associated with the borrower
of the underlying Senior Loan. The Fund may incur additional credit risk,
however, when the Fund acquires a participation in a Senior Loan from another
lender because the Fund must assume the risk of insolvency or bankruptcy of the
other lender from which the Senior Loan was acquired. However, in acquiring
Senior Loans, the Fund conducts an analysis and evaluation of the financial
condition of each such lender. The Fund has taken the following measures in an
effort to reduce such risks. The Fund will only acquire participations in Senior
Loans if the lender selling the participation, and any
8
<PAGE> 75
other persons interpositioned between the Fund and the lender, at the time of
investment has outstanding debt or deposit obligations rated investment grade
(BBB or A-3 or higher by Standard & Poor's Ratings Group ("S&P") or Baa or P-3
or higher by Moody's Investors Service ("Moody's")) or determined by the Adviser
to be of comparable quality. Long-term debt rated BBB by S&P is regarded by S&P
as having adequate capacity to pay interest and repay principal and debt rated
Baa by Moody's is regarded by Moody's as a medium grade obligation, i.e., it is
neither highly protected nor poorly secured. Commercial paper rated A-1 by S&P
indicates that the degree of safety regarding timely payment is considered by
S&P to be either overwhelming or very strong and issues of commercial paper
rated Prime-1 by Moody's are considered by Moody's to have a superior ability
for repayment of senior short-term debt obligations.
Senior Loans, unlike certain bonds, usually do not have call protection.
This means that interests comprising the Fund's portfolio, while having a stated
one to ten-year term, may be prepaid, often without penalty. The Fund generally
holds Senior Loans to maturity unless it has become necessary to sell them to
satisfy any Repurchase Offers or to adjust the Fund's portfolio in accordance
with the Adviser's view of current or expected economic or specific industry or
borrower conditions.
Senior Loans frequently require full or partial prepayment of a loan when
there are asset sales or a securities issuance. Prepayments on Senior Loans may
also be made by the borrower at its election. The rate of such prepayments may
be affected by, among other things, general business and economic conditions, as
well as the financial status of the borrower. Prepayment would cause the actual
duration of a Senior Loan to be shorter than its stated maturity. Prepayment may
be deferred by the Fund. This should, however, allow the Fund to reinvest in a
new loan and recognize as income any unamortized loan fees. This may result in a
new facility fee payable to the Fund.
Because interest rates paid on these Senior Loans periodically fluctuate
with the market, it is expected that the prepayment and a subsequent purchase of
a new Senior Loan by the Fund will not have a material adverse impact on the
yield of the portfolio. See "Portfolio Transactions."
Under a Senior Loan, the borrower generally must pledge as collateral
assets which may include one or more of the following: cash; accounts
receivable; inventory; property, plant and equipment; both common and preferred
stock in its subsidiaries; trademarks, copyrights, patent rights; and franchise
value. The Fund may also receive guarantees as a form of collateral. In some
instances, a Senior Loan may be secured only by stock in a borrower or its
affiliates. The Fund may also invest in Senior Loans not secured by any
collateral. The market value of the assets serving as collateral (if any) will,
at the time of investment, in the opinion of the Adviser, equal or exceed the
principal amount of the Senior Loan. The valuations of these assets may be
performed by an independent appraisal. If the agent becomes aware that the value
of the collateral has declined, the agent may take action as it deems necessary
for the protection of its own interests and the interests of the other lenders,
including, for example, giving the borrower an opportunity to provide additional
collateral or accelerating the loan. There is no assurance, however, that the
borrower would provide additional collateral or that the liquidation of the
existing collateral would satisfy the borrower's obligation in the event of
nonpayment of scheduled interest or principal, or that such collateral could be
readily liquidated. The Fund may invest up to 20% of its total assets in Senior
Loans that are not secured by collateral.
The Fund may be required to pay and may receive various fees and
commissions in the process of purchasing, selling and holding Senior Loans. The
fee component may include any, or a combination of, the following elements:
arrangement fees, non-use fees, facility fees, letter of credit fees and ticking
fees. Arrangement fees are paid at the commencement of a loan as compensation
for the initiation of the transaction. A non-use fee is paid based upon the
amount committed but not used under the loan. Facility fees are on-going annual
fees paid in connection with a loan. Letter of credit fees are paid if a loan
involves a letter of credit. Ticking fees are paid from the initial commitment
indication until loan closing if for an extended period. The amount of fees is
negotiated at the time of transaction.
If legislation or state or federal regulators impose additional
requirements or restrictions on the ability of financial institutions to make
loans that are considered highly leveraged transactions, the availability of
Senior Loans for investment by the Fund may be adversely affected. In addition,
such requirements or restrictions could reduce or eliminate sources of financing
for certain borrowers. This would increase the risk of default. If
9
<PAGE> 76
legislation or federal or state regulators require financial institutions to
dispose of Senior Loans that are considered highly leveraged transactions or
subject such Senior Loans to increased regulatory scrutiny, financial
institutions may determine to sell such Senior Loans. Such sales could result in
prices that, in the opinion of the Adviser, do not represent fair value. If the
Fund attempts to sell a Senior Loan at a time when a financial institution is
engaging in such a sale, the price the Fund could get for the Senior Loan may be
adversely affected.
REAL ESTATE
The Fund may acquire real estate or invests therein as a consequence of the
Fund's ownership of securities. It is the policy of the Fund to liquidate real
estate or interests therein promptly after acquiring such assets. It is unlikely
that more than 5% of the Fund's total assets will ever be invested in real
estate or interests therein.
MANAGEMENT
INVESTMENT ADVISER
Scudder Kemper Investments, Inc. (the "Adviser"), 345 Park Avenue, New
York, New York 10154, the global investment management business of Zurich
Financial Services Group (the "Group"), is one of the largest and most
experienced investment management organizations in the world, managing assets
for institutional and corporate clients, retirement and pension plans, insurance
companies, mutual fund investors, and individuals. The Adviser offers a full
range of investment counsel and asset management capabilities, based on a
combination of proprietary research and disciplined, long-term investment
strategies.
Headquartered in Zurich, Switzerland, Zurich Financial Services Group is
one of the global leaders in the financial services industry, providing its
customers with products and solutions in the area of financial protection and
asset accumulation. The Group has four core businesses: non-life and life
insurance, reinsurance and asset management.
The Investment Management Agreement provides that the Adviser will provide
portfolio management services, place portfolio transactions in accordance with
policies expressed in the Fund's Registration Statement, pay the Fund's office
rent, and render significant administrative services on behalf of the Fund (not
otherwise provided by third parties) necessary for the Fund's operating as a
closed-end investment company, including, but not limited to, preparing reports
to and meeting materials for the Fund's Board and reports and notices to Fund
shareholders; supervising, negotiating contractual arrangements with, to the
extent appropriate, and monitoring the performance of various third-party and
affiliated service providers to the Fund (such as the Fund's transfer and
pricing agents, fund accounting agent, custodian, accountants and others) and
other persons in any capacity deemed necessary or desirable to Fund operations;
preparing and making filings with the Commission and other regulatory and
self-regulatory organizations, including but not limited to, preliminary and
definitive proxy materials, post-effective amendments to the Fund's registration
statement and semi-annual reports on Form N-SAR; overseeing the tabulation of
proxies by the Fund's transfer agent; assisting in the preparation of filing of
the Fund's Federal, state and local tax returns; preparing and filing the Fund's
Federal excise tax returns pursuant to Section 4982 of the Internal Revenue Code
of 1986, as amended; providing assistance with investor and public relations
matters; monitoring the valuation of portfolio securities and the calculation of
net asset value; monitoring the registration of shares of the Fund under
applicable Federal and state securities laws; maintaining or causing to be
maintained for the Fund all books, records and reports and any other information
required under the 1940 Act, to the extent such books, records and reports and
other information are not maintained by the Fund's custodian or other agents of
the Fund; assisting in establishing accounting policies of the Fund; assisting
in the resolution of accounting issues that may arise with respect to the Fund's
operations and consulting with the Fund's independent accountants, legal counsel
and other agents as necessary in connection therewith; establishing and
monitoring the Fund's operating expense budgets; reviewing the Fund's bills;
processing the payment of bills that have been approved by an authorized person;
assisting the Fund in determining the amount of dividends and distributions
available
10
<PAGE> 77
to be paid by the Fund to its shareholders, preparing and arranging for the
printing of dividend notices to shareholders, and providing the transfer and
dividend paying agent, the custodian, and the accounting agent with such
information as is required for such parties to effect the payment of dividends
and distributions; and otherwise assisting the Fund in the conduct of its
business, subject to the direction and control of the Fund's Board.
Under the Investment Management Agreement, the Fund is responsible for
other expenses, including organizational expenses (including out-of-pocket
expenses, but not including the Adviser's overhead or employee costs); brokers'
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; legal, auditing and accounting expenses; payment for portfolio
pricing or valuation services to pricing agents, accountants, bankers and other
specialists, if any; taxes and governmental fees; the fees and expenses of the
Fund's transfer agent; expenses of preparing share certificates and any other
expenses, including clerical expenses, of issuance, offering, distribution,
sale, redemption or repurchase of shares; the expenses of and fees for
registering or qualifying securities for sale; the fees and expenses of those
Trustees who are not "interested persons" of the Fund (as defined in the 1940
Act); the cost of printing and distributing reports, notices and dividends to
current shareholders; and the fees and expenses of the Fund's custodians,
subcustodians, accounting agent, dividend disbursing agents and registrars. The
Fund may arrange to have third parties assume all or part of the expenses of
sale, underwriting and distribution of shares of the Fund. The Fund is also
responsible for expenses of shareholders' and other meetings and its expenses
incurred in connection with litigation and the legal obligation it may have to
indemnify officers and Trustees of the Fund with respect thereto. The Fund is
also responsible for the maintenance of books and records which are required to
be maintained by the Fund's custodian or other agents of the Fund; telephone,
telex, facsimile, postage and other communications expenses; any fees, dues and
expenses incurred by the Fund in connection with membership in investment
company trade organizations; expenses of printing and mailing prospectuses and
statements of additional information of the Fund and supplements thereto to
current shareholders; costs of stationery; fees payable to the Adviser and to
any other Fund advisors or consultants; expenses relating to investor and public
relations; interest charges, bond premiums and other insurance expense; freight,
insurance and other charges in connection with the shipment of the Fund's
portfolio securities; and other expenses.
The Adviser is responsible for the payment of the compensation and expenses
of all Trustees, officers and executive employees of the Fund (including the
Fund's share of payroll taxes) affiliated with the Adviser and making available,
without expense to the Fund, the services of such Trustees, officers and
employees as may duly be elected officers of the Fund, subject to their
individual consent to serve and to any limitations imposed by law. The Fund is
responsible for the fees and expenses (specifically including travel expenses
relating to Fund business) of Trustees not affiliated with the Adviser
("Non-Interested Trustees"). Under the Investment Management Agreement, the
Adviser also pays the Fund's share of payroll taxes.
In return for the services provided by the Adviser as investment manager
and the expenses it assumes under the Investment Management Agreement, the Fund
pays the Adviser a management fee which is payable monthly, at the annual rate,
expressed as a percentage of average daily net assets, of 0.50% of the first $1
billion of average daily net assets, 0.49% of the next $2 billion, 0.48% of the
next $2 billion, 0.47% of the next $5 billion, and 0.45% of average daily net
assets over $10 billion. The fee is payable monthly, provided that the Fund will
make such interim payments as may be requested by the Adviser not to exceed 75%
of the amount of the fee then accrued on the books of the Fund and unpaid.
The Adviser has agreed to reduce its investment management fee to 0% of the
Fund's average daily net assets through November 30, 1999. The investment
management fee will be reinstated during the one year period ending November 30,
2000. During the period from commencement of operations to the end of the Fund's
fiscal year, August 31, 1999, the Distributor agreed to reduce its
administrative services and distribution fee and the Adviser agreed to reimburse
other expenses to the extent necessary to maintain maximum expense ratios
ranging from 0% to 1.00%. During the period from May 25, 1999 (commencement of
operations) to August 31, 1999, the Adviser reimbursed Fund expenses of $375,748
pursuant to these arrangements. The Fund paid fees to the Adviser from May 25,
1999 (commencement of operations) through August 31, 1999 of $0 under the
Investment Management Agreement, after the effect of the expense waiver by the
Adviser.
11
<PAGE> 78
The Investment Management Agreement further provides that the Adviser shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with matters to which such agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of the Adviser in the performance of its duties or from reckless
disregard by the Adviser of its obligations and duties under such agreement. The
Investment Management Agreement also provides that purchase and sale
opportunities, which are suitable for more than one client of the Adviser, will
be allocated by the Adviser in an equitable manner. Lastly, the Investment
Management Agreement contains a provision stating that it supersedes all prior
agreements.
The Investment Management Agreement may be terminated without penalty upon
sixty (60) days' written notice by either party. The Fund may agree to terminate
its Investment Management Agreement either by the vote of a majority of the
outstanding voting securities of the Fund, or by a vote of the Board. The
Investment Management Agreement may also be terminated at any time without
penalty by the vote of a majority of the outstanding voting securities of the
Fund or by a vote of the Board if a court establishes that the Adviser or any of
its officers or directors has taken any action resulting in a breach of the
Adviser's covenants under the Investment Management Agreement. As stated above,
the Investment Management Agreement automatically terminates in the event of its
assignment.
FUND ACCOUNTING AGENT
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts 02110, a subsidiary of the Adviser, is responsible for
determining the net asset value of the Fund, recording daily trading activity,
and maintaining all accounting records related thereto. SFAC receives a fee for
its services to the Fund at the annual rate of 0.025% of the first $150,000,000
of average daily net assets, 0.0075% of the next $850,000,000, and 0.0045% of
the excess over $1 billion. This fee increases by 1/3 for each additional class
of shares the Fund establishes. The minimum monthly fee is $3,125. SFAC also
charges $7.50 per month for each issue maintained by the Fund and a fee ranging
from $5.00 to $25.00 per portfolio or derivatives transaction. The Fund paid
fees to SFAC from May 25, 1999 (commencement of operations) through August 31,
1999 of $0, after the effect of the expense absorption by the Adviser referred
to above.
DISTRIBUTOR
Pursuant to an Underwriting and Distribution Services Agreement
("Distribution Agreement"), Kemper Distributors, Inc., 222 South Riverside
Plaza, Chicago, Illinois 60606, a subsidiary of the Adviser, is the principal
underwriter and distributor for the shares of the Fund and acts as agent of the
Fund in the continuous offering of its shares. The Distributor bears all of its
expenses of providing services pursuant to the Distribution Agreement, including
the payment of any commissions. The Fund pays the cost for the prospectus and
shareholder reports to be set in type and printed for existing shareholders, and
the Distributor pays for the printing and distribution of copies thereof used in
connection with the offering of shares to prospective investors. The Distributor
also pays for supplementary sales literature and advertising costs.
The Distribution Agreement continues in effect from year to year so long as
such continuance is approved for each class at least annually by a vote of the
Board of Trustees of the Fund, including the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
Distribution Agreement. The Distribution Agreement automatically terminates in
the event of its assignment and may be terminated for a class at any time
without penalty by the Fund or by the Distributor upon 60 days' notice.
Termination by the Fund with respect to a class may be by vote of a majority of
the Board of Trustees, and a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
Distribution Agreement, or a "majority of the outstanding voting securities" of
the class of the Fund, as defined under the 1940 Act.
ADMINISTRATIVE SERVICES
Administrative services are provided to the Fund under an Administrative
Services Agreement ("Administrative Agreement") with the Distributor. The
Distributor bears all its expenses of providing services
12
<PAGE> 79
pursuant to the Administrative Agreement, including the payment of service fees.
For the services under the Administrative Agreement, the Fund pays the
Distributor an administrative services fee, payable monthly, at an annual rate
of up to 0.25% of average daily net assets of the shares of the Fund. The Fund
paid administrative services fees to the Distributor from May 25, 1999
(commencement of operations) through August 31, 1999 of $0, after fee reductions
as referred to above.
The Distributor enters into related arrangements with various broker-dealer
firms and other service or administrative firms ("service firms") that provide
services and facilities for their customers or clients who are investors in the
Fund. The firms provide such office space and equipment, telephone facilities
and personnel as is necessary or beneficial for providing information and
services to their clients. Such services and assistance may include, but are not
limited to, establishing and maintaining accounts and records, processing
purchase and repurchase transactions, answering routine inquiries regarding the
Fund, assistance to clients in changing dividend and investment options, account
designations and addresses and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. For Class A shares, the Distributor pays each firm a service fee,
normally payable quarterly, at an annual rate of up to 0.25% of the net assets
in Fund accounts that it maintains and services, commencing with the month after
investment. With respect to Class B and Class C shares, the Distributor
currently advances to service firms the first-year service fee at a rate of up
to 0.25% of the purchase price of such shares. For periods after the first year,
the Distributor currently intends to pay service firms a service fee at a rate
of up to 0.25% (calculated monthly and paid quarterly) of the net assets
attributable to Class B and Class C shares maintained and serviced by the
service firm. After the first year, a service firm becomes eligible for the
quarterly service fee and the fee continues until terminated by the Distributor
or the Fund. Services to which service fees may be paid may include affiliates
of the Distributor.
The Distributor also may provide some of the above services and may retain
any portion of the fee under the Administrative Agreement not paid to service
firms to compensate itself for administrative functions performed for the Fund.
Currently, the administrative services fee payable to the Distributor is payable
at the annual rate of 0.25% based upon Fund assets in accounts for which a
service firm provides administrative services listed on the Fund's records and,
effective January 1, 2000, at the annual rate of 0.15% based upon Fund assets in
accounts for which there is no firm (other than the Distributor) listed on the
Fund's records. The effective administrative services fee rate to be charged
against all assets of the Fund while this procedure is in effect will depend
upon the proportion of Fund assets that is in accounts for which there is a
service firm of record. The Board of Trustees of the Fund, in its discretion,
may approve paying the fee at the 0.25% annual rate on all Fund assets in the
future. In addition, the Distributor may, from time to time, from its own
resources, pay certain service firms additional amounts for ongoing
administrative services and assistance provided to their customers and clients
who are shareholders of the Fund.
Certain Trustees or officers of the Fund are also directors or officers of
the Adviser or the Distributor, as indicated under "Officers and Trustees."
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Fund's custodian and maintains custody of all
securities and cash held by the Fund.
TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT
Kemper Service Company ("KSvC"), 811 Main Street, Kansas City, Missouri
64105, a subsidiary of the Adviser, is the Fund's transfer agent and dividend
disbursing agent and, as such, generally serves as "Shareholder Service Agent"
of the Fund. KSvC receives as transfer agent the following from the Fund: annual
account fees of $14.00 ($23.00 for retirement accounts) per account, plus set up
charges, annual fees associated with the early withdrawal charge, an asset-based
fee of 0.05%, and out-of-pocket reimbursement. For the fiscal year ended August
31, 1999 the Fund paid KsvC $0 in fees, after the effect of the expense
absorption by the Adviser referred to above.
13
<PAGE> 80
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.
James R. Edgar Trustee Distinguished Fellow, Institute of Government
1927 County Road, 150E and Public Affairs, University of Illinois;
Seymour, Illinois Director, Kemper Insurance Companies; formerly,
Date of birth: 7/22/46 Illinois Governor, 1991-99.
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, Vice President, The Reuben H.
Donnelly Corporation, and attorney.
*Cornelia M. Small Trustee Managing Director, Scudder Kemper Investments,
345 Park Avenue Inc.
New York, NY 10154
Date of birth: 7/28/44
*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 unaffiliated
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.
</TABLE>
14
<PAGE> 81
<TABLE>
<CAPTION>
POSITION
WITH PRINCIPAL OCCUPATIONS DURING
NAME, ADDRESS AND AGE THE FUND THE PAST FIVE YEARS
- --------------------- -------------- -----------------------------------------------
<S> <C> <C>
*Mark S. Casady President Managing Director, Scudder Kemper Investments,
Two International Place Inc.
Boston, MA 02110
Date of birth: 9/21/60
*Philip J. Collora Vice President Senior Vice President, Scudder Kemper
222 South Riverside Plaza and Secretary Investments, Inc.
Chicago, IL 60606
Date of birth: 11/15/45
*John R. Hebble Treasurer Senior Vice President, Scudder Kemper
222 South Riverside Plaza, Investments, Inc.
Chicago, IL 60606
Date of birth: 6/27/58
*Ann M. McCreary Vice President Managing Director, Scudder Kemper Investments,
345 Park Avenue Inc.
New York, NY 10154
Date of birth: 11/6/56
*Robert C. Peck Vice President Managing Director, Scudder Kemper Investments,
222 South Riverside Plaza, Inc.; formerly, Executive Vice President, Van
Chicago, IL 60606 Kampen American Capital, Inc.; Senior Vice
Date of birth: 10/1/46 President, Manufacturers Hanover Investment
Corporation
*Jonathan Trutter Vice President Senior Vice President, Scudder Kemper
222 South Riverside Plaza Investments, Inc.
Chicago, IL 60606
Date of birth: 11/29/57
*Mark Wittnebel Vice President Senior Vice President, Scudder Kemper
222 South Riverside Plaza Investments, Inc.
Chicago, IL 60606
Date of birth: 5/26/58
*Maureen E. Kane Assistant Vice President, Scudder Kemper Investments,
Two International Place Secretary Inc.; formerly, Assistant Vice President of an
Boston, MA 02110 unaffiliated investment management firm;
Date of birth: 2/14/62 formerly, Associate Staff Attorney of an
unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
*Brenda Lyons Assistant Senior Vice President, Scudder Kemper
Two International Place Treasurer Investments, Inc.
Boston, MA 02110
Date of birth: 2/21/63
*Caroline Pearson Assistant Senior Vice President, Scudder Kemper
Two International Place Secretary Investments Inc.; formerly, Associate, Dechert
Boston, MA 02110 Price & Rhoads (law firm) from 1989 to 1997.
Date of birth: 4/1/62
</TABLE>
- ---------------
* Interested person of the Fund as defined in the 1940 Act.
The Board has an audit and governance committee that is composed of Messrs.
Akins, Edgar, Gottschalk, Kelsey, Renwick, and Weithers. The Committee makes
recommendations regarding the selection
15
<PAGE> 82
of independent accountants for the Fund, confers with the independent
accountants regarding the Fund's financial statements, the results of audits and
related matters, seeks and reviews nominees for Board membership and performs
other tasks as the Board assigns.
COMPENSATION OF TRUSTEES
The Trustees and officers who are "interested persons" as designated above
receive no compensation from the Fund. The table below shows estimated amounts
to be paid or accrued to those Trustees who are not designated "interested
persons" during the current fiscal year, except that the information regarding
the total compensation from the Fund and Fund complex in the last column is for
the calendar year 1998 and does not include estimated amounts received from the
Fund for the current fiscal year.
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FUND COMPLEX(2)
NAME FROM FUND PAID TO TRUSTEES
- ---- ------------ --------------------
<S> <C> <C>
James E. Akins.............................................. $2,300 $140,300
James R. Edgar.............................................. $2,300 $ --0--
Arthur R. Gottschalk(1)..................................... $2,300 $146,300
Frederick T. Kelsey......................................... $2,300 $141,300
Fred B. Renwick............................................. $2,300 $141,300
John G. Weithers............................................ $2,300 $146,300
</TABLE>
- ---------------
(1) Includes deferred fees. Pursuant to a deferred compensation agreement with
the Fund, deferred amounts accrued interest monthly at a rate approximate to
the yield of Zurich Money Funds -- Zurich Money Market Fund.
(2) Includes compensation for service on the Boards of 15 Kemper Funds with 50
fund portfolios. Each Trustee currently serves as trustee of 16 Kemper Funds
with 56 fund portfolios.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following persons held of record 5% or more of the fund's outstanding
shares of beneficial interest as of October 27, 1999:
<TABLE>
<CAPTION>
REGISTRATION SHARES PERCENTAGE
- ------------ ------------- ----------
<S> <C> <C>
Charles C. Matthews Limited Partnership..................... 3,339,149.863 21.66
P.O. Box 427
Carthage, TX 75633
Donaldson Lufkin Jenrette................................... 1,449,779.441 9.40
Securities Corp. Inc.
P.O. Box 2052
Jersey City, NJ 07303
BHC Securities Inc.......................................... 1,843,725.61 11.96
FAD 84431723
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103
First Union Securities, Inc................................. 1,850,255.332 12.00
FBO Floyd A. Dragdo IRA
111 East Kilbourn Avenue
Milwaukee, WI 53202
</TABLE>
As of that same date, the Trustees and officers of the Fund in the
aggregate owned less than 1% of the Fund's outstanding shares of beneficial
interest.
16
<PAGE> 83
PORTFOLIO TRANSACTIONS
The primary objective of the Adviser in placing orders for the purchase and
sale of securities for the Fund is to obtain the most favorable net results
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on compatible transactions, as well as
by comparing commissions paid by the Fund to reported commissions paid by
others. The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
The Fund may purchase Senior Loans in individually negotiated transactions
with commercial banks, thrifts, insurance companies, finance companies and other
financial institutions. In determining whether to purchase Senior Loans from
these financial institutions, the Adviser may consider, among other factors, the
financial strength, professional ability, level of service and research
capability of the institution. While financial institutions generally are not
required to repurchase Senior Loans which they have sold, they may act as
principal or on an agency basis in connection with the Fund's disposition of
Senior Loans. The Fund has no obligation to deal with any bank, broker or dealer
in execution of transactions in portfolio securities.
The Fund's purchases and sales of fixed-income securities may be placed by
the Adviser with primary market makers for these securities on a net basis,
without any brokerage commission being paid by the Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Adviser or the Fund. The term "research, market and statistical information"
includes advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts. The Adviser is authorized when placing portfolio
transactions for the Fund to pay a brokerage commission in excess of that which
another broker might charge for executing the same transaction on account of the
receipt of research, market or statistical information. The Adviser has entered
into arrangements with certain broker/dealers pursuant to which a broker/dealer
will provide research, market or statistical information to the Adviser or the
Fund in exchange for the direction by the Adviser of brokerage transactions to
the broker/dealer. The Adviser may give consideration to those firms that have
sold or are selling shares of a fund managed by the Adviser. In effecting
transactions in over-the-counter securities, orders are placed with the
principal market makers for the security being traded unless, after exercising
care, it appears that more favorable results are available elsewhere.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Adviser, it is the opinion
of the Adviser that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Fund and not all such information is used by
the Adviser in connection with the Fund. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Fund.
The Trustees of the Fund review from time to time whether the recapture for
the benefit of the Fund of some portion of the brokerage commissions, if any, or
similar fees paid by the Fund on portfolio transactions is legally permissible
and advisable.
The Fund's average portfolio turnover rate is the ratio of the lesser of
sales or purchases to the monthly average value of the portfolio securities
owned during the year, excluding all securities with maturities or expiration
dates at the time of acquisition of one year or less. A higher rate involves
greater transaction
17
<PAGE> 84
expenses to the Fund and may result in the realization of net capital gains,
which would be taxable to shareholders when distributed. Purchases and sales are
made for the Fund whenever necessary, in management's opinion, to meet the
Fund's objective.
It is not anticipated that the Fund will pay significant brokerage
commissions. However, on occasion it may be necessary or desirable to purchase
or sell a security through a broker on an agency basis, in which case the Fund
will incur a brokerage commission. For the fiscal period from May 25, 1999
(commencement of operations) through August 31, 1999, the Fund paid no brokerage
commissions.
The Fund will not purchase securities from its affiliates in principal
transactions unless an exemption is available from applicable regulations.
LIQUIDITY REQUIREMENTS
From the time that the Fund sends a Notification to shareholders until the
Pricing Date, the Fund will maintain a percentage of the Fund's assets equal to
at least 100 percent of the Repurchase Offer Amount in assets: (a) that can be
sold or disposed of in the ordinary course of business at approximately the
price at which the Fund has valued the asset within the time period between the
Repurchase Request Deadline and the next Repurchase Payment Deadline; or (b)
that mature by the next Repurchase Payment Deadline.
In the event that the Fund's assets fail to comply with the requirements in
the preceding paragraph, the Board shall cause the Fund to take such action as
the Board deems appropriate to ensure compliance.
NET ASSET VALUE
The net asset value per share of the Fund is the value of one share and is
determined separately for each class by dividing the value of the Fund's net
assets attributable to that class by the number of shares of that class
outstanding. The per share net asset value of classes of shares will vary based
on expenses borne by each class. The net asset value of shares of the Fund is
computed as of the close of regular trading on the New York Stock Exchange (the
"Exchange") on each day the Exchange is open for trading. The Exchange is
scheduled to be closed on the following holidays: New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the time and in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.
Securities listed primarily on foreign exchanges may trade on days when the
Fund's net asset value is not computed, and therefore, the net asset value of a
Fund may be significantly affected on days when investors have no access to the
Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by the Fund's pricing
agent(s) which reflect broker-dealer supplied valuations and electronic data
processing techniques. Money market instruments purchased with an original
maturity of sixty days or less, maturing at par, shall be valued at amortized
cost, which the Board believes approximates market value. If it is not possible
to value a particular debt security pursuant to these valuation methods, the
value of such security is the most recent bid quotation supplied by a bona fide
market
18
<PAGE> 85
maker. If it is not possible to value a particular debt security pursuant to the
above methods, the Adviser may calculate the price of that debt security,
subject to limitations established by the Board.
An exchange-traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price.
If a security is traded on more than one exchange, or upon one or more
exchanges and the over-the-counter market, quotations are taken from the market
in which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee, most
fairly reflects the fair market value of the property on the valuation date.
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
19
<PAGE> 86
each calendar year an amount equal to the sum of: (a) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year; (b) at least 98% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses) for a one-year period generally
ending on October 31 of the calendar year; and (c) all ordinary income and
capital gains for previous years that were not distributed during such years. To
avoid application of the excise tax, the Fund intends to make distributions in
accordance with the calendar year distribution requirement.
A distribution will be treated as paid on December 31 of a calendar year if
it is declared by the Fund in October, November or December of that year with a
record date in such a month and paid by the Fund during January of the following
year. Such a distribution will be taxable to shareholders in the calendar year
in which the distribution is declared, rather than the calendar year in which it
is received.
DISTRIBUTIONS
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Dividends paid
by the Fund to a corporate shareholder, to the extent such dividends are
attributable to dividends received by the Fund from U.S. corporations, may,
subject to limitation, be eligible for the dividends received deduction.
However, the alternative minimum tax applicable to corporations may reduce the
value of the dividends received deduction.
The excess of net long-term capital gains over net short-term capital
losses realized, distributed and properly designated by the Fund, whether paid
in cash or reinvested in Fund shares, will generally be taxable to shareholders
as long-term gain, regardless of how long a shareholder has held Fund shares.
Net capital gains from assets held for one year or less will be taxed as
ordinary income.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
DISPOSITIONS
Upon a repurchase, redemption, sale or exchange of shares of the Fund, a
shareholder will realize a taxable gain or loss depending upon his or her basis
in the shares. A gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands, and the rate of tax will
depend upon the shareholder's holding period for the shares. Any loss realized
on a redemption, sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including through reinvestment of dividends) within a
period of 61 days, beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case the basis of the shares acquired will be
adjusted to reflect the disallowed loss. If a shareholder holds Fund shares for
six months or less and during that period receives a distribution taxable to the
shareholder as long-term capital gain, any loss realized on the sale of such
shares during such six-month period would be a long-term loss to the extent of
such distribution.
If, within 90 days after purchasing Fund shares with a sales charge, a
shareholder exchanges the shares and acquires new shares at a reduced (or
without any) sales charge pursuant to a right acquired with the original shares,
then the shareholder may not take the original sales charge into account in
determining the shareholder's gain or loss on the disposition of the shares.
Gain or loss will generally be determined by excluding all or a portion of the
sales charge from the shareholder's tax basis in the exchanged shares, and the
amount excluded will be treated as an amount paid for the new shares.
If, pursuant to an offer by the Fund to repurchase its shares, a
shareholder sells all shares of the Fund that he or she owns or is considered to
own, the shareholder may realize a taxable gain or loss. This gain or loss will
20
<PAGE> 87
be treated as capital gain or loss if the Fund shares are held as capital assets
and will be long-term or short-term depending upon the shareholder's holding
period for the shares. If, pursuant to an offer by the Fund to repurchase its
shares, a shareholder sells less than all of the shares of the Fund that he or
she owns or is considered to own, the sale may not qualify as an exchange, and
the proceeds received may be treated as a dividend, return of capital or capital
gain, depending on the Fund's earning and profits and the shareholder's basis in
the tendered shares. If that occurs, there is a risk that non-tendering
shareholders may be considered to have received a deemed distribution as a
result of the Fund's purchase of tendered shares, and all or a portion of that
deemed distribution may be taxable as a dividend.
BACKUP WITHHOLDING
The Fund generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid (other than
exempt-interest dividends), capital gain distributions, and redemption proceeds
to shareholders if: (a) the shareholder fails to furnish the Fund with the
shareholder's correct taxpayer identification number or social security number;
(b) the IRS notifies the shareholder or the Fund that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect; or (c) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Non-U.S. shareholders may
be subject to U.S. tax rules that differ significantly from those summarized
above, including the likelihood that ordinary income dividends to them would be
subject to withholding of U.S. tax at a rate of 30% (or a lower treaty rate, if
applicable).
FUND INVESTMENTS
Market Discount. If the Fund purchases a debt security at a price lower
than the stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount." If the amount of
market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of: (a) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account); or (b) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by the Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
Original Issue Discount. Certain debt securities acquired by the Fund may
be treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by the Fund, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes as interest
and, therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies. Some debt securities may be
purchased by the Fund at a discount that exceeds the original issue discount on
such debt securities, if any. This additional discount represents market
discount for federal income tax purposes (see above).
21
<PAGE> 88
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.
FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS
Ernst & Young, LLP are the Fund's independent accountants providing audit
and tax return preparation services and assistance and consultation in
connection with the review of various Commission filings.
22
<PAGE> 89
REPORTS
When available, the Fund will furnish, without charge, a copy of its Annual
and Semi-Annual Reports to Shareholders upon request to the Fund, 222 South
Riverside Plaza, Chicago, Illinois 60606 or call 1-800-621-1048.
FINANCIAL STATEMENTS
The audited financial statements, notes to the audited financial
statements, and reports of the independent accountants included in the Annual
Report to the Shareholders of the Fund for the period from May 25, 1999 to
August 31, 1999, which was prepared by the Fund's independent accountants, are
hereby incorporated by reference into this SAI.
23
<PAGE> 90
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.
24
<PAGE> 91
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.
25
<PAGE> 92
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. FINANCIAL STATEMENTS: Included in Part A: Financial Highlights for the
period from May 25, 1999 (commencement of
operations) through August 31, 1999.
Included in Part B: The audited financial
statements, notes to the audited financial
statements, and reports of the independent
accountants included in the Annual Report to the
Shareholders of the Fund for the period from May
25, 1999 to August 31, 1999, which was prepared
by the Fund's independent accountants, are
incorporated by reference into Part B of this
Registration Statement.
2. EXHIBITS
(a) (1) Declaration of Trust of Registrant.*
(2) Amended and Restated Establishment and Designation of Classes of
Shares of Beneficial Interest is filed herewith.
(b) By-Laws of Registrant.*
(c) Not Applicable.
(d) Declaration of Trust and By-laws of Registrant.*
(e) Not Applicable.
(f) Not Applicable.
(g) Investment Management Agreement between Registrant and Scudder Kemper
Investments, Inc.*
(h) (1) Amended and Restated Underwriting and Distribution Services
Agreement between Registrant and Kemper Distributors, Inc is
filed herewith.
(2) Form of Selling Group Agreement.*
(i) Not Applicable.
(j) Custodian Contract between Registrant and State Street Bank and Trust
Company.***
(k) (1) Administrative Services Agreement between Registrant and Kemper
Distributors, Inc.*
(2) Agency Agreement between Registrant and Kemper Service Company.*
(3) Fund Accounting Services Agreement between Registrant and Scudder
Fund Accounting Corporation.*
(4) Distribution Plan for Class B shares.*
(5) Amended and Restated Multi-Distribution System Plan of Registrant
is filed herewith.
(6) Distribution Plan for Class C Shares is filed herewith.
(l) Opinion and Consent of Dechert Price & Rhoads is filed herewith.
(m) Not Applicable
(n) (1) Consent of independent accountants is filed herewith.
(2) Powers of Attorney (except with respect to Ms. Quirk and Messrs.
Edgar and Gottschalk).*
C-1
<PAGE> 93
(3) Powers of Attorney for Ms. Quirk and Messrs. Edgar and Gottschalk
are filed herewith.
(o) Not Applicable.
(p) Subscription Agreement for Initial Capital.**
(q) Not Applicable.
(r) Not Applicable.
- ---------------
* Incorporated by reference to Amendment No. 1 to Registrant's Registration
Statement under the Investment Company Act of 1940, as amended (the "1940
Act"), as filed with the SEC on April 27, 1999.
** Incorporated by reference to Amendment No. 2 to Registrant's Registration
Statement under the 1940 Act, as filed with the SEC on May 25, 1999. **
*** Incorporated by reference to Amendment No. 3 to Registrant's Registration
Statement under the 1940 Act, as filed with the SEC on September 2, 1999.
ITEM 25. MARKETING AGREEMENTS
See Amended and Restated Underwriting and Distribution Services Agreement
filed as Exhibit (h)(1) to this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration Fees........................................... $222,800
Legal Fees and Expenses..................................... $ 20,000
National Association of Securities Dealers, Inc. Fees....... $ 0
Accounting Fees and Expenses................................ $ 5,000
Blue Sky Fees............................................... $ 30,000
Miscellaneous Expenses...................................... $ 5,000
Total.................................................. $282,000
</TABLE>
ITEM 27. PERSON CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of October 27, 1999, each Class of shares of the Fund had the following
number of record owners.
<TABLE>
<CAPTION>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
- -------------- ------------------------
<S> <C>
Class A Shares.................................... None
Class B Shares.................................... 2,204
Class C Shares.................................... None
</TABLE>
ITEM 29. INDEMNIFICATION
A policy of insurance covering Scudder Kemper Investments, Inc., its
affiliates including Scudder Investor Services, Inc., and all of the registered
investment companies advised by Scudder Kemper Investments, Inc. insures the
Registrant's trustees and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent act, error or
accidental omission in the scope of their duties. Article IV, Sections 4.1-4.3
of the Registrant's Declaration of Trust states as follows:
C-2
<PAGE> 94
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
C-3
<PAGE> 95
(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,
C-4
<PAGE> 96
New York, 10154-0010, and (iii) the offices of Scudder Kemper Investments, Inc.
at 2 International Place, Boston, Massachusetts 02110-4103.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, maintains all the records in its capacity as custodian of
the Registrant's assets. Kemper Service Company, 811 Main Street, Kansas City,
Missouri, maintains all the required records in its capacity as transfer,
dividend paying and shareholder service agent of the Registrant.
ITEM 32. MANAGEMENT SERVICES
Not Applicable.
ITEM 33. UNDERTAKINGS
1. Not Applicable
2. Not Applicable.
3. Not Applicable
4. a. Registrant undertakes to file during any period in which offers or
sales are being made, a post-effective amendment to this registration
statement: (i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933; (ii) to reflect in the Prospectus any
facts or events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement;
and (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
b. Registrants undertakes that, for the purpose of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
c. Registrant undertakes to remove from registration by means of
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
5. Not Applicable.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days
of receipt of a written or oral request, any Statement of Additional
Information.
C-5
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets the
requirements for effectiveness of this Registration Statement pursuant to Rule
486(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boston, and Commonwealth of Massachusetts, on this
29th day of October, 1999.
KEMPER FLOATING RATE FUND
By: /s/ MARK S. CASADY
-----------------------------------
Mark S. Casady
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARK S. CASADY President (Principal Executive October 29, 1999
- --------------------------------------------- Officer)
Mark S. Casady
/s/ JOHN R. HEBBLE Treasurer (Principal Financial and October 29, 1999
- --------------------------------------------- Accounting Officer)
John R. Hebble
* Trustee October 29, 1999
- ---------------------------------------------
James E. Akins
** Trustee October 29, 1999
- ---------------------------------------------
James R. Edgar
** Trustee October 29, 1999
- ---------------------------------------------
Arthur R. Gottschalk
* Trustee October 29, 1999
- ---------------------------------------------
Frederick T. Kelsey
* Trustee October 29, 1999
- ---------------------------------------------
Thomas W. Littauer
** Trustee October 29, 1999
- ---------------------------------------------
Kathryn L. Quirk
* Trustee October 29, 1999
- ---------------------------------------------
Fred B. Renwick
</TABLE>
C-6
<PAGE> 98
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Trustee October 29, 1999
- ---------------------------------------------
Cornelia M. Small
* Trustee October 29, 1999
- ---------------------------------------------
John G. Weithers
</TABLE>
* Pursuant to Powers of Attorney previously filed.
** Pursuant to Powers of Attorney filed herewith.
By: /s/ MAUREEN KANE
- --------------------------------------
Maureen Kane
As Attorney-In-Fact
C-7
<PAGE> 99
KEMPER FLOATING RATE FUND
EXHIBITS FILED WITH AMENDMENT NO. 4
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
2(a)(2) Amended and Restated Designation of Classes of Shares of
Beneficial Interest.
2(h)(1) Amended and Restated Underwriting and Distribution Services
Agreement between Registrant and Kemper Distributors, Inc.
2(k)(5) Amended and Restated Multi-Distribution System Plan of
Registrant.
2(k)(6) Distribution Plan for Class C Shares.
2(l) Opinion and Consent of Dechert Price & Rhoads.
2(n)(1) Consent of Ernst & Young.
2(n)(3) Powers of Attorney
</TABLE>
C-8
<PAGE> 1
EXHIBIT 2(a)(2)
KEMPER FLOATING RATE FUND
Amended and Restated
Establishment and Designation of Classes
of Shares of Beneficial Interest, $.01 Par Value
(the "Instrument")
The undersigned, being a majority of the Trustees of Kemper Floating Rate
Fund, a Massachusetts business trust (the "Fund"), acting pursuant to Section
5.14 of the Fund's Declaration of Trust dated March 23, 1999 (the "Declaration
of Trust"), having heretofore by the Establishment and Designation of Classes of
Beneficial Interest, $.01 Par Value, dated May 19, 1999, established Class A and
Class B shares of beneficial interest, $.01 par value, of the Fund, hereby
further divide the authorized and unissued shares of beneficial interest
(together with Class A and Class B shares of beneficial interest, $.01 par
value, now outstanding, the "Shares") of the Fund, into the three classes of
common shares designated below in paragraph 1 (each a "Class" and, collectively,
the "Classes"), each Class (including, to the extent appropriate, currently
outstanding Class A Shares and Class B Shares) to be unlimited in number and to
have the special and relative rights specified in this Instrument:
1. The Classes shall be designated as follows:
Kemper Floating Rate Fund Class A
Kemper Floating Rate Fund Class B
Kemper Floating Rate Fund Class C
2. Each Share shall represent a pro rata beneficial interest in the assets
attributable to its Class, and shall be entitled to receive its pro rata share
of net assets attributable to that Class of Shares of the Fund upon liquidation
of the Fund, all as provided in or not inconsistent with the Declaration of
Trust. Unless otherwise provided in this Instrument, each Share shall have the
voting, dividend, liquidation and other rights, preferences, powers,
restrictions, limitations, qualifications, terms and conditions, as set forth in
the Declaration of Trust.
3. Upon the effective date of this Instrument:
a. Each Share of each Class of the Fund shall be entitled to one vote
(or fraction thereof in respect of a fractional Share) on matters which
those Shares (or Class of Shares) shall be entitled to vote. Shareholders
of the Fund shall vote together on any matter, except to the extent
otherwise required by the Investment Company Act of 1940, as amended (the
"1940 Act"), and the rules thereunder, in which case only the Shareholders
of that Class or those Classes shall be entitled to vote thereon.
b. Liabilities, expenses, costs, charges or reserves that should be
properly allocated to the Shares of a particular Class of the Fund may,
pursuant to a Plan adopted by the Trustees to conform with Rule 18f-3 under
the 1940 Act, or a similar rule,
<PAGE> 2
provision, interpretation or order under the 1940 Act ("Rule 18f-3 Plan"),
be charged to and borne solely by that Class and the bearing of expenses
solely by a Class of Shares may be appropriately reflected and cause
differences in net asset value attributable to, and the dividend,
redemption and liquidation rights of, the Shares of different Classes.
c. The liabilities allocable to Class A and Class B, respectively, of
the Fund existing on the date hereof shall continue to be allocated to
those Classes and, hereafter, the liabilities of the Fund shall be
allocated among the Classes, now or hereafter created, in accordance with
the terms of the Declaration of Trust and the Fund's Rule 18f-3 Plan.
4. The Trustees (including any successor Trustees) shall have the right at
any time and from time to time to reallocate assets, liabilities and expenses or
to change the designation of any Class now or hereafter created, or to otherwise
change the special and relative rights of any Class, provided that no change
shall adversely affect the rights of Shareholders of such Class.
Except as otherwise provided in this Instrument, the foregoing shall be
effective as of the date set forth below.
/s/ James Akins /s/ Cornelia M. Small
- -------------------------------- --------------------------------
James Akins, as Trustee Cornelia M. Small, Trustee
/s/ James R. Edgar /s/ Kathryn L. Quirk
- -------------------------------- --------------------------------
James R. Edgar, as Trustee Kathryn L. Quirk, Trustee
/s/ Arthur R. Gottschalk /s/ Fred B. Renwick
- -------------------------------- --------------------------------
Arthur R. Gottschalk, as Trustee Fred B. Renwick, as Trustee
/s/ Frederick T. Kelsey /s/ John G. Weithers
- -------------------------------- --------------------------------
Frederick T. Kelsey, as Trustee John G. Weithers, as Trustee
/s/ Thomas W. Littauer
- --------------------------------
Thomas W. Littauer, as Trustee
Dated: September 29, 1999
<PAGE> 1
EXHIBIT 2(h)(1)
AMENDED AND RESTATED
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT
AGREEMENT made this 31st day of March 1999, between KEMPER FLOATING RATE
FUND, a Massachusetts business trust (the "Fund"), and KEMPER DISTRIBUTORS,
INC., a Delaware corporation ("KDI"), as amended and restated this 1st day of
October, 1999.
In consideration of the mutual covenants hereinafter contained, it is
hereby agreed by and between the parties hereto as follows:
1. The Fund hereby appoints KDI to act as distributor of shares of
beneficial interest (hereinafter called "shares") of the Fund in jurisdictions
wherein shares of the Fund may legally be offered for sale; provided, however,
that the Fund in its absolute discretion may: (a) issue or sell shares directly
to holders of shares of the Fund upon such terms and conditions and for such
consideration, if any, as it may determine, whether in connection with the
distribution of subscription or purchase rights, the payment or reinvestment of
dividends or distributions, or otherwise; (b) issue or sell shares at net asset
value to the shareholders of any other investment company, for which KDI shall
act as exclusive distributor, who wish to exchange all or a portion of their
investment in shares of such other investment company for shares of the Fund; or
(c) issue shares in connection with the merger or consolidation of any other
investment company with the Fund or the Fund's acquisition, by purchase or
otherwise, of all or substantially all of the assets of any other investment
company or all or substantially all of the outstanding shares of any such
company. KDI shall appoint various financial service firms ("Firms") to provide
distribution services to investors. The Firms shall provide such office space
and equipment, telephone facilities, personnel, literature distribution,
advertising and promotion as is necessary or beneficial for providing
information and distribution services to existing and potential clients of the
Firms. KDI may also provide some of the above services for the Fund.
KDI accepts such appointment as principal underwriter and agrees to render
such services and to assume the obligations herein set forth for the
compensation herein provided. KDI shall for all purposes herein provided be
deemed to be an independent contractor and, unless expressly provided herein or
otherwise authorized, shall have no authority to act for or represent the Fund
in any way. KDI, by separate agreement with the Fund, may also serve the Fund in
other capacities. The services of KDI to the Fund under this Agreement are not
to be deemed exclusive, and KDI shall be free to render similar services or
other services to others so long as its services hereunder are not impaired
thereby.
In carrying out its duties and responsibilities hereunder, KDI may,
pursuant to separate written contracts, appoint various Firms to provide
advertising, promotion and other distribution services contemplated hereunder
directly to or for the benefit of existing and potential shareholders who may be
clients of such Firms. Such Firms shall at all times be deemed to be independent
contractors retained by KDI and not the Fund.
<PAGE> 2
KDI shall use its best efforts with reasonable promptness to sell such part
of the authorized shares of the Fund remaining unissued as from time to time
shall be effectively registered under the Securities Act of 1933 ("Securities
Act"), at prices determined as hereinafter provided and on terms hereinafter set
forth, all subject to applicable federal and state laws and regulations and to
the Fund's organizational documents, provided, however, that KDI may in its
discretion refuse to accept orders for shares from any particular applicant.
2. KDI shall sell shares of the Fund to or through qualified Firms in such
manner, not inconsistent with the provisions hereof and the Fund's currently
effective registration statement, including the prospectus and the statement of
additional information and any supplements or amendments thereto ("Registration
Statement"), as KDI may determine from time to time, provided that no Firm or
other person shall be appointed or authorized to act as agent of the Fund
without prior consent of the Fund. In addition to sales made by it as agent of
the Fund, KDI may, in its discretion, also sell shares of the Fund as principal
to persons with whom it does not have selling group agreements.
Shares of any class of the Fund offered for sale or sold by KDI shall be so
offered or sold at a price per share determined in accordance with the
Registration Statement. The price the Fund shall receive for all shares
purchased from it shall be the net asset value used in determining the public
offering price applicable to the sale of such shares, except with respect to
shares sold during the Initial Offering Period, as defined in the Prospectus,
which shall be offered and sold at the price set forth therein. Any excess of
the sales price over the net asset value of the shares of the Fund sold by KDI
as agent shall be retained by KDI as a commission for its services hereunder.
KDI may compensate Firms for sales of shares at the commission levels provided
in the Registration Statement from time to time. KDI may pay other commissions,
fees or concessions to Firms, and may pay them to others in its discretion, in
such amounts as KDI shall determine from time to time. KDI shall be entitled to
receive and retain any applicable early withdrawal charge as described in the
Registration Statement. KDI shall also receive any distribution services fees
payable by the Fund as provided in the Fund's plan of distribution with respect
to any class of shares, as amended from time to time (the "Plan").
KDI will require each Firm to conform to the provisions hereof and the
Registration Statement with respect to the public offering price or net asset
value, as applicable, of the Fund's shares, and neither KDI nor any such Firms
shall withhold the placing of purchase orders so as to make a profit thereby.
3. The Fund will use its best efforts to keep effectively registered under
the Securities Act for sale as herein contemplated such shares as KDI shall
reasonably request and as the Securities and Exchange Commission shall permit to
be so registered. Notwithstanding any other provision hereof, the Fund may
terminate, suspend or withdraw the offering of shares whenever, in its sole
discretion, it deems such action to be desirable.
4. The Fund will execute any and all documents and furnish any and all
information that may be reasonably necessary in connection with the
qualification of its shares for sale (including the qualification of the Fund as
a dealer where necessary or advisable) in such states as
<PAGE> 3
KDI may reasonably request (it being understood that the Fund shall not be
required without its consent to comply with any requirement which in its opinion
is unduly burdensome). The Fund will furnish to KDI from time to time such
information with respect to the Fund and its shares as KDI may reasonably
request for use in connection with the sale of shares of the Fund.
5. KDI shall issue and deliver or shall arrange for various Firms to issue
and deliver on behalf of the Fund such confirmations of sales made by it
pursuant to this Agreement as may be required. At or prior to the time of
issuance of shares, KDI will pay or cause to be paid to the Fund the amount due
the Fund for the sale of such shares. Certificates shall be issued or shares
registered on the transfer books of the Fund in such names and denominations as
KDI may specify.
6. KDI shall order shares of the Fund from the Fund only to the extent that
it shall have received purchase orders therefor. KDI will not make, or authorize
Firms or others to make: (a) any short sales of shares of the Fund; or (b) any
sales of such shares to any Board member or officer of the Fund or to any
officer or Board member of KDI or of any corporation or association furnishing
investment advisory, managerial or supervisory services to the Fund, or to any
corporation or association, unless such sales are made in accordance with the
Registration Statement relating to the sale of such shares. KDI, as agent of and
for the account of the Fund, may repurchase the shares of the Fund at such
prices and upon such terms and conditions as shall be specified in the
Registration Statement. In selling or reacquiring shares of the Fund for the
account of the Fund, KDI will in all respects conform to the requirements of all
state and federal laws and the Conduct Rules of the National Association of
Securities Dealers, Inc., relating to such sale or reacquisition, as the case
may be, KDI will observe and be bound by all the provisions of the Fund's
organizational documents (and of any fundamental policies adopted by the Fund
pursuant to the Investment Company Act, notice of which shall have been given to
KDI) which at the time in any way require, limit, restrict, prohibit or
otherwise regulate any action on the part of KDI hereunder.
KDI agrees to indemnify and hold harmless the Fund and each of its Board
members and officers and each person, if any, who controls the Fund within the
meaning of Section 15 of the Securities Act, against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
the Fund or such Board members, officers, or controlling persons may become
subject under such Act, under any other statute, at common law or otherwise,
arising out of the acquisition of any shares by any person which (i) may be
based upon any wrongful act by KDI or any of KDI's employees or representatives,
or (ii) may be based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein not misleading if such statement or
omission was made in reliance upon information furnished to the Fund by KDI, or
(iii) may be incurred or arise by reason of KDI's acting as the Fund's agent
instead of purchasing and reselling shares as principal in distributing the
shares to the public, provided, however, that in no case (i) is KDI's indemnity
in favor of a Board member or officer or any other person deemed to protect such
Board member or officer or other person against any liability to which any such
person would otherwise be subject by reason of willful misfeasance, bad faith,
or gross negligence in the performance of his
<PAGE> 4
duties or by reason of reckless disregard of obligations and duties under this
Agreement or (ii) is KDI to be liable under the indemnity agreement contained in
this paragraph with respect to any claim made against the Fund or any person
indemnified unless the Fund or such person, as the case may be, shall have
notified KDI in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claims shall have
been served upon the Fund or such upon such person (or after the Fund or such
person shall have received notice of such service on any designated agent), but
failure to notify KDI of any such claim shall not relieve KDI from any liability
which KDI may have to the Fund or any other person against whom such action is
brought otherwise than on account of KDI's indemnity agreement contained in this
paragraph. KDI shall be entitled to participate, at KDI's own expense, in the
defense, or, if KDI so elects, to assume the defense of any suit brought to
enforce any such liability, but if KDI elects to assume the defense, such
defense shall be conducted by counsel chosen by KDI and satisfactory to the
Fund, to its officers and Board members, or to any controlling person or
persons, defendant or defendants in the suit. In the event KDI elects to assume
the defense of any such suit and retain such counsel, the Fund, such officers
and Board members or controlling person or persons, defendant or defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them, but, in case KDI does not elect to assume the defense of any such suit,
KDI will reimburse the Fund, such officers and Board members or controlling
person or persons, defendant or defendants in such suit for reasonable fees and
expenses of any counsel retained by them. KDI agrees to notify the Fund promptly
of the commencement of any litigation or proceedings against it in connection
with the issue and sale of any shares. The Fund shall not, without the prior
written consent of KDI, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which the Fund is or could have been a
party and indemnity has or could have been sought hereunder by the Fund, unless
such settlement includes an unconditional release of KDI from all liability on
claims that are the subject matter of such action, suit or proceeding.
The Fund agrees to indemnify and hold harmless KDI and each of KDI's
directors and officers and each person, if any, who controls KDI within the
meaning of Section 15 of the Securities Act, against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
KDI or such directors, officers or controlling persons may become subject under
such Act, under any other statute, at common law or otherwise, arising out of
the acquisition of any shares by any person which (i) may be based upon any
wrongful act by the Fund or any of its employees or representatives, or (ii) may
be based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading if such statement or omission was not
made in reliance upon information furnished to KDI by the Fund; provided,
however, that in no case (i) is the Fund's indemnity in favor of a director or
officer or any other person deemed to protect such director or officer or any
other person against any liability to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence in the
performance of his duties or by reason of his reckless disregard of obligations
and duties under this Agreement or (ii) is the Fund to be liable under its
indemnity agreement contained in this paragraph with respect to any claims made
against KDI or any such director, officer or controlling person unless KDI or
such director, officer or controlling person, as the case may be, shall have
notified the Fund in writing within a reasonable time after the summons or other
first legal process
<PAGE> 5
giving information of the nature of the claim shall have been served upon KDI or
upon such director, officer or controlling person (or after KDI or such
director, officer or controlling person shall have received notice of such
service on any designated agent), but failure to notify the Fund of any such
claim shall not relieve it from any liability which it may have to the person
against whom such action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Fund will be entitled to participate
at its own expense in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Fund elects to assume
the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to KDI, its directors, officers or controlling person or persons,
by defendant or defendants in the suit. In the event that the Fund elects to
assume the defense of any such suit and retain such counsel, KDI, its directors,
officers or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them,
but, in case the Fund does not elect to assume the defense of any such suit, it
will reimburse KDI or such directors, officers or controlling person or persons,
defendant or defendants in the suit, for reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify KDI promptly of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of any shares. KDI shall
not, without the prior written consent of the Fund, effect any settlement of any
pending or threatened action, suit or proceeding in respect of which either KDI
is or could have been a party and indemnity has or could have been sought
hereunder by KDI, unless such settlement includes an unconditional release of
the Fund from all liability on claims that are the subject matter of such
action, suit or proceeding.
7. The Fund shall assume and pay all charges and expenses of its operations
not specifically assumed or otherwise to be provided by KDI under this Agreement
or the Plan. The Fund will pay (or will enter into arrangements providing that
others will pay) all fees and expenses in connection with the registration of
the Fund and its shares under the United States securities laws and, effective
January 1, 2000, the registration and qualification of shares for sale in
various jurisdictions in which the Fund shall determine it advisable to qualify
such shares for sale (including registering the Fund as a broker or dealer or
any officer of the Fund or other person as agent or salesman of the Fund in any
such jurisdictions) ("Blue Sky Expenses"). Prior to January 1, 2000, KDI will
pay all such Blue Sky expenses. In addition, KDI will pay all expenses (other
than expenses which one or more Firms may bear pursuant to any agreement with
KDI) incident to the sale and distribution of the shares issued or sold
hereunder, including, without limiting the generality of the foregoing, all (a)
expenses of printing and distributing any prospectus and of preparing, printing
and distributing or disseminating any other literature, advertising and selling
aids in connection with the offering of the shares for sale (except that such
expenses need not include expenses incurred by the Fund in connection with the
preparation, typesetting, printing and distribution of any registration
statement or prospectus, report or other communication to shareholders in their
capacity as such), and (b) expenses of advertising in connection with such
offering.
No transfer taxes, if any, which may be payable in connection with the
issue or delivery of shares sold as herein contemplated or of the certificates
for such shares shall be borne by the Fund, and KDI will bear all such transfer
taxes.
<PAGE> 6
8. This Agreement shall become effective on the date hereof and shall
continue until September 30, 2000; and shall continue from year to year
thereafter only so long as such continuance is approved in the manner required
by the Investment Company Act.
This Agreement shall automatically terminate in the event of its assignment
and may be terminated at any time without the payment of any penalty by the Fund
or by KDI on sixty (60) days' written notice to the other party. The indemnity
provisions contained herein shall remain operative and in full force and effect
regardless of any termination of this Agreement. The Fund may effect termination
with respect to any class of the Fund by a vote of (i) a majority of the Board
members who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Plan, this Agreement, or in
any other agreement related to the Plan, or (ii) a majority of the outstanding
voting securities of such class. Without prejudice to any other remedies of the
Fund, the Fund may terminate this Agreement at any time immediately upon KDI's
failure to fulfill any of its obligations hereunder.
All material amendments to this Agreement must be approved by a vote of a
majority of the Board, and of the Board members who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
operation of the Plan, this Agreement or in any other agreement related to the
Plan, cast in person at a meeting called for such purpose.
The terms "assignment," "interested person" and "vote of a majority of the
outstanding voting securities" shall have the meanings set forth in the
Investment Company Act and the rules and regulations thereunder.
KDI shall receive such compensation for its distribution services as set
forth in the Plan. Termination of this Agreement shall not affect the right of
KDI to receive payments on any unpaid balance of the compensation earned prior
to such termination, as set forth in the Plan.
Notwithstanding anything in this Agreement to the contrary, KDI shall be
contractually bound hereunder by the terms of any publicly announced waiver of
or cap on the compensation received for its distribution services under the Plan
or by the terms of any written document provided to the Board of the Fund
announcing a waiver or cap, as if such waiver or cap were fully set forth
herein.
9. KDI will not use or distribute, or authorize the use, distribution or
dissemination by Firms or others in connection with the sale of Fund shares any
statements other than those contained in the Registration Statement, except such
supplemental literature or advertising as shall be lawful under federal and
state securities laws and regulations. KDI will furnish the Fund with copies of
all such material.
10. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder shall not be thereby
affected.
11. Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate for
<PAGE> 7
the receipt of such notice.
12. All parties hereto are expressly put on notice of the Fund's
Declaration of Trust, and all amendments thereto, all of which are on file with
the Secretary of The Commonwealth of Massachusetts, and the limitation of
shareholder and trustee liability contained therein. This Agreement has been
executed by and on behalf of the Fund by its representatives as such
representatives and not individually, and the obligations of the Fund hereunder
are not binding upon any of the Trustees, officers or shareholders of the Fund
individually but are binding upon only the assets and property of the Fund. With
respect to any claim by KDI for recovery of any liability of the Fund arising
hereunder allocated to a particular class, whether in accordance with the
express terms hereof or otherwise, KDI shall have recourse solely against the
assets of that class to satisfy such claim and shall have no recourse against
the assets of any other class for such purpose.
13. This Agreement shall be construed in accordance with applicable federal
law and with the laws of The Commonwealth of Massachusetts.
14. This Agreement is the entire contract between the parties relating to
the subject matter hereof and supersedes all prior agreements between the
parties relating to the subject matter hereof.
IN WITNESS WHEREOF, the Fund and KDI have caused this Agreement to be
executed as of the day and year first above written.
KEMPER FLOATING RATE FUND
___________________________________
By: Thomas W. Littauer
Title: Vice President
KEMPER DISTRIBUTORS, INC.
___________________________________
By: James L. Greenawalt
Title: President
<PAGE> 1
EXHIBIT 2(k)(5)
KEMPER FLOATING RATE FUND
AMENDED AND RESTATED
MULTI DISTRIBUTION SYSTEM PLAN
WHEREAS, Kemper Floating Rate Fund (the "Fund") is a closed-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") that has received an order from the Securities and Exchange
Commission to permit it to issue common shares of beneficial interest pursuant
to Rule 18f-3 under the 1940 Act (the "Order");
WHEREAS, Scudder Kemper Investments, Inc. ("Scudder Kemper") serves as
investment adviser and Kemper Distributors, Inc. serves as principal underwriter
for the Fund;
WHEREAS, the Fund has an administrative services agreement providing for a
service fee at an annual rate of up to 0.25% of average daily net assets;
WHEREAS, the Fund has established a Multi-Distribution System to enable the
Fund, as more fully reflected in its prospectus, as may be amended from time to
time (the "Prospectus"), to offer investors the option of purchasing shares (a)
without a front-end sales load, an early withdrawal charge ("EWC") or a
distribution plan providing for a distribution fee, but subject to an
administrative services fee ("Class A Shares"); (b) without a front-end sales
load, but subject to an EWC, a distribution plan providing for a distribution
fee, and an administrative service fee ("Class B shares") that convert to Class
A Shares; and (c) without a front-end sales load, but subject to an EWC, a
distribution plan providing for a distribution fee, and an administrative
services fee ("Class C shares") that convert to Class A Shares; and
WHEREAS, Rule 18f-3 under the 1940 Act permits open-end management
investment companies to issue multiple classes of voting stock representing
interests in the same portfolio notwithstanding Sections 18(f)(1) and 18(i)
under the 1940 Act if, among other things, such investment companies adopt a
written plan setting forth the separate arrangement and expense allocation of
each class and any related conversion features or exchange privileges;
NOW, THEREFORE, the Fund, wishing to be governed by Rule 18f-3 under the
1940 Act pursuant to exemptive relief obtained from the Securities and Exchange
Commission, hereby adopts this Amended and Restated Multi-Distribution System
Plan, as follows:
1. Each class of shares will represent interests in the same portfolio of
investments of the Fund, and be identical in all respects to each other class,
except as set forth below. The only differences among the various classes of
shares of the Fund will relate solely to: (a) different distribution fee
payments associated with any Distribution Plan1 for a particular class of shares
and any other costs relating to implementing or amending such Distribution Plan
(including
______________
1 The term "Distribution Plan" means a plan of distribution adopted by the
Fund in compliance with the terms of Rule 12b-1 under the 1940 Act.
<PAGE> 2
obtaining shareholder approval of such Distribution Plan or any amendment
thereto), which will be borne solely by shareholders of such classes; (b)
different administrative service fees; (c) different shareholder servicing fees;
(d) different class expenses, which will be limited to the following expenses
determined by the Fund's Board of Trustees to be attributable to a specific
class of shares: (i) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses, and proxy
statements to current shareholders of a specific class; (ii) Securities and
Exchange Commission registration fees incurred by a specific class; (iii)
litigation or other legal expenses relating to a specific class; (iv) Board
member fees or expenses incurred as a result of issues relating to a specific
class; and (v) accounting expenses relating to a specific class; (e) the voting
rights related to any Distribution Plan affecting a specific class of shares;
(f) conversion features; (g) exchange privileges; and (h) class names or
designations. Any additional incremental expenses not specifically identified
above that are subsequently identified and determined to be properly applied to
one class of shares of the Fund shall be so applied upon approval by a majority
of the members of the Fund's Board, including a majority of the Board members
who are not interested persons of the Fund.
2. Under the Multi-Distribution System, certain expenses may be
attributable to the Fund, but not to a particular series or class thereof. All
such expenses will be borne by each class on the basis of the relative aggregate
net assets of the classes, except that, if the Fund has series, expenses will
first be allocated among series, based upon their relative aggregate net assets.
Expenses that are attributable to a particular series, but not to a particular
class thereof, will be borne by each class of that series on the basis of the
relative aggregate net assets of the classes. Notwithstanding the foregoing, the
underwriter, the investment manager or other provider of services to the Fund
may waive or reimburse the expenses of a specific class or classes to the extent
permitted under Rule 18f-3 under the 1940 Act.
A class of shares may be permitted to bear expenses that are directly
attributable to that class including: (a) any distribution fees associated with
any Distribution Plan for a particular class and any other costs relating to
implementing or amending such Distribution Plan (including obtaining shareholder
approval of such Distribution Plan or any amendment thereto); (b) any
administrative service fees attributable to such class; (c) any shareholder
servicing fees attributable to such class; and (d) any class expenses determined
by the Fund's Board of Trustees to be attributable to such class.
3. After a shareholder's Class B shares have been outstanding for six
years, they will automatically convert to Class A shares of the Fund at the
relative net asset values of the two classes and will thereafter not be subject
to a Distribution Plan. Class B shares issued upon reinvestment of income and
capital gain dividends and other distributions will be converted to Class A
shares on a pro rata basis with the Class B shares.
4. After a shareholder's Class C shares have been outstanding for ten
years, they will automatically convert to Class A shares of the Fund at the
relative net asset values of the two classes and will thereafter not be subject
to a Distribution Plan. Class C shares issued upon reinvestment of income and
capital gain dividends and other distributions will be converted to Class A
shares on a pro rata basis with the Class C shares.
<PAGE> 3
5. Any conversion of shares of one class to shares of another class is
subject to the continuing availability of a ruling of the Internal Revenue
Service or an opinion of counsel to the effect that the conversion of shares
does not constitute a taxable event under federal income tax law. Any such
conversion may be suspended if such a ruling or opinion is no longer available.
6. To the extent exchanges are permitted, shares of any class of the Fund
will be exchangeable with shares of the same class of certain other shares of
funds in the Scudder Kemper family as described in the Prospectus. Exchanges
will comply with all applicable provisions of Rule 11a-3 under the 1940 Act. For
purposes of calculating the time period remaining on the conversion of Class B
or Class C shares to Class A shares, Class B or Class C shares received on
exchange retain their original purchase date.
7. Dividends paid by the Fund as to each class of its shares, to the extent
any dividends are paid, will be calculated in the same manner, at the same time,
on the same day, and will be in the same amount; except that any distribution
fees, administrative service fees, shareholder servicing fees and class expenses
allocated to a class will be borne exclusively by that class.
8. Any distribution arrangement of the Fund, including distribution fees,
front-end sales loads and EWCs, will comply with Rule 2830(d) of the Conduct
Rules of the National Association of Securities Dealers, Inc.
9. All material amendments to this Plan must be approved by a majority of
the members of the Fund's Board, including a majority of the Board members who
are not interested persons of the Fund.
For use on or after: September 29, 1999
<PAGE> 1
EXHIBIT 2(k)(6)
FUND: KEMPER FLOATING RATE FUND ("FUND")
CLASS: CLASS C (THE "CLASS")
DISTRIBUTION PLAN
This Distribution Plan (the "Plan") has been adopted for the Fund with
respect to the Class (all as noted and defined above) by a majority of the
members of the Fund's Board of Trustees (the "Board"), including a majority of
the Board members who are not "interested persons" of the Fund and who have no
direct or indirect financial interest in the operation of the Plan or in any
agreements related to the Plan (the "Qualified Board Members") at a meeting
called for the purpose of voting on this Plan. The Plan has been adopted
pursuant to the terms of an exemptive order from the Securities and Exchange
Commission which provides that the Fund may adopt a Plan pursuant to the terms
and conditions of rule 12b-1 under the Investment Company Act of 1940, as
amended (the "Act") as if that rule were applicable to the Fund.
1. Compensation. The Fund will pay to Kemper Distributors, Inc. ("KDI") at
the end of each calendar month a distribution services fee computed at the
annual rate of 0.60% of the average daily net assets attributable to the Class C
shares. KDI may compensate various financial service firms appointed by KDI
("Firms") in accordance with the provisions of the Fund's Underwriting and
Distribution Agreement (the "Distribution Agreement") for sales of shares at the
fee levels provided in the Fund's prospectus from time to time. KDI may pay
other commissions, fees or concessions to Firms, and may pay them to others in
its discretion, in such amounts as KDI shall determine from time to time. The
distribution services fee for the Class shall be based upon average daily net
assets attributable to the Class and such fee shall be charged only to the
Class. For the month and year in which this Plan becomes effective or
terminates, there shall be an appropriate proration of the distribution services
fee set forth in Paragraph 1 hereof on the basis of the number of days that the
Plan and any agreements related to the Plan are in effect during the month and
year, respectively. The distribution services fee shall be in addition to and
shall not be reduced or offset by the amount of any early withdrawal charge
received by KDI.
2. Periodic Reporting. KDI shall prepare reports for the Board on a
quarterly basis for the Class showing amounts paid to the various Firms and such
other information as from time to time shall be reasonably requested by the
Board.
3. Continuance. This Plan shall continue in effect indefinitely, provided
that such continuance is approved at least annually by a vote of a majority of
the Board, and of the Qualified Board Members, cast in person at a meeting
called for such purpose or by vote of at least a majority of the outstanding
voting securities of the Class.
4. Termination. This Plan may be terminated at any time without penalty
with respect to the Class by vote of a majority of the Qualified Board Members
or by vote of the majority of the outstanding voting securities of the Class.
<PAGE> 2
5. Amendment. This Plan may not be amended to increase materially the
amount to be paid to KDI by the Fund for distribution services with respect to
the Class without the vote of a majority of the outstanding voting securities of
the Class. All material amendments to this Plan must in any event be approved by
a vote of a majority of the Board, and of the Qualified Board Members, cast in
person at a meeting called for such purpose.
6. Selection of Non-Interested Board Members. So long as this Plan is in
effect, the selection and nomination of those Board members who are not
interested persons of the Fund will be committed to the discretion of Board
members who are not themselves interested persons.
7. Recordkeeping. The Fund will preserve copies of this Plan, the
Distribution Agreement, and all reports made pursuant to Paragraph 2 above for a
period of not less than six (6) years from the date of this Plan, the
Distribution Agreement, or any such report, as the case may be, the first two
(2) years in an easily accessible place.
8. Limitation of Liability. Any obligation of the Fund hereunder shall be
binding only upon the assets of the Class and shall not be binding on any Board
member, officer, employee, agent, or shareholder of the Fund. Neither the
authorization of any action by the Board members or shareholders of the Fund nor
the adoption of the Plan on behalf of the Fund shall impose any liability upon
any Board member or upon any shareholder.
9. Definitions. The terms "interested person" and "vote of a majority of
the outstanding voting securities" shall have the meanings set forth in the Act,
and the rules and regulations thereunder.
10. Severability; Separate Action. If any provision of this Plan shall be
held or made invalid by a court decision, rule or otherwise, the remainder of
this Plan shall not be affected thereby. Action shall be taken separately for
the Class as the Act or the rules thereunder so require.
11. Effectiveness. This Plan shall become effective as of the date set
forth below.
Dated: September 29, 1999
<PAGE> 1
EXHIBIT 2(l)
October 29, 1999
Kemper Floating Rate Fund
222 South Riverside Plaza
Chicago, Illinois 60606
Re: Registration Statement on Form N-2 as filed with the
Securities and Exchange Commission on October 29, 1999
Ladies and Gentlemen:
Kemper Floating Rate Fund (the "Trust") is a trust created under a written
Declaration of Trust dated March 23, 1999. The Declaration of Trust, as amended
from time to time, is referred to as the "Declaration of Trust." The beneficial
interest under the Declaration of Trust is represented by transferable shares,
$.01 par value per share. The Trustees have the powers set forth in the
Declaration of Trust, subject to the terms, provisions and conditions therein
provided.
We are of the opinion that all legal requirements have been complied with
in the creation of the Trust and that said Declaration of Trust is legal and
valid.
Under Article V, Section 5.5 of the Declaration of Trust, the Trustees are
empowered, in their discretion, from time to time, to issue Shares for such
amount and type of consideration, at such time or times and on such terms as the
Trustees may deem best. Under Article V, Section 5.1, it is provided that the
number of Shares authorized to be issued under the Declaration of Trust is
unlimited.
We understand that you are about to file with the Securities and Exchange
Commission a Registration Statement on Form N-2 (the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), in
connection with the offering of 80,000,000 Class A transferable shares of
beneficial interest of the Trust, par value $.01 per share, 80,000,000 Class B
transferable shares of beneficial interest of the Trust, par value $.01 per
share, and 80,000,000 Class C transferable shares of beneficial interest of the
Trust, par value $.01 per share (collectively, the "Shares"). We understand that
our opinion is required to be filed as an exhibit to the Registration Statement.
By resolutions adopted on July 14, 1999 and September 29, 1999, the
Trustees of the Trust authorized the officers of the Trust file the
Registration Statement and to take any and all action in connection with the
public issuance, offering and sale of the Shares.
We are of the opinion that all necessary Trust action precedent to the
issue of the Shares has been duly taken, and that all such Shares may be legally
and validly issued for cash, and when sold will be fully paid and non-assessable
by the Trust upon receipt by the Trust or its agent of consideration for such
Shares in accordance with the terms in the Registration Statement, subject to
compliance with the Securities Act, the Investment Company Act of 1940, as
amended, and applicable state laws regulating the sale of securities.
<PAGE> 2
We consent to your filing this opinion with the Securities and Exchange
Commission as an Exhibit to the Registration Statement.
Very truly yours,
Dechert Price & Rhoads
<PAGE> 1
EXHIBIT 2(n)(1)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent
Accountants" and to the use of our report dated October 19, 1999 in the
Registration Statement (Form N-2) of Kemper Floating Rate Fund and in the
related Prospectus and Statement of Additional Information filed with the
Securities and Exchange Commission in this Registration Statement under the
Securities Act of 1933 and in this Amendment No. 4 to the Registration Statement
under the Investment Company Act of 1940 (File No. 811-09269).
ERNST & YOUNG LLP
Chicago, Illinois
October 29, 1999
<PAGE> 1
EXHIBIT 2(n)(3)
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Caroline Pearson, Maureen E. Kane, and Philip J. Collora and any of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement of Kemper Floating
Rate Fund, a Massachusetts business trust, on Form N-2 under the Securities Act
of 1933, as amended, and the Investment Company Act of 1940, as amended, and any
or all amendments thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully as all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
DATED: October 29, 1999
/s/James R. Edgar
-----------------
James R. Edgar
Trustee
<PAGE> 2
POWERS OF ATTORNEY
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 dates indicated. By so signing, the undersigned in his
capacity as trustee or officer, or both, as the case may be, of the Registrant,
does hereby appoint Mark S. Casady, Kathryn L. Quirk, Philip J. Collora,
Caroline Pearson and Maureen E. Kane and each of them, severally, or if more
than one acts, a majority of them, his true and lawful attorney and agent to
execute in his name, place and stead (in such capacity) any and all amendments
to the Registration Statement and any post-effective amendments thereto and all
instruments necessary or desirable in connection therewith, to attest the seal
of the Registrant thereon and to file the same with the Securities and Exchange
Commission. Each of said attorneys and agents shall have power to act with or
without the other and have full power and authority to do and perform in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever necessary or advisable to be done in the premises as fully and to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and approving the act of said attorneys and agents and each of them.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Arthur R. Gottschalk Trustee April 20, 1999
- -----------------------------
Arthur R. Gottschalk
/s/ Kathryn L. Quirk Trustee April 20, 1999
- -----------------------------
Kathryn L. Quirk
</TABLE>
