<PAGE>
<TABLE>
<S> <C>
TABLE OF CONTENTS
- -----------------------------------------------
Summary 1
- -----------------------------------------------
Summary of Expenses 3
- -----------------------------------------------
Financial Highlights 5
- -----------------------------------------------
Investment Objectives, Policies and Risk
Factors 14
- -----------------------------------------------
Investment Manager and Underwriter 33
- -----------------------------------------------
Dividends and Taxes 37
- -----------------------------------------------
Net Asset Value 38
- -----------------------------------------------
Purchase of Shares 39
- -----------------------------------------------
Redemption or Repurchase of Shares 45
- -----------------------------------------------
Special Features 49
- -----------------------------------------------
Performance 52
- -----------------------------------------------
Capital Structure 54
- -----------------------------------------------
Appendix--Portfolio Composition 56
- -----------------------------------------------
</TABLE>
This combined prospectus of the Kemper Income Funds contains information about
each of the Funds that you should know before investing and should be retained
for future reference. A Statement of Additional Information dated December 30,
1997, has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. It is available upon request without charge
from the Funds at the address or telephone number on this cover or the firm from
which this prospectus was obtained.
THE FUNDS' SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT IN A
FUND'S SHARES INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Kemper Logo
KEMPER
INCOME
FUNDS
PROSPECTUS December 30, 1997
KEMPER INCOME FUNDS
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This prospectus describes a choice of eight income investment portfolios managed
by Zurich Kemper Investments, Inc.
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
KEMPER DIVERSIFIED INCOME FUND
KEMPER U.S. GOVERNMENT SECURITIES FUND
KEMPER HIGH YIELD FUND
KEMPER HIGH YIELD OPPORTUNITY FUND
KEMPER INCOME AND CAPITAL PRESERVATION FUND
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
Kemper U.S. Mortgage Fund and Kemper Short-Intermediate Government Fund are each
a series of Kemper Portfolios. Kemper High Yield Fund and Kemper High Yield
Opportunity Fund are each a series of Kemper High Yield Series.
KEMPER DIVERSIFIED INCOME FUND MAY AND KEMPER HIGH YIELD FUND AND KEMPER HIGH
YIELD OPPORTUNITY FUND DO INVEST PRIMARILY IN LOWER RATED BONDS, COMMONLY
REFERRED TO AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A GREATER
RISK OF LOSS OF PRINCIPAL AND INTEREST THAN INVESTMENTS IN HIGHER RATED
SECURITIES. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THESE FUNDS.
<PAGE>
KEMPER INCOME FUNDS
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606, TELEPHONE 1-800-621-1048
SUMMARY
INVESTMENT OBJECTIVES. The eight open-end, diversified, management investment
companies or portfolios thereof (the "Funds") covered in this combined
prospectus are as follows:
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND (the "Adjustable Rate Fund") seeks
high current income consistent with low volatility of principal.
KEMPER DIVERSIFIED INCOME FUND (the "Diversified Fund") seeks a high current
return.
KEMPER U.S. GOVERNMENT SECURITIES FUND (the "Government Fund") seeks high
current income, liquidity and security of principal.
KEMPER HIGH YIELD FUND (the "High Yield Fund") seeks the highest level of
current income obtainable from a professionally managed, diversified portfolio
of fixed income securities which the Fund's investment manager considers
consistent with reasonable risk.
KEMPER HIGH YIELD OPPORTUNITY FUND (the "Opportunity Fund") seeks total return
through high current income and capital appreciation.
KEMPER INCOME AND CAPITAL PRESERVATION FUND (the "Income and Capital Fund")
seeks as high a level of current income as is consistent with prudent investment
management, preservation of capital and ready marketability of its portfolio.
KEMPER U.S. MORTGAGE FUND (the "Mortgage Fund") seeks maximum current return
from U.S. Government securities.
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND (the "Short-Intermediate Government
Fund") seeks, with equal emphasis, high current income and preservation of
capital from a portfolio composed primarily of short and intermediate-term U.S.
Government securities.
Each Fund may engage in options and financial futures transactions. The
Diversified, High Yield, Income and Capital and Opportunity Funds each may
invest a portion of its assets in foreign securities and engage in related
foreign currency transactions. See "Investment Objectives, Policies and Risk
Factors."
RISK FACTORS. There is no assurance that the investment objective of any Fund
will be achieved and investment in each Fund includes risks that vary in kind
and degree depending upon the investment policies of that Fund. The returns and
net asset value of each Fund will fluctuate. Investors should note that
investments in high yield securities by certain Funds (principally the
Diversified, High Yield and Opportunity Funds) entail relatively greater risk of
loss of income and principal than investments in higher rated securities and
market prices of high yield securities may fluctuate more than market prices of
higher rated securities. Foreign investments by certain Funds involve risk and
opportunity considerations not typically associated with investing in U.S.
companies. The U.S. Dollar value of a foreign security tends to decrease when
the value of the U.S. Dollar rises against the foreign currency in which the
security is denominated and tends to increase when the value of the U.S. Dollar
falls against such currency. Thus, the U.S. Dollar value of foreign securities
in a Fund's portfolio, and the Fund's net asset value, may change in response to
changes in currency exchange rates even though the value of the foreign
securities in local currency terms may not have changed. A Fund's investments in
foreign securities may be in developed countries or in countries considered by
the Fund's investment manager to be developing or "emerging" markets, which
involve exposure to economic structures that are generally less diverse and
mature than in the United States, and to political systems that may be less
stable. There are special risks associated with options, financial futures,
foreign currency and other derivative transactions and there is no assurance
that use of those investment techniques will be successful. The Opportunity Fund
may borrow money for leverage purposes, which can exaggerate the effect on its
net asset value of any increase or decrease in the market value of the Fund's
portfolio. The government guarantee of the U.S. Government securities in which
certain Funds invest (principally
1
<PAGE>
the Adjustable Rate, Government, Mortgage and Short-Intermediate Government
Funds) does not guarantee the market value of the shares of such Funds.
Normally, the value of investments in U.S. Government securities, as with most
debt securities, varies inversely with changes in interest rates. See
"Investment Objectives, Policies and Risk Factors."
PURCHASES AND REDEMPTIONS. Each Fund provides investors with the option of
purchasing shares in the following ways:
<TABLE>
<S> <C>
Class A Shares............................ Offered at net asset value plus a maximum sales charge of
4.5% (3.5% for the Adjustable Rate and Short-Intermediate
Government Funds) of the offering price. Reduced sales
charges apply to purchases of $100,000 or more. Class A
shares purchased at net asset value under the Large Order
NAV Purchase Privilege may be subject to a 1% contingent
deferred sales charge if redeemed within one year of
purchase and a .50% contingent deferred sales charge if
redeemed during the second year of purchase.
Class B Shares............................ Offered at net asset value, subject to a Rule 12b-1
distribution fee and a contingent deferred sales charge that
declines from 4% to zero on certain redemptions made within
six years of purchase. Class B shares automatically convert
into Class A shares (which have lower ongoing expenses) six
years after purchase.
Class C Shares............................ Offered at net asset value without an initial sales charge,
but subject to a Rule 12b-1 distribution fee and a 1%
contingent deferred sales charge on redemptions made within
one year of purchase. Class C shares do not convert into
another class.
</TABLE>
Each class of shares represents interests in the same portfolio of investments
of a Fund. The minimum initial investment is $1,000 and each investment
thereafter must be at least $100. Shares are redeemable at net asset value,
which may be more or less than original cost, subject to any applicable
contingent deferred sales charge. See "Purchase of Shares" and "Redemption or
Repurchase of Shares."
INVESTMENT MANAGER AND UNDERWRITER. Zurich Kemper Investments, Inc. ("ZKI")
serves as investment manager for each Fund. ZKI is paid an investment management
fee by each Fund based upon the average daily net assets of that Fund at an
effective annual rate that differs for each Fund. Zurich Investment Management
Limited ("ZIML"), an affiliate of ZKI, is the sub-adviser for each of the
Diversified, High Yield, Income and Capital and Opportunity Funds and is paid by
ZKI a fee of .30% of the portion of the average daily net assets of that Fund
allocated by ZKI to ZIML for management. ZIML is not expected to continue as
sub-adviser after the closing of the acquisition of Scudder, Stevens & Clark,
Inc. ("Scudder") by Zurich Insurance Company ("Zurich"). For further details see
"Investment Manager and Underwriter." Kemper Distributors, Inc. ("KDI"), a
wholly owned subsidiary of ZKI, is principal underwriter and administrator for
each Fund. For Class B shares and Class C shares, KDI receives a Rule 12b-1
distribution fee of .75 of 1% of average daily net assets. KDI also receives the
amount of any contingent deferred sales charges paid on the redemption of
shares. Administrative services are provided to shareholders under
administrative services agreements with KDI. Each Fund pays an administrative
services fee at the annual rate of up to .25 of 1% of average daily net assets
of each class of the Fund, which KDI pays to various broker-dealer firms and
other service or administrative firms. See "Investment Manager and Underwriter."
DIVIDENDS. Each Fund normally distributes monthly dividends of net investment
income and distributes any net realized capital gains at least annually. Income
and capital gain dividends of a Fund are automatically reinvested in additional
shares of that Fund, without a sales charge, unless the shareholder makes a
different election. See "Dividends and Taxes."
GENERAL. In the opinion of the staff of the Securities and Exchange Commission,
the use of this combined prospectus may make each Fund liable for any
misstatement or omission in this prospectus regardless of the particular Fund to
which it pertains.
2
<PAGE>
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO ALL CLASS A CLASS B CLASS C
FUNDS)(1) ------- ------- -------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases
(as a percentage of offering price).................. %(2)
3.5*/4.5 None None
Maximum Sales Charge on Reinvested Dividends........... None None None
Redemption Fees........................................ None None None
Exchange Fee........................................... None None None
Deferred Sales Charge (as a percentage of redemption
proceeds)............................................ None(3) 4% during the first 1% during
year, 3% during the the first
second and third years, year
2% during the fourth and
fifth years and 1% in
the sixth year
</TABLE>
* 3.5% APPLIES TO THE ADJUSTABLE RATE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS
ONLY.
- ---------------
(1) Investment dealers and other firms may independently charge additional fees
for shareholder transactions or for advisory services; please see their
materials for details. The table does not include the $9.00 quarterly small
account fee. See "Redemption or Repurchase of Shares."
(2) Reduced sales charges apply to purchases of $100,000 or more. See "Purchase
of Shares -- Initial Sales Charge Alternative -- Class A Shares."
(3) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% the first year and .50% the second year. See "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares."
CLASS A SHARES
<TABLE>
<CAPTION>
INCOME SHORT-
ANNUAL FUND ADJUSTABLE HIGH AND INTERMEDIATE
OPERATING EXPENSES RATE DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE OPPORTUNITY GOVERNMENT
(AS A PERCENTAGE OF AVERAGE NET FUND FUND FUND FUND FUND FUND FUND FUND
assets) ---------- ----------- ---------- ----- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............... .55% .56% .41% .53% .53% .50% .65% .55%
12b-1 Fees.................... None None None None None None None None
Other Expenses(6)............. .70% .47% .37% .35% .44% .46% 1.20% .64%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses...... 1.25% 1.03% .78% .88% .97% .96% 1.85% 1.19%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
ANNUAL FUND
INCOME SHORT-
ADJUSTABLE HIGH AND INTERMEDIATE
OPERATING EXPENSES RATE DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE OPPORTUNITY GOVERNMENT
(as a percentage of average net FUND FUND FUND FUND FUND FUND FUND FUND
assets) ---------- ----------- ---------- ----- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............... .55% .56% .41% .53% .53% .50% .65% .55%
12b-1 Fees(4)................. .75% .75% .75% .75% .75% .75% .75% .75%
Other Expenses(6)............. .63% .67% .57% .48% .62% .58% 1.33% .72%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses...... 1.93% 1.98% 1.73% 1.76% 1.90% 1.83% 2.73% 2.02%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(4) Long-term shareholders may pay more than the economic equivalent of the
maximum initial sales charges permitted by the National Association of
Securities Dealers, although KDI believes that it is unlikely because of the
automatic conversion feature described under "Purchase of Shares--Deferred
Sales Charge Alternative--Class B Shares."
3
<PAGE>
CLASS C SHARES
<TABLE>
<CAPTION>
ANNUAL FUND
INCOME SHORT-
ADJUSTABLE HIGH AND INTERMEDIATE
OPERATING EXPENSES RATE DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE OPPORTUNITY GOVERNMENT
(as a percentage of average net FUND FUND FUND FUND FUND FUND FUND FUND
assets) ---------- ----------- ---------- ----- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............... .55% .56% .41% .53% .53% .50% .65% .55%
12b-1 Fees(5)................. .75% .75% .75% .75% .75% .75% .75% .75%
Other Expenses(6)............. .58% .54% .52% .43% .58% .46% 1.30% .56%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses...... 1.88% 1.85% 1.68% 1.71% 1.86% 1.71% 2.70% 1.86%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(5) As a result of the accrual of 12b-1 fees, long-term shareholders may pay
more than the economic equivalent of the maximum initial sales charges
permitted by the National Association of Securities Dealers.
(6) "Other Expenses" have been estimated for the Opportunity Fund for the
current fiscal year. These expenses include estimated interest expense of
.60% of average net assets. Interest expense represents interest paid by the
Opportunity Fund on borrowings for the purpose of making additional
portfolio investments. Excluding interest expense, "Total Operating
Expenses" would be for Class A, 1.25%, for Class B, 2.13%, and for Class C,
2.10%.
CLASS A SHARES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
EXAMPLE
You would pay the following Adjustable Rate $47 $ 73 $101 $181
expenses on a $1,000 Diversified $55 $ 76 $ 99 $165
investment, assuming (1) 5% Government $53 $ 69 $ 86 $137
annual return and (2) High Yield $54 $ 72 $ 92 $149
redemption at the end of each Income and Capital $54 $ 75 $ 96 $159
time period: Mortgage $54 $ 74 $ 96 $158
Opportunity(7) $63 $101 $ -- $ --
Short-Intermediate Government $47 $ 71 $ 98 $174
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
EXAMPLE(8)
You would pay the following Adjustable Rate $60 $ 91 $124 $192
expenses on a $1,000 Diversified $60 $ 92 $127 $183
investment, assuming (1) 5% Government $58 $ 84 $114 $156
annual return and (2) High Yield $58 $ 85 $115 $163
redemption at the end of each Income and Capital $59 $ 90 $123 $176
time period: Mortgage $59 $ 88 $119 $171
Opportunity(7) $68 $115 $ -- $ --
Short-Intermediate Government $61 $ 93 $129 $194
You would pay the following Adjustable Rate $20 $ 61 $104 $192
expenses on the same Diversified $20 $ 62 $107 $183
investment, assuming no Government $18 $ 54 $ 94 $156
redemption: High Yield $18 $ 55 $ 95 $163
Income and Capital $19 $ 60 $103 $176
Mortgage $19 $ 58 $ 99 $171
Opportunity(7) $28 $ 85 $ -- $ --
Short-Intermediate Government $21 $ 63 $109 $194
</TABLE>
- ---------------
(7) For the Opportunity Fund, excluding interest expense discussed in footnote
(6) above, expenses shown in the Example would be for Class A, $57 and $83,
for Class B with redemption, $62 and $97, for Class B without redemption,
$22 and $67, for Class C with redemption, $31 and $66, and for Class C
without redemption, $21 and $66, respectively.
(8) Assumes conversion to Class A shares six years after purchase. The
contingent deferred sales charge was applied as follows: 1 year (4%), 3
years (3%), 5 years (2%) and 10 years (0%). See "Redemption or Repurchase of
Shares -- Contingent Deferred Sales Charge -- Class B Shares" for more
information regarding the calculation of the contingent deferred sales
charge.
4
<PAGE>
CLASS C SHARES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
EXAMPLE(9)
You would pay the following Adjustable Rate $29 $59 $102 $220
expenses on a $1,000 Diversified $29 $58 $100 $217
investment,
assuming (1) 5% annual return Government $27 $53 $ 91 $199
and (2) redemption at the end High Yield $27 $54 $ 93 $202
of each time period: Income and Capital $29 $58 $101 $218
Mortgage $27 $54 $ 93 $202
Opportunity(7) $37 $84 $ -- $ --
Short-Intermediate Government $29 $58 $101 $218
You would pay the following Adjustable Rate $19 $59 $102 $220
expenses on the same Diversified $19 $58 $100 $217
investment,
assuming no redemption: Government $17 $53 $ 91 $199
High Yield $17 $54 $ 93 $202
Income and Capital $19 $58 $101 $218
Mortgage $17 $54 $ 93 $202
Opportunity(7) $27 $84 $ -- $ --
Short-Intermediate Government $19 $58 $101 $218
</TABLE>
- ---------------
(9) The contingent deferred sales charge was applied as follows: 1 year (1%), 3
years (0%), 5 years (0%) and 10 years (0%). See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Class C Shares."
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in a Fund will bear directly or
indirectly. See "Investment Manager and Underwriter" for more information. The
Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of any Fund. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The tables below show financial information for each Fund, except the
Opportunity Fund, expressed in terms of one share outstanding throughout the
period. The information in the table for each Fund is covered by the report of
the Fund's independent auditors. The report for each Fund is contained in its
Registration Statement and is available from that Fund. The financial statements
contained in each Fund's 1997 Annual Report to Shareholders (except the
Opportunity Fund) are incorporated herein by reference and may be obtained by
writing or calling that Fund.
5
<PAGE>
ADJUSTABLE RATE FUND
<TABLE>
<CAPTION>
SEPTEMBER 1,
JULY 1 TO YEAR ENDED 1987 TO
YEAR ENDED AUGUST 31, AUGUST 31, JUNE 30, JUNE 30,
1997 1996 1995 1994 1993 1992 1991 1991 1990 1989 1988
CLASS A SHARES ----------------------------------------- ---------- -------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $8.22 8.30 8.33 8.68 8.63 8.37 8.21 8.21 8.66 8.79 9.00
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45 .46 .48 .34 .47 .63 .13 .79 .81 .87 .52
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .09 (.09) (.04) (.29) .02 .22 .17 .02 (.41) (.08) (.14)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .54 .37 .44 .05 .49 .85 .30 .81 .40 .79 .38
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .45 .45 .47 .40 .44 .59 .14 .81 .78 .85 .49
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized
gain -- -- -- -- -- -- -- -- .07 .07 .10
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .45 .45 .47 .40 .44 .59 .14 .81 .85 .92 .59
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.31 8.22 8.30 8.33 8.68 8.63 8.37 8.21 8.21 8.66 8.79
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 6.75% 4.55 5.52 .59 5.87 10.56 3.62 10.33 4.85 9.64 4.29
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)(A):
Expenses 1.25% 1.15 1.10 .93 .21 .28 1.09 1.07 1.37 1.41 1.51
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.50% 5.49 5.76 3.96 5.44 7.02 9.45 9.62 9.60 10.10 8.63
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED YEAR ENDED
AUGUST 31, MAY 31 TO AUGUST 31, MAY 31 TO
1997 1996 1995 AUGUST 31, 1994 1997 1996 1995 AUGUST 31, 1994
CLASS B & C SHARES ------------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.23 8.31 8.32 8.37 8.24 8.32 8.33 8.37
- ------------------------------------------------------------------------------------ ------------------------------------
Income from investment operations:
Net investment income .39 .40 .43 .07 .39 .40 .43 .08
- ------------------------------------------------------------------------------------ ------------------------------------
Net realized and unrealized gain (loss) .09 (.09) (.04) (.04) .09 (.09) (.04) (.04)
- ------------------------------------------------------------------------------------ ------------------------------------
Total from investment operations .48 .31 .39 .03 .48 .31 .39 .04
- ------------------------------------------------------------------------------------ ------------------------------------
Less distribution from net investment income .39 .39 .40 .08 .39 .39 .40 .08
- ------------------------------------------------------------------------------------ ------------------------------------
Net asset value, end of period $8.32 8.23 8.31 8.32 8.33 8.24 8.32 8.33
- ------------------------------------------------------------------------------------ ------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.96% 3.79 4.84 .34 5.98 3.82 4.89 .47
- ------------------------------------------------------------------------------------ ------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.93% 1.89 1.85 1.96 1.88 1.89 1.79 1.88
- ------------------------------------------------------------------------------------ ------------------------------------
Net investment income 4.82% 4.75 5.01 3.36 4.87 4.75 5.07 3.52
- ------------------------------------------------------------------------------------ ------------------------------------
</TABLE>
<TABLE>
<CAPTION>
JULY 1 TO
YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED JUNE 30,
1997 1996 1995 1994 1993 1992 1991 1991 1990 1989
ALL CLASSES ---------------------------------------------------------- ---------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) $ 81,967 94,477 129,757 202,815 212,694 174,967 76,749 75,012 75,913 75,704
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 249% 272 308 533 138 309 228 259 278 265
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SEPTEMBER 1,
1987 TO
JUNE 30,
1988
ALL CLASSES ------------
<S> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) 59,054
- ------------------------
Portfolio turnover rate
(annualized) 201
- ------------------------
</TABLE>
(a) ZKI agreed to waive its management fee and to absorb certain other operating
expenses of the Adjustable Rate Fund through December 31, 1992. Thereafter,
these expenses were gradually reinstated through January 31, 1994. Without this
agreement, the ratio of expenses to average net assets and the ratio of net
investment income to average net assets for Class A Shares would have been .99%
and 3.90%, respectively, for fiscal 1994, .95% and 4.70%, respectively, for
fiscal 1993, and .90% and 6.40%, respectively, for fiscal 1992.
6
<PAGE>
DIVERSIFIED FUND
<TABLE>
<CAPTION>
DEC. 1, THIRTEEN
1990 YEAR MONTHS YEAR
TO ENDED ENDED ENDED
YEAR ENDED OCTOBER 31, OCT. 31, NOV. 30, NOV. 30, OCT. 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------- --------- --------- --------- ---------
CLASS A SHARES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period $5.99 5.98 5.77 6.23 5.65 5.47 4.14 5.48 6.06 6.10
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .46 .46 .55 .52 .59 .63 .60 .71 .39 .13
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investments and
foreign currency .01 .12 .16 (.45) .58 .14 1.36 (1.34) .10 .72
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .47 .58 .71 .07 1.17 .77 1.96 (.63) .49 .85
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment
income .50 .57 .50 .53 .59 .59 .63 .71 .40 .13
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net
realized gain -- -- -- -- -- -- -- -- -- .02
- ---------------------------------------------------------------------------------------------------------------------------------
Paid in surplus -- -- -- -- -- -- -- -- .67 .74
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .50 .57 .50 .53 .59 .59 .63 .71 1.07 .89
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $5.96 5.99 5.98 5.77 6.23 5.65 5.47 4.14 5.48 6.06
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT
ANNUALIZED): 8.13% 10.27 12.90 1.02 21.60 14.59 50.58 (12.79) 8.59 15.30
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS (ANNUALIZED):
Expenses 1.03% 1.03 1.09 1.12 1.10 1.19 1.21 1.15 .96 .97
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 7.68% 7.72 9.43 8.81 9.74 11.02 13.41 14.32 6.76 3.08
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED OCT. 31, MAY 31 TO YEAR ENDED OCT. 31, MAY 31 TO
1997 1996 1995 OCTOBER 31, 1994 1997 1996 1995 OCTOBER 31, 1994
----------------------- ---------------- --------------------- ----------------
CLASS B & C SHARES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $5.99 5.98 5.77 5.94 6.01 6.00 5.79 5.95
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .40 .41 .49 .19 .42 .41 .50 .20
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency .01 .12 .16 (.17) .01 .12 .16 (.17)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .41 .53 .65 .02 .43 .53 .66 .03
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends from net investment
income .44 .52 .44 .19 .45 .52 .45 .19
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.96 5.99 5.98 5.77 5.99 6.01 6.00 5.79
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 7.13% 9.23 11.87 .35 7.37 9.33 11.95 .55
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.98% 1.96 2.04 1.97 1.85 1.86 1.86 1.96
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.73% 6.79 8.48 8.01 6.86 6.89 8.68 8.02
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DEC. 1, THIRTEEN
1990 YEAR MONTHS
TO ENDED ENDED
YEAR ENDED OCT. 31, OCT. 31, NOV. 30, NOV. 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989
--------------------------------------------------------------- --------- --------- ---------
ALL CLASSES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period
(in thousands) $861,543 778,752 754,222 738,014 328,512 244,620 227,625 179,154 284,497
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover
rate (annualized) 347% 310 286 179 80 57 20 45 102
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR
ENDED
OCT. 31,
1988
---------
ALL CLASSES
<S> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period
(in thousands) 371,758
- ---------------------
Portfolio turnover
rate (annualized) 16
- ---------------------
</TABLE>
7
<PAGE>
GOVERNMENT FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
CLASS A SHARES
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of year $8.74 8.92 8.35 9.29 9.30 9.32 8.71 9.09 9.02 9.13
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .63 .66 .67 .69 .78 .84 .85 .88 .93
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .06 (.17) .56 (.97) (.01) (.02) .61 (.38) .09 (.08)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .70 .46 1.22 (.30) .68 .76 1.45 .47 .97 .85
- ---------------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment
income .63 .64 .65 .64 .69 .78 .84 .85 .90 .96
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $8.81 8.74 8.92 8.35 9.29 9.30 9.32 8.71 9.09 9.02
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: 8.41% 5.36 15.24 (3.37) 7.60 8.44 17.41 5.53 11.51 9.73
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .78% .77 .72 .75 .65 .64 .63 .53 .49 .50
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 7.34% 7.17 7.68 7.58 7.36 8.31 9.24 9.62 9.93 10.20
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED OCT. 31, MAY 31 TO YEAR ENDED OCT. 31, MAY 31 TO
1997 1996 1995 OCTOBER 31, 1994 1997 1996 1995 OCTOBER 31, 1994
CLASS B & C SHARES ---------------------- ---------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
$8.73 8.91 8.34 8.67 8.75 8.93 8.35 8.67
Net asset value, beginning of period
- ------------------------------------------------------------------------------------ -----------------------------------------
Income from investment operations:
Net investment income .56 .54 .58 .28 .56 .55 .60 .29
- ------------------------------------------------------------------------------------ -----------------------------------------
Net realized and unrealized gain
(loss) .06 (.17) .56 (.38) .06 (.17) .56 (.38)
- ------------------------------------------------------------------------------------ -----------------------------------------
Total from investment operations .62 .37 1.14 (.10) .62 .38 1.16 (.09)
- ------------------------------------------------------------------------------------ -----------------------------------------
Less distribution from net investment
income .55 .55 .57 .23 .55 .56 .58 .23
- ------------------------------------------------------------------------------------ -----------------------------------------
Net asset value, end of period $8.80 8.73 8.91 8.34 8.82 8.75 8.93 8.35
- ------------------------------------------------------------------------------------ -----------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 7.40% 4.36 14.18 (1.15) 7.42 4.40 14.33 (1.01)
- ------------------------------------------------------------------------------------ -----------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.73% 1.73 1.69 1.71 1.68 1.70 1.64 1.68
- ------------------------------------------------------------------------------------ -----------------------------------------
Net investment income 6.39% 6.21 6.71 7.09 6.44 6.24 6.76 7.12
- ------------------------------------------------------------------------------------ -----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991
ALL CLASSES
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of year
(in thousands) $3,642,027 4,163,157 4,738,415 4,941,451 6,686,735 6,683,092 5,544,095
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 261% 391 362 1,000 550 569 695
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED OCTOBER 31,
1990 1989 1988
ALL CLASSES
<S> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of year
(in thousands) 4,565,689 4,540,382 4,403,110
- --------------------------
Portfolio turnover rate 497 289 203
- --------------------------
</TABLE>
8
<PAGE>
HIGH YIELD FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
CLASS A SHARES
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $8.23 8.01 7.74 8.12 7.86 7.30 6.22 8.34 8.95 9.23
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .76 .76 .83 .73 .81 .85 .92 1.07 1.09 1.10
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .31 .23 .20 (.35) .23 .54 1.15 (2.13) (.58) .09
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.07 .99 1.03 .38 1.04 1.39 2.07 (1.06) .51 1.19
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .80 .77 .76 .76 .78 .83 .99 1.06 1.12 1.11
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- -- -- -- -- -- .36
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .80 .77 .76 .76 .78 .83 .99 1.06 1.12 1.47
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.50 8.23 8.01 7.74 8.12 7.86 7.30 6.22 8.34 8.95
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 13.69% 13.00 14.10 4.64 13.92 19.96 36.82 (13.83) 5.91 14.22
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses .88% .88 .90 .86 .80 .82 .85 .73 .67 .72
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 9.18% 9.45 10.74 9.22 10.22 11.00 14.02 14.46 12.40 12.59
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED MAY 31 TO YEAR ENDED MAY 31 TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
CLASS B & C SHARES 1997 1996 1995 1994 1997 1996 1995 1994
------------------ ----------- ----------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.22 8.00 7.73 7.96 8.24 8.02 7.75 7.96
- -------------------------------------------------------------------------------- -------------------------------------
Income from investment operations:
Net investment income .69 .69 .76 .23 .70 .69 .77 .25
- -------------------------------------------------------------------------------- -------------------------------------
Net realized and unrealized gain (loss) .31 .23 .20 (.23) .31 .23 .20 (.23)
- -------------------------------------------------------------------------------- -------------------------------------
Total from investment operations 1.00 .92 .96 -- 1.01 .92 .97 .02
- -------------------------------------------------------------------------------- -------------------------------------
Less distribution from net investment income .73 .70 .69 .23 .73 .70 .70 .23
- -------------------------------------------------------------------------------- -------------------------------------
Net asset value, end of period $8.49 8.22 8.00 7.73 8.52 8.24 8.02 7.75
- -------------------------------------------------------------------------------- -------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 12.72% 12.02 13.09 -- 12.88 12.06 13.13 .27
- -------------------------------------------------------------------------------- -------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.76% 1.77 1.77 1.80 1.71 1.71 1.71 1.74
- -------------------------------------------------------------------------------- -------------------------------------
Net investment income 8.30% 8.56 9.87 8.70 8.35 8.62 9.93 8.75
- -------------------------------------------------------------------------------- -------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993 1992 1991
ALL CLASSES
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
year (in thousands) $4,939,302 4,096,939 3,527,954 3,152,029 1,957,524 1,953,509 1,673,161
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover
rate (annualized) 91% 102 99 93 101 69 31
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1990 1989 1988
ALL CLASSES
------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
year (in thousands) 1,183,943 1,552,762 978,310
- ---------------------------------------------------------------------------------------
Portfolio turnover
rate (annualized) 37 45 76
- ------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
INCOME AND CAPITAL FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
CLASS A SHARES
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 8.46 8.62 7.91 8.97 8.34 8.22 7.70 8.22 8.53 8.44
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .57 .58 .61 .61 .63 .67 .74 .80 .84 .89
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 (.15) .72 (1.03) .62 .11 .53 (.52) (.26) .12
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .65 .43 1.33 (.42) 1.25 .78 1.27 .28 .58 1.01
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .57 .59 .62 .59 .62 .66 .75 .80 .89 .92
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- .05 -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .57 .59 .62 .64 .62 .66 .75 .80 .89 .92
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 8.54 8.46 8.62 7.91 8.97 8.34 8.22 7.70 8.22 8.53
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: 8.00% 5.17 17.47 (4.86) 15.48 9.83 17.26 3.60 7.13 12.67
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .97% .96 .90 .94 .82 .82 .82 .73 .67 .69
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.75% 6.90 7.31 7.34 7.26 8.01 9.21 10.05 10.02 10.53
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED YEAR ENDED
OCTOBER 31, MAY 31 TO OCTOBER 31, MAY 31 TO
CLASS B & C SHARES 1997 1996 1995 OCTOBER 31, 1994 1997 1996 1995 OCTOBER 31, 1994
--------------------- --------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.43 8.59 7.90 8.16 8.45 8.61 7.90 8.16
- ------------------------------------------------------------------------------ --------------------------------------
Income from investment operations:
Net investment income .49 .50 .51 .23 .49 .50 .53 .23
- ------------------------------------------------------------------------------ --------------------------------------
Net realized and unrealized gain
(loss) .08 (.15) .72 (.26) .08 (.15) .72 (.26)
- ------------------------------------------------------------------------------ --------------------------------------
Total from investment operations .57 .35 1.23 (.03) .57 .35 1.25 (.03)
- ------------------------------------------------------------------------------ --------------------------------------
Less distribution from net investment
income .49 .51 .54 .23 .49 .51 .54 .23
- ------------------------------------------------------------------------------ --------------------------------------
Net asset value, end of period $ 8.51 8.43 8.59 7.90 8.53 8.45 8.61 7.90
- ------------------------------------------------------------------------------ --------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 6.99% 4.20 16.12 (.45) 7.03 4.23 16.45 (.44)
- ------------------------------------------------------------------------------ --------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.90% 1.93 1.81 1.92 1.86 1.90 1.78 1.89
- ------------------------------------------------------------------------------ --------------------------------------
Net investment income 5.82% 5.93 6.40 6.72 5.86 5.96 6.43 6.75
- ------------------------------------------------------------------------------ --------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
ALL CLASSES
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of year (in
thousands) $613,470 572,998 649,427 510,432 569,145 482,009 432,490 394,131 404,995 322,229
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 164% 74 182 163 190 178 115 189 64 34
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
MORTGAGE FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31, JANUARY 10 TO
CLASS A SHARES 1997 1996 1995 1995 1994 1993 JULY 31, 1992
------------- ------------ --------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $6.91 7.13 7.06 6.96 7.56 7.78 7.81
- ------------------------------------------
Income from investment operations:
Net investment income .52 .49 .08 .53 .51 .62 .38
- ------------------------------------------
Net realized and unrealized gain (loss) .10 (.19) .08 .09 (.59) (.21) (.03)
- ------------------------------------------
Total from investment operations .62 .30 .16 .62 (.08) .41 .35
- ------------------------------------------
Less distribution from net investment
income .52 .52 .09 .52 .52 .63 .38
- ------------------------------------------
Net asset value, end of period $7.01 6.91 7.13 7.06 6.96 7.56 7.78
- ------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 9.26% 4.28 2.23 9.48 (1.21) 5.52 4.76
- ------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses .96% .97 .94 .89 .99 .97 .94
- ------------------------------------------
Net investment income 7.23% 6.98 6.87 7.77 7.00 8.22 8.73
- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31,
CLASS B SHARES 1997 1996 1995 1995 1994 1993 1992 1991 1990 1989 1988
------------ ------------ ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $6.91 7.12 7.05 6.96 7.56 7.77 7.25 7.25 7.61 7.58 8.01
- ------------------------------------
Income from investment operations:
Net investment income .45 .44 .07 .47 .45 .57 .65 .64 .66 .72 .72
- ------------------------------------
Net realized and unrealized gain
(loss) .10 (.19) .08 .09 (.59) (.21) .49 .01 (.36) .07 (.33)
- ------------------------------------
Total from investment operations .55 .25 .15 .56 (.14) .36 1.14 .65 .30 .79 .39
- ------------------------------------
Less dividends:
Distribution from net
investment income .46 .46 .08 .47 .46 .57 .62 .65 .66 .76 .74
- ------------------------------------
Distribution from net realized
gain -- -- -- -- -- -- -- -- -- -- .08
- ------------------------------------
Total dividends .46 .46 .08 .47 .46 .57 .62 .65 .66 .76 .82
- ------------------------------------
Net asset value, end of period $7.00 6.91 7.12 7.05 6.96 7.56 7.77 7.25 7.25 7.61 7.58
- ------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 8.17% 3.54 2.09 8.44 (2.00) 4.85 16.36 9.37 4.26 11.12 5.06
- ------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.83% 1.80 1.79 1.75 1.79 1.75 1.86 2.03 1.99 1.98 1.98
- ------------------------------------
Net investment income 6.36% 6.15 6.02 6.91 6.27 7.44 8.70 8.86 9.00 9.62 9.28
- ------------------------------------
</TABLE>
11
<PAGE>
MORTGAGE FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, JULY 31, MAY 31 TO
CLASS C SHARES 1997 1996 1995 1995 JULY 31, 1994
----------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $6.90 7.12 7.05 6.95 6.99
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .43 .07 .48 .07
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .10 (.19) .08 .09 (.04)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .56 .24 .15 .57 .03
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividend from net investment income .46 .46 .08 .47 .07
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.00 6.90 7.12 7.05 6.95
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 8.45% 3.47 2.10 8.65 .47
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.71% 1.72 1.69 1.71 1.55
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.48% 6.23 6.12 6.95 6.46
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUG. 1, 1995
SEPT. 30, TO SEPT. 30, YEAR ENDED JULY 31,
ALL CLASSES 1997 1996 1995 1995 1994 1993 1992 1991
---------------- ----------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) $2,497,825 2,960,135 3,493,052 3,528,329 4,158,066 5,639,097 5,602,682 4,879,832
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 235% 391 249 573 963 551 376 498
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED JULY 31,
ALL CLASSES 1990 1989 1988
---------------- ----------- -----------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) 5,178,159 6,193,674 6,332,021
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 206 152 178
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
SHORT-INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
AUGUST 1 JANUARY 10
YEAR ENDED TO TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31, JULY 31,
1997 1996 1995 1995 1994 1993 1992
CLASS A SHARES --------------- ------------- ----------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.89 8.08 8.09 8.11 8.63 8.65 8.59
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .51 .54 .09 .54 .48 .53 .29
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.07) (.20) (.01) (.03) (.44) (.03) .11
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .44 .34 .08 .51 .04 .50 .40
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends from:
Distribution from net investment income .53 .53 .09 .53 .45 .52 .34
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- .11 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .53 .53 .09 .53 .56 .52 .34
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.80 7.89 8.08 8.09 8.11 8.63 8.65
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.80% 4.25 1.00 6.58 .41 6.01 4.87
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.19% 1.15 1.05 1.06 1.06 1.04 .95
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.61% 6.65 6.56 6.65 5.85 6.06 7.48
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AUGUST 1 FEBRUARY 1
YEAR ENDED TO TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31, JULY 31,
1997 1996 1995 1995 1994 1993 1992 1991 1990 1989
CLASS B SHARES --------------- ------------- ------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.85 8.05 8.06 8.08 8.61 8.64 8.27 8.42 8.70 8.50
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .46 .08 .47 .40 .45 .58 .69 .72 .36
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) (.07) (.20) (.01) (.03) (.44) (.02) .36 (.14) (.27) .14
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .39 .26 .07 .44 (.04) .43 .94 .55 .45 .50
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .47 .46 .08 .46 .38 .46 .57 .70 .72 .30
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- .11 -- -- -- .01 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .47 .46 .08 .46 .49 .46 .57 .70 .73 .30
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.77 7.85 8.05 8.06 8.08 8.61 8.64 8.27 8.42 8.70
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.11% 3.28 .87 5.68 (.48) 5.13 11.76 6.85 5.52 5.99
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 2.02% 1.97 1.91 1.87 1.93 1.87 1.89 2.07 2.10 2.24
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.78% 5.83 5.70 5.84 4.95 5.23 6.84 8.19 8.60 8.50
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
SHORT-INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
MAY 31
AUGUST 1 TO YEAR ENDED TO
YEAR ENDED SEPTEMBER 30, JULY 31, JULY 31,
SEPTEMBER 30, 1995 1995 1994
1997 1996 ------------- ---------- --------
CLASS C SHARES ----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.86 8.06 8.06 8.08 8.09
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .47 .47 .09 .47 .07
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.07) (.20) (.01) (.03) (.01)
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .40 .27 .08 .44 .06
- ------------------------------------------------------------------------------------------------------------------------
Less dividends from net investment income .48 .47 .08 .46 .07
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.78 7.86 8.06 8.06 8.08
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.24% 3.36 1.00 5.73 .77
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.86% 1.85 1.74 1.78 1.83
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 5.94% 5.95 5.87 5.93 5.54
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31,
1997 1996 1995 1995 1994 1993 1992 1991 1990
ALL CLASSES --------------------- ------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of period (in
thousands) $171,400 204,021 239,619 246,248 266,640 283,249 191,716 104,279 51,741
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (annualized) 164% 180 173 597 916 339 120 180 89
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES FOR ALL FUNDS:
Total return does not reflect the effect of any sales charges. The Adjustable
Rate, Diversified, Government and Income and Capital Funds are separate
Massachusetts business trusts. The Mortgage and Short-Intermediate Government
Funds are separate portfolios of Kemper Portfolios, a Massachusetts business
trust, and the High Yield and Opportunity Funds are separate portfolios of
Kemper High Yield Series, a Massachusetts business trust. See "Capital
Structure."
The Opportunity Fund (not shown above) commenced operations on October 1, 1997.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following information sets forth each Fund's investment objective and
policies. Each Fund's returns and net asset value will fluctuate and there is no
assurance that any Fund will achieve its objective.
ADJUSTABLE RATE FUND. The Adjustable Rate Fund seeks high current income
consistent with low volatility of principal. Under normal market conditions, the
Fund will, as a fundamental policy, invest at least 65% of its total assets in
adjustable rate securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities"). See "Government
Fund" below concerning U.S. Government Securities and the risks related to those
securities, including the fact that the government guarantee of such securities
in the Fund's portfolio does not guarantee the net asset value of the Fund's
shares. The Fund is designed for the investor who seeks a higher yield than a
stable price money market fund or an insured bank certificate of deposit and
less fluctuation in net asset value than a longer-term bond fund; unlike money
market funds, however, the Fund does not seek to maintain a stable net asset
value and, unlike an insured bank certificate of deposit, the Fund's shares are
not insured. There is no assurance that the Fund will achieve its objective.
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Adjustable rate securities bear interest at rates that adjust at periodic
intervals in response to changes in market levels of interest rates generally.
As the interest rates are reset periodically, yields on such securities will
gradually align themselves to reflect changes in market interest rates. The
adjustable interest rate feature of the securities in which the Fund invests
generally will act as a buffer to reduce sharp changes in the Fund's net asset
value in response to normal interest rate fluctuations. As the interest rates on
the Fund's investments are reset periodically, yields of portfolio securities
will gradually align themselves to reflect changes in market rates and should
cause the net asset value of the Fund's shares to fluctuate less dramatically
than it would if the Fund invested in long-term, fixed rate securities.
Adjustable rate securities allow the Fund to participate in increases in
interest rates through periodic adjustments in the interest rate resulting in
both higher current yields and lower price fluctuations. During periods of
declining interest rates, of course, the coupon rates may readjust downward,
resulting in lower yields to the Fund. Further, because of this feature, the
value of adjustable rate mortgages is unlikely to rise during periods of
declining interest rates to the same extent as fixed rate instruments. As with
other mortgage-backed securities, interest rate declines may result in
accelerated prepayment of mortgages, and the proceeds from such prepayments must
be reinvested at lower prevailing interest rates. However, during periods of
rising interest rates, changes in the coupon rate lag behind changes in the
market rate, possibly resulting in a lower net asset value until the coupon
resets to market rates. Thus, investors could suffer some principal loss if they
sold their shares of the Fund before the interest rates on portfolio investments
are adjusted to reflect current market rates. During periods of extreme
fluctuations in interest rates, the Fund's net asset value will fluctuate as
well.
The Fund may invest without limit in Mortgage-Backed Securities, as described
under "Mortgage Fund" below. Mortgage-Backed Securities can have either a fixed
rate of interest or an adjustable rate. Adjustable rate mortgage securities in
which the Fund generally invests would have the same characteristics as
described above with respect to adjustable rate securities. In addition, since
most mortgage securities in the Fund's portfolio will generally have annual
reset caps of 100 to 200 basis points (1-2%), fluctuation in interest rates
above these levels could cause such mortgage securities to "cap out" and to
behave more like long-term, fixed rate debt securities.
To help protect the value of the Fund's portfolio primarily from interest rate
fluctuations, the Fund may engage in interest rate swaps and other swap-related
products such as interest rate "caps" and "floors." The Fund will enter into
these transactions normally to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities the Fund anticipates purchasing. There is no assurance that
these transactions will be successful. The Fund will not sell interest rate caps
or floors that it does not own. See "Additional Investment Information--Interest
Rate Swaps and Swap-Related Products" below.
The Fund may also invest up to 35% of its total assets in securities other than
adjustable rate U.S. Government Securities including, without limitation,
privately issued Mortgage-Backed Securities, commercial paper and other debt
obligations of corporations and other business organizations, certificates of
deposit, bankers' acceptances and time deposits and other debt securities such
as convertible securities and preferred stocks. These securities will, at the
time of purchase, be rated within the two highest grades (Aaa or Aa) assigned by
Moody's Investors Service, Inc. ("Moody's"), or (AAA or AA) by Standard & Poor's
Corporation ("S&P"), or will be non-rated but of comparable quality in the
opinion of the investment manager.
The Fund also may invest in obligations collateralized by a portfolio or pool of
mortgages, Mortgage-Backed Securities, U.S. Government Securities or other
assets and may engage in options and financial futures transactions, securities
lending, delayed delivery transactions and other portfolio strategies. See
"Additional Investment Information" below.
Additional information concerning the Adjustable Rate Fund appears in the
"Interest Rate Swaps, Caps and Floors" and "Additional Information--Adjustable
Rate Securities" sections under "Investment Policies and Techniques" in the
Statement of Additional Information.
DIVERSIFIED FUND. The Diversified Fund seeks high current return. The Fund
pursues its objective by investing primarily in fixed income securities and
dividend-paying common stocks and by writing options. Current return includes
interest income, common stock dividends and any net short-term gains.
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Investment in fixed income securities will include corporate debt obligations,
U.S. and Canadian Government securities, obligations of U.S. and Canadian
banking institutions, convertible securities, preferred stocks, and cash and
cash equivalents, including repurchase agreements. Investment in equity
securities will primarily be in dividend-paying common stocks. The percentage of
assets invested in fixed income and equity securities will vary from time to
time depending upon the judgment of the investment manager as to general market
and economic conditions, trends in yields and interest rates and changes in
fiscal or monetary policies. The Fund may invest up to 50% of its total assets
in foreign securities that are traded principally in securities markets outside
the United States. Foreign securities present certain risks in addition to those
presented by domestic securities, including risks associated with currency
fluctuations, possible imposition of foreign governmental regulations or taxes
adversely affecting portfolio securities and generally different degrees of
liquidity, market volatility and availability of information. See "Special Risk
Factors--Foreign Securities" below.
The Fund may invest without limit in high yield, fixed income securities,
commonly referred to as "junk bonds," that are in the lower rating categories
and those that are non-rated. The high yield, fixed income securities (debt and
preferred stock issues, including convertibles and assignments or participations
in loans) in which the Fund may invest normally offer a current yield or yield
to maturity that is significantly higher than the yield available from
securities rated in the four highest categories assigned by S&P or Moody's. The
characteristics of the securities in the Fund's portfolio, such as the maturity
and the type of issuer, will affect yields and yield differentials, which vary
over time. The actual yield realized by the investor is subject, among other
things, to the Fund's expenses and the investor's transaction costs.
The Fund may also purchase options on securities and index options, purchase and
sell financial futures contracts and options on financial futures contracts,
engage in foreign currency transactions, engage in delayed delivery transactions
and lend its portfolio securities. See "Special Risk Factors--Foreign
Securities" and "Additional Investment Information" below. Under normal market
conditions, the Fund will invest at least 65% of its total assets in income
producing investments. In periods of unusual market conditions, the Fund may,
for defensive purposes, temporarily retain all or any part of its assets in cash
or cash equivalents.
There are market and investment risks with any security and the value of an
investment in the Fund will fluctuate over time. In seeking to achieve its
investment objective, the Fund will invest in fixed income securities based on
the investment manager's analysis without relying on any published ratings. The
Fund will invest in a particular fixed income security if in the investment
manager's view, the increased yield offered, regardless of published ratings, is
sufficient to compensate for a reasonable element of assumed risk. Since
investments will be based upon the investment manager's analysis rather than
upon published ratings, achievement of the Fund's goals may depend more upon the
abilities of the investment manager than would otherwise be the case.
Investments in lower rated or non-rated securities, while generally providing
greater income and opportunity for gain than investments in higher rated
securities, entail greater risk of loss of income and principal. See "Special
Risk Factors--High Yield (High Risk) Bonds" below and "Appendix--Ratings of
Investments" in the Statement of Additional Information.
Since interest rates vary with changes in economic, market, political and other
conditions, there can be no assurance that historic interest rates are
indicative of rates that may prevail in the future. The values of fixed income
securities in the Fund's portfolio will fluctuate depending upon market factors
and inversely with current interest rate levels. The market value of equity
securities in the Fund's portfolio will also fluctuate with market and other
conditions.
GOVERNMENT FUND. The Government Fund seeks high current income, liquidity and
security of principal by investing in obligations issued or guaranteed by the
U.S. Government or its agencies, and by obtaining rights to acquire such
securities. The Fund's yield and net asset value will fluctuate and there can be
no assurance that the Fund will attain its objective.
The Fund intends to invest some or all of its assets in Government National
Mortgage Association ("GNMA") Certificates of the modified pass-through type.
These GNMA Certificates are debt securities issued by a mortgage
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banker or other mortgagee and represent an interest in one or a pool of
mortgages insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. GNMA guarantees the timely payment of monthly
installments of principal and interest on modified pass-through Certificates at
the time such payments are due, whether or not such amounts are collected by the
issuer of these Certificates on the underlying mortgages.
The National Housing Act provides that the full faith and credit of the United
States is pledged to the timely payment of principal and interest by GNMA of
amounts due on these GNMA Certificates, and an assistant attorney general of the
United States has rendered an opinion that this guarantee by GNMA is a general
obligation of the United States backed by its full faith and credit.
Mortgages included in single family residential mortgage pools backing an issue
of GNMA Certificates have a maximum maturity of 30 years. Scheduled payments of
principal and interest are made to the registered holders of GNMA Certificates
(such as the Fund) each month. Unscheduled prepayments of mortgages included in
these pools occur as a result of the prepayment or refinancing of such mortgages
by homeowners or as a result of the foreclosure of such mortgages. Such
prepayments are passed through to the registered holders of GNMA Certificates
with the regular monthly payments of principal and interest, which has the
effect of reducing future payments on such Certificates. That portion of monthly
payments received by the Fund which represents interest and discount will be
included in the Fund's net investment income. See "Dividends and Taxes."
Principal payments on a GNMA Certificate will be reinvested by the Fund.
The balance of the Fund's assets, other than those invested in GNMA Certificates
and options and financial futures contracts as discussed below, will be invested
in obligations issued or guaranteed by the United States or by its agencies.
There are two broad categories of U.S. Government-related debt instruments: (a)
direct obligations of the U.S. Treasury, and (b) securities issued or guaranteed
by U.S. Government agencies. Examples of direct obligations of the U.S. Treasury
are Treasury Bills, Notes, Bonds and other debt securities issued by the U.S.
Treasury. These instruments are backed by the "full faith and credit" of the
United States. They differ primarily in interest rates, the length of maturities
and the dates of issuance. Some obligations issued or guaranteed by agencies of
the U.S. Government are backed by the full faith and credit of the United States
(such as Maritime Administration Title XI Ship Financing Bonds and Agency for
International Development Housing Guarantee Program Bonds) and others are backed
only by the rights of the issuer to borrow from the U.S. Treasury (such as
Federal Home Loan Bank Bonds and Federal National Mortgage Association Bonds).
With respect to securities supported only by the credit of the issuing agency or
by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies and such
securities may involve risk of loss of principal and interest. U.S. Government
Securities may include "zero coupon" securities that have been stripped by the
U.S. Government of their unmatured interest coupons (see "Investment Policies
and Techniques--Zero Coupon Government Securities" in the Statement of
Additional Information for a discussion of their features and risks) and
collateralized obligations issued or guaranteed by a U.S. Government agency or
instrumentality (see "Collateralized Obligations" below).
U.S. Government Securities of the type in which the Fund may invest have
historically involved little risk of loss of principal if held to maturity. The
government guarantee of the U.S. Government Securities in the Fund's portfolio,
however, does not guarantee the net asset value of the shares of the Fund. There
are market risks inherent in all investments in securities and the value of an
investment in the Fund will fluctuate over time. Normally, the value of the
Fund's investments varies inversely with changes in interest rates. For example,
as interest rates rise the value of the Fund's investments will tend to decline,
and as interest rates fall the value of the Fund's investments will tend to
increase. In addition, the potential for appreciation in the event of a decline
in interest rates may be limited or negated by increased principal prepayments
in respect to certain Mortgage-Backed Securities, such as GNMA Certificates.
Prepayments of high interest rate Mortgage-Backed Securities during times of
declining interest rates will tend to lower the return of the Fund and may even
result in losses to the Fund if some securities were acquired at a premium.
Moreover, during periods of rising interest rates, prepayments of
Mortgage-Backed Securities may decline, resulting in the extension of the Fund's
average portfolio maturity. As a result, the Fund's portfolio may experience
greater volatility during periods of rising interest rates than under normal
market
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<PAGE>
conditions. With respect to U.S. Government Securities supported only by the
credit of the issuing agency or by an additional line of credit with the U.S.
Treasury, there is no guarantee that the U.S. Government will provide support to
such agencies and such securities may involve risk of loss of principal and
interest. The Fund will not invest in Mortgage-Backed Securities issued by
private issuers.
The Fund may also write (sell) and purchase options on securities, index
options, financial futures contracts and options on financial futures contracts
in connection with attempts to hedge its portfolio investments and not for
speculation. See "Additional Investment Information" below.
HIGH YIELD FUND. The primary objective of the High Yield Fund is to achieve the
highest level of current income obtainable from a professionally managed,
diversified portfolio of fixed income securities which the investment adviser
considers consistent with reasonable risk. As a secondary objective, the Fund
will seek capital gain where consistent with its primary objective.
The high yield, fixed income securities (debt and preferred stock issues,
including convertibles and assignments or participations in loans) in which the
Fund intends to invest are commonly referred to as "junk bonds" and normally
offer a current yield or yield to maturity that is significantly higher than the
yield available from securities rated in the four highest categories assigned by
S&P or Moody's. The characteristics of the securities in the Fund's portfolio,
such as the maturity and the type of issuer, will affect yields and yield
differentials, which vary over time. The actual yield realized by the investor
is subject, among other things, to the Fund's expenses and the investor's
transaction costs.
There are market and investment risks with any security and the value of an
investment in the Fund may fluctuate over time. In seeking to achieve its
investment objectives, the Fund will invest in fixed income securities based on
the investment manager's analysis without relying on published ratings. The Fund
will invest in a particular security if in the view of the investment manager
the increased yield offered, regardless of published ratings, is sufficient to
compensate for a reasonable element of assumed risk. Since investments will be
based upon the investment manager's analysis rather than upon published ratings,
achievement of the Fund's goals may depend more upon the abilities of the
investment manager than would otherwise be the case. Investment in high yield
securities, while providing greater income and opportunity for gain than
investment in higher rated securities, entails relatively greater risk of loss
of income and principal. See "Special Risk Factors--High Yield (High Risk)
Bonds" below and "Appendix--Ratings of Investments" in the Statement of
Additional Information.
As a secondary objective, the Fund will seek capital gain where consistent with
its primary objective. However, the Fund intends to hold portfolio securities to
maturity unless yields on alternative investments, based on current market
prices, are more attractive than those on securities held in the Fund's
portfolio or unless the investment manager determines defensive strategies
should be implemented.
The Fund anticipates that under normal circumstances 90 to 100% of its assets
will be invested in fixed income securities (debt and preferred stock issues,
including convertibles). The Fund may invest in common stocks, rights or other
equity securities when consistent with the Fund's objectives, but will generally
hold such equity investments only as a result of purchases of unit offerings of
fixed income securities which include such securities or in connection with an
actual or proposed conversion or exchange of fixed income securities.
The Fund may invest all or a portion of its assets in money market instruments
such as obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the three highest grades by Moody's or S&P;
commercial paper rated within the two highest grades by either of such rating
services; bank certificates of deposit or bankers' acceptances of domestic or
Canadian chartered banks having total assets in excess of $1 billion; and any of
the foregoing investments subject to short-term repurchase agreements (an
instrument under which the purchaser acquires ownership of the underlying
obligation and the seller agrees, at the time of sale, to repurchase the
obligation at a mutually agreed upon time and price). The Fund may also purchase
and sell options on securities, index options, financial futures contracts and
options on financial futures contracts in connection with attempts to hedge its
portfolio investments and not for speculation; and it may purchase
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foreign securities and engage in foreign currency transactions. See "Special
Risk Factors--Foreign Securities" and "Additional Investment Information" below.
INCOME AND CAPITAL FUND. The Income and Capital Fund seeks as high a level of
current income as is consistent with prudent investment management, preservation
of capital and ready marketability of its portfolio by investing primarily in a
diversified portfolio of investment grade debt securities. Specifically, at
least 90% of the Fund's assets will be invested in the following categories: (a)
corporate debt securities which are rated Aaa, Aa, A or Baa by Moody's or AAA,
AA, A or BBB by S&P; (b) obligations of, or guaranteed by, the United States,
its agencies or instrumentalities; (c) obligations (payable in U.S. Dollars) of,
or guaranteed by, the government of Canada or any instrumentality or political
subdivision thereof; (d) commercial paper rated Prime-1 or Prime-2 by Moody's or
A-1 or A-2 by S&P; (e) bank certificates of deposit or bankers' acceptances
issued by domestic or Canadian chartered banks having total deposits in excess
of $1 billion; (f) options on securities, index options, financial futures
contracts and options on financial futures contracts as described under
"Additional Investment Information" in connection with attempts to hedge its
portfolio investments and not for speculation; and (g) cash and cash
equivalents.
There are market and investment risks with any security and the value of an
investment in the Fund may fluctuate over time. Normally, the value of the
Fund's investments varies inversely with changes in interest rates. There can be
no assurance that the objective of the Fund will be achieved. Corporate debt
securities rated within the four highest grades by Moody's or S&P are generally
considered to be "investment grade." Like higher rated securities, securities
rated in the BBB or Baa categories are considered to have adequate capacity to
pay principal and interest, although they may have fewer protective provisions
than higher rated securities and thus may be adversely affected by severe
economic circumstances and are considered to have speculative characteristics.
The Fund may invest up to 10% of its total assets in fixed income securities
that are rated below BBB by S&P and Baa by Moody's or are non-rated. For a
discussion of lower rated and non-rated securities, commonly referred to as
"junk bonds," and related risks, see "Special Risk Factors--High Yield (High
Risk) Bonds" below and "Appendix--Ratings of Investments" in the Statement of
Additional Information. The Fund may also invest in foreign securities and
engage in foreign currency transactions. See "Special Risk Factors--Foreign
Securities" below.
MORTGAGE FUND. The Mortgage Fund seeks maximum current return from a portfolio
of U.S. Government Securities. Additionally, the Fund may engage in options and
financial futures transactions which relate to U.S. Government Securities and
may purchase or sell securities on a when-issued or delayed delivery basis. See
"Additional Investment Information" below for a discussion of such transactions
applicable to the Fund.
As a non-fundamental policy, at least 65% of the Fund's total assets normally
will be invested in "Mortgage-Backed Securities." Mortgage-Backed Securities are
securities that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans secured by real property. There are
currently three basic types of Mortgage-Backed Securities: (a) those issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities,
such as the Government National Mortgage Association ("Ginnie Mae" or "GNMA"),
the Federal National Mortgage Association ("Fannie Mae" or "FNMA") and the
Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"); (b) those
issued by private issuers that represent an interest in or are collateralized by
Mortgage-Backed Securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities; and (c) those issued by private issuers that
represent an interest in or are collateralized by whole mortgage loans or
Mortgage-Backed Securities without a government guarantee but usually having
some form of private credit enhancement. The dominant issuers or guarantors of
Mortgage-Backed Securities today are GNMA, FNMA and FHLMC. GNMA creates mortgage
securities from pools of government guaranteed or insured (Federal Housing
Authority or Veterans Administration) mortgages originated by mortgage bankers,
commercial banks, and savings and loan associations. FNMA and FHLMC issue
Mortgage-Backed Securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks, credit
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<PAGE>
unions and mortgage bankers. Mortgage-Backed Securities issued by GNMA, FNMA and
FHLMC are considered U.S. Government Securities. The Fund will not invest in
Mortgage-Backed Securities issued by private issuers.
U.S. Government Securities of the type in which the Fund may invest have
historically involved little risk of loss of principal if held to maturity. The
government guarantee of the securities in the Fund, however, does not guarantee
the net asset value of the shares of the Fund. There are market risks inherent
in all investments in securities and the value of an investment in the Fund will
fluctuate over time. Normally, the value of the Fund's investments varies
inversely with changes in interest rates. For example, as interest rates rise,
the value of the Fund's investments will tend to decline and, as interest rates
fall, the value of the Fund's investments will tend to increase. In addition,
the potential for appreciation in the event of a decline in interest rates may
be limited or negated by increased principal prepayments in respect to certain
Mortgage-Backed Securities, such as GNMA Certificates. Prepayment of high
interest rate Mortgage-Backed Securities during times of declining interest
rates will tend to lower the return of the Fund and may even result in losses to
the Fund if some securities were acquired at a premium. Moreover, during periods
of rising interest rates, prepayments of Mortgage-Backed Securities may decline,
resulting in the extension of the Fund's average portfolio maturity. As a
result, the Fund's portfolio may experience greater volatility during periods of
rising interest rates than under normal market conditions.
OPPORTUNITY FUND. The Opportunity Fund seeks total return through high current
income and capital appreciation. The Fund will invest primarily in fixed income
securities and under normal market conditions, the Fund will, invest at least
65% of its total assets in high yield, fixed income securities. The Fund
anticipates that under normal conditions approximately 80 to 90% of its total
assets will be held in high yield, fixed income securities.
The high yield, fixed income securities (debt and preferred stock issues,
including convertibles and assignments or participations in loans) in which the
Fund intends to invest are commonly referred to as "junk bonds" and normally
offer a current yield or yield to maturity that is significantly higher than the
yield available from securities rated in the four highest categories assigned by
S&P or Moody's. The characteristics of the securities in the Fund's portfolio,
such as the maturity and the type of issuer, will affect yields and yield
differentials, which vary over time. The actual yield realized by the investor
is subject, among other things, to the Fund's expenses and the investor's
transaction costs.
There are market and investment risks with any security and the value of an
investment in the Fund may fluctuate over time. In seeking to achieve its
investment objective, the Fund will invest in fixed income securities based on
the investment manager's analysis without relying on published ratings. The Fund
will invest in a particular security if in the view of the investment manager
the increased yield offered, regardless of published ratings, is sufficient to
compensate for a reasonable element of assumed risk. Since investments will be
based upon the investment manager's analysis rather than upon published ratings,
achievement of the Fund's goals may depend more upon the abilities of the
investment manager than would otherwise be the case. Investment in high yield
securities, while providing greater income and opportunity for gain than
investment in higher rated securities, entails relatively greater risk of loss
of income and principal. See "Special Risk Factors--High Yield (High Risk)
Bonds" below and "Appendix--Ratings of Investments" in the Statement of
Additional Information.
The Fund may invest up to a maximum of 20% of its total assets in common stocks,
rights or other equity securities; generally of companies that issue high yield,
fixed income securities. The Fund anticipates that under normal circumstances
approximately 10% of its total assets will be in equity securities.
The Fund may borrow money for leverage purposes, which can exaggerate the effect
on its net asset value for any increase or decrease in the market value of the
Fund's portfolio. Money borrowed for leveraging will be limited to 20% of the
total assets of the Fund, including the amount borrowed. The Fund anticipates
that under normal conditions, the Fund would keep the leverage portion under 10%
of its total assets. These borrowings are subject to interest costs which may or
may not be recovered by the return received on the securities purchased. Under
certain circumstances, the interest costs may exceed the return received on the
securities purchased.
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To help protect the value of the Fund's portfolio primarily from interest rate
fluctuations, the Fund may engage in interest rate swaps and other swap-related
products such as interest rate "caps" and "floors." The Fund will enter into
these transactions normally to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities the Fund anticipates purchasing. There is no assurance that
these transactions will be successful. The Fund will not sell interest rate caps
or floors that it does not own. See "Additional Investment Information--Interest
Rate Swaps and Swap-Related Products" below.
When a defensive position is deemed advisable, all or a significant portion of
the Fund's assets may be held temporarily in cash or defensive type securities,
such as high-grade debt securities, securities of the U.S. Government or its
agencies and high quality money market instruments, including repurchase
agreements. The Fund may also: (i) purchase foreign securities and engage in
foreign currency transactions and (ii) purchase and sell options on securities,
index options, financial futures contracts and options on financial futures
contracts. See "Special Risk Factors--Foreign Securities" and "Additional
Investment Information" below.
SHORT-INTERMEDIATE GOVERNMENT FUND. The Short-Intermediate Government Fund
seeks, with equal emphasis, high current income and preservation of capital from
a portfolio composed primarily of short and intermediate-term U.S. Government
Securities. Under normal market conditions, the Fund will, as a fundamental
policy, invest at least 65% of its total assets in U.S. Government Securities
and repurchase agreements of U.S. Government Securities. See "Government Fund"
above for a discussion of U.S. Government Securities and the risks related to
those securities, including the fact that the government guarantee of U.S.
Government Securities in the Fund does not guarantee the net asset value of the
shares of the Fund.
Under normal market conditions, the Fund will maintain a Dollar-weighted average
portfolio maturity of more than two years but less than five years. The maturity
of a security held by the Fund will generally be considered to be the time
remaining until repayment of the principal amount of such security, except that
the maturity of a security may be considered to be a shorter period in the case
of (a) contractual rights to dispose of a security, because such rights limit
the period during which the Fund bears a market risk with respect to the
security, and (b) Mortgage-Backed Securities, because of possible prepayment of
principal on the mortgages underlying such securities. Short and
intermediate-term securities generally are more stable and less susceptible to
principal decline than longer term securities. While short and intermediate-term
securities in most cases offer lower yields than securities with longer
maturities, the Fund will seek to enhance income through limited investment in
fixed income securities other than U.S. Government Securities. The investment
manager believes that investment in short and intermediate-term securities
allows the Fund to seek both high current income and preservation of capital.
There is, however, no assurance that the Fund's objective will be achieved. The
return and net asset value of the Fund will fluctuate over time.
Up to 35% of the total assets of the Fund may be invested in fixed income
securities other than U.S. Government Securities. Such other fixed income
securities include: (a) corporate debt securities that are rated at the time of
purchase within the four highest grades by either Moody's (Aaa, Aa, A, or Baa)
or S&P (AAA, AA, A, or BBB); (b) commercial paper that is rated at the time of
purchase within the two highest grades by either Moody's (Prime-1 or Prime-2) or
S&P (A-1 or A-2); (c) bank certificates of deposit (including term deposits) or
bankers' acceptances issued by domestic banks (including their foreign branches)
and Canadian chartered banks having total assets in excess of $1 billion; and
(d) repurchase agreements with respect to any of the foregoing. Corporate debt
securities rated within the four highest grades by Moody's or S&P are generally
considered to be "investment grade." Like higher rated securities, securities
rated in the BBB or Baa categories are considered to have adequate capacity to
pay principal and interest, although they may have fewer protective provisions
than higher rated securities and thus may be adversely affected by severe
economic circumstances and are considered to have speculative characteristics.
During temporary defensive periods when the investment manager deems it
appropriate, the Fund may invest all or a portion of its assets in cash or
short-term high quality money market instruments, including short-term U.S.
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Government Securities and repurchase agreements with respect to such securities.
The yields on these securities tend to be lower than the yields on other
securities to be purchased by the Fund.
The Fund may purchase or sell securities on a when-issued or delayed delivery
basis. The Fund may invest in collateralized obligations which, consistent with
the limitations reflected above, may be privately issued or may be issued or
guaranteed by U.S. Government agencies or instrumentalities. The Fund also may
engage in options or financial futures transactions in connection with attempts
to hedge its portfolio investments and not for speculation. See "Additional
Investment Information" below.
SPECIAL RISK FACTORS--HIGH YIELD (HIGH RISK) BONDS. As stated above, the
Diversified Fund may, and the High Yield and Opportunity Funds do, invest a
substantial portion of their assets in fixed income securities offering high
current income. Subject to its specific investment objective and policies as
described above, the Income and Capital Fund may invest up to 10% of its assets
in such securities. Such high yield (high risk), fixed income securities
ordinarily will be in the lower rating categories (securities rated below the
fourth category) of recognized rating agencies or will be non-rated. Lower-rated
and non-rated securities, which are commonly referred to as "junk bonds," have
widely varying characteristics and quality. These lower rated and non-rated
fixed income securities are considered, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories. Accordingly, an investment in the
Diversified, High Yield or Opportunity Funds may not constitute a complete
investment program and may not be appropriate for all investors.
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do those of higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower rated securities also are more sensitive to economic conditions than are
higher rated securities. Adverse publicity and investor perceptions regarding
lower rated bonds, whether or not based on fundamental analysis, may depress the
prices for such securities. These and other factors adversely affecting the
market value of high yield securities will adversely affect each Fund's net
asset value.
The investment philosophy of the Diversified, High Yield and Opportunity Funds
with respect to high yield (high risk) bonds is based upon the premise that over
the long term a broadly diversified portfolio of high yield fixed income
securities should, even taking into account possible losses, provide a higher
net return than that achievable on a portfolio of higher rated securities. The
Funds seek to achieve the highest yields possible while reducing relative risk
through (a) broad diversification, (b) credit analysis by the investment manager
of the issuers in which the Funds invest, (c) purchase of high yield securities
at discounts from par or stated value when practicable and (d) monitoring and
seeking to anticipate changes and trends in the economy and financial markets
that might affect the prices of portfolio securities. The investment manager's
judgment as to the "reasonableness" of the risk involved in any particular
investment will be a function of its experience in managing fixed income
investments and its evaluation of general economic and financial conditions, a
specific issuer's business and management, cash flow, earnings coverage of
interest and dividends, ability to operate under adverse economic conditions,
and fair market value of assets, and of such other considerations as the
investment manager may deem appropriate. The investment manager, while seeking
maximum current yield, will monitor current corporate developments with respect
to portfolio securities and potential investments and to broad trends in the
economy. In some circumstances, defensive strategies may be implemented to
preserve or enhance capital even at the sacrifice of current yield. Defensive
strategies, which may be used singly or in any combination, may include, but are
not limited to, investments in discount securities or investments in money
market instruments as well as futures and options strategies.
High yield (high risk) securities frequently are issued by corporations in the
growth stage of their development. They may also be issued in connection with a
corporate reorganization or a corporate takeover. Companies that issue such high
yielding securities often are highly leveraged and may not have available to
them more traditional methods of financing. Therefore, the risk associated with
acquiring the securities of such issuers generally is greater than is the case
with higher rated securities. For example, during an economic downturn or
recession,
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highly leveraged issuers of high yield securities may experience financial
stress. During such periods, such issuers may not have sufficient revenues to
meet their interest payment obligations. The issuer's ability to service its
debt obligations may also be adversely affected by specific corporate
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss from
default by the issuer is significantly greater for the holders of high yield
securities because such securities are generally unsecured and are often
subordinated to other creditors of the issuer. Although some risk is inherent in
all securities ownership, holders of fixed income securities have a claim on the
assets of the issuer prior to the holders of common stock. Therefore, an
investment in fixed income securities generally entails less risk than an
investment in common stock of the same issuer.
A Fund may have difficulty disposing of certain high yield (high risk)
securities because they may have a thin trading market. Because not all dealers
maintain markets in all high yield securities, the Funds anticipate that such
securities could be sold only to a limited number of dealers or institutional
investors. The lack of a liquid secondary market may have an adverse effect on
the market price and a Fund's ability to dispose of particular issues and may
also make it more difficult for a Fund to obtain accurate market quotations for
purposes of valuing the Fund's assets. Market quotations generally are available
on many high yield issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
Zero coupon securities and pay-in-kind bonds involve additional special
considerations. Zero coupon securities are debt obligations that do not entitle
the holder to any periodic payments of interest prior to maturity or a specified
cash payment date when the securities begin paying current interest (the "cash
payment date") and therefore are issued and traded at a discount from their face
amount or par value. The market prices of zero coupon securities are generally
more volatile than the market prices of securities that pay interest
periodically and are likely to respond to changes in interest rates to a greater
degree than do securities paying interest currently having similar maturities
and credit quality. Zero coupon, pay-in-kind or deferred interest bonds carry
additional risk in that, unlike bonds that pay interest throughout the period to
maturity, a Fund will realize no cash until the cash payment date unless a
portion of such securities is sold and, if the issuer defaults, a Fund may
obtain no return at all on its investment.
Current federal income tax law requires the holder of a zero coupon security or
of certain pay-in-kind bonds (bonds which pay interest through the issuance of
additional bonds) to accrue income with respect to these securities prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and avoid liability for federal income and excise taxes, a
Fund will be required to distribute income accrued with respect to these
securities and may be required to dispose of portfolio securities under
disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.
Additional information concerning high yield (high risk) securities appears
under "Appendix--Portfolio Composition of High Yield Bonds" below and
"Appendix--Ratings of Investments" in the Statement of Additional Information.
SPECIAL RISK FACTORS--FOREIGN SECURITIES. The Diversified, High Yield, Income
and Capital and Opportunity Funds have the discretion to invest a portion of
their assets in foreign securities that are traded principally in securities
markets outside the United States. These Funds currently limit investment in
foreign securities not publicly traded in the United States to 50% of total
assets in the case of the Diversified Fund and 25% of total assets in the case
of the High Yield, Income and Capital and Opportunity Funds. These Funds may
also invest without limit in U.S. Dollar denominated American Depository
Receipts ("ADRs"), which are bought and sold in the United States and are not
subject to the preceding limitation. In connection with their foreign securities
investments, these Funds may, to a limited extent, engage in foreign currency
exchange, options and futures transactions as a hedge and not for speculation.
See "Additional Investment Information--Options and Financial Futures
Transactions and Foreign Currency Transactions." The Short-Intermediate
Government Fund may, subject to its quality standards, invest in U.S.
Dollar-denominated securities of foreign issuers.
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Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possible imposition of exchange controls.
The prices of such securities may be more volatile than those of domestic
securities and the markets for such securities may be less liquid. In addition,
there may be less publicly available information about foreign issuers than
about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks and listed companies abroad than in the United States.
With respect to certain foreign countries, there is a possibility of
expropriation or diplomatic developments that could affect investment in these
countries.
EMERGING MARKETS. A Fund's investments in foreign securities may be in developed
countries or in countries considered by the Fund's investment manager to be
developing or "emerging" markets, which involve exposure to economic structures
that are generally less diverse and mature than in the United States, and to
political systems that may be less stable. A developing or emerging market
country can be considered to be a country that is in the initial stages of its
industrialization cycle. Currently, emerging markets generally include every
country in the world other than the United States, Canada, Japan, Australia, New
Zealand, Hong Kong, Singapore and most Western European countries. Currently,
investing in many emerging markets may not be desirable or feasible because of
the lack of adequate custody arrangements for a Fund's assets, overly burdensome
repatriation and similar restrictions, the lack of organized and liquid
securities markets, unacceptable political risks or other reasons. As
opportunities to invest in securities in emerging markets develop, a Fund may
expand and further broaden the group of emerging markets in which it invests. In
the past, markets of developing or emerging market countries have been more
volatile than the markets of developed countries; however, such markets often
have provided higher rates of return to investors. The investment manager
believes that these characteristics can be expected to continue in the future.
Many of the risks described above relating to foreign securities generally will
be greater for emerging markets than for developed countries. For instance,
economies in individual developing markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross domestic product,
rates of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely by economic conditions in the countries with which they
trade.
Also, the securities markets of developing countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure, regulatory and
accounting standards in many respects are less stringent than in the United
States and other developed markets. There also may be a lower level of
monitoring and regulation of developing markets and the activities of investors
in such markets, and enforcement of existing regulations has been extremely
limited.
In addition, brokerage commissions, custodial services and other costs relating
to investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging markets. Such markets
have different settlement and clearance procedures. In certain markets there
have been times when
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settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Such settlement
problems may cause emerging market securities to be illiquid. The inability of a
Fund to make intended securities purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of a portfolio security caused by settlement problems could result either in
losses to a Fund due to subsequent declines in value of the portfolio security
or, if a Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Certain emerging markets may lack clearing
facilities equivalent to those in developed countries. Accordingly, settlements
can pose additional risks in such markets and ultimately can expose a Fund to
the risk of losses resulting from a Fund's inability to recover from a
counterparty.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading securities may cease or may be
substantially curtailed and prices for a Fund's portfolio securities in such
markets may not be readily available. A Fund's portfolio securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Trustees.
Investment in certain emerging market securities is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in certain emerging market securities and increase the costs
and expenses of a Fund. Emerging markets may require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments, the market could impose temporary
restrictions on foreign capital remittances.
FIXED INCOME. Since most foreign fixed income securities are not rated, a Fund
will invest in foreign fixed income securities based on the investment manager's
analysis without relying on published ratings. Since such investments will be
based upon the investment manager's analysis rather than upon published ratings,
achievement of a Fund's goals may depend more upon the abilities of the
investment manager than would otherwise be the case.
The value of the foreign fixed income securities held by a Fund, and thus the
net asset value of the Fund's shares, generally will fluctuate with (a) changes
in the perceived creditworthiness of the issuers of those securities, (b)
movements in interest rates, and (c) changes in the relative values of the
currencies in which a Fund's investments in fixed income securities are
denominated with respect to the U.S. Dollar. The extent of the fluctuation will
depend on various factors, such as the average maturity of a Fund's investments
in foreign fixed income securities, and the extent to which a Fund hedges its
interest rate, credit and currency exchange rate risks. Many of the foreign
fixed income obligations in which a Fund will invest will have long maturities.
A longer average maturity generally is associated with a higher level of
volatility in the market value of such securities in response to changes in
market conditions.
Investments in sovereign debt, including Brady Bonds, involve special risks.
Brady Bonds are debt securities issued under a plan implemented to allow debtor
nations to restructure their outstanding commercial bank indebtedness. Foreign
governmental issuers of debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or pay
interest when due. In the event of default, there may be limited or no legal
recourse in that, generally, remedies for defaults must be pursued in the courts
of the defaulting party. Political conditions, especially a sovereign entity's
willingness to meet the terms of its fixed income securities, are of
considerable significance. Also, there can be no assurance that the holders of
commercial bank loans to the same sovereign entity may not contest payments to
the holders of sovereign debt in the event of default under commercial bank loan
agreements. In addition, there is no bankruptcy proceeding with respect to
sovereign debt on which a sovereign has defaulted, and a Fund may be unable to
collect all or any part of its investment in a particular issue.
Foreign investment in certain sovereign debt is restricted or controlled to
varying degrees, including requiring governmental approval for the repatriation
of income, capital or proceed of sales by foreign investors. These restrictions
or controls may at times limit or preclude foreign investment in certain
sovereign debt or increase the costs and expenses of a Fund. A significant
portion of the sovereign debt in which a Fund may invest is issued as
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part of debt restructuring and such debt is to be considered speculative. There
is a history of defaults with respect to commercial bank loans by public and
private entities issuing Brady Bonds. All or a portion of the interest payments
and/or principal repayment with respect to Brady Bonds may be uncollateralized.
PRIVATIZED ENTERPRISES. Investments in foreign securities may include securities
issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. A Fund's investments in the
securities of privatized enterprises include privately negotiated investments in
a government or state-owned or controlled company or enterprise that has not yet
conducted an initial equity offering, investments in the initial offering of
equity securities of a state enterprise or former state enterprise and
investments in the securities of a state enterprise following its initial equity
offering.
In certain jurisdictions, the ability of foreign entities, such as a Fund, to
participate in privatizations may be limited by local law, or the price or terms
on which the Fund may be able to participate may be less advantageous than for
local investors. Moreover, there can be no assurance that governments that have
embarked on privatization programs will continue to divest their ownership of
state enterprises, that proposed privatizations will be successful or that
governments will not re-nationalize enterprises that have been privatized.
In the case of the enterprises in which a Fund may invest, large blocks of the
stock of those enterprises may be held by a small group of stockholders, even
after the initial equity offerings by those enterprises. The sale of some
portion or all of those blocks could have an adverse effect on the price of the
stock of any such enterprise.
Prior to making an initial equity offering, most state enterprises or former
state enterprises go through an internal reorganization or management. Such
reorganizations are made in an attempt to better enable these enterprises to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprises's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which a Fund may invest
enjoy the protection of and receive preferential treatment from the respective
sovereigns that own or control them. After making an initial equity offering
these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
effectively operate in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
DEPOSITORY RECEIPTS. For many foreign securities, there are U.S. Dollar
denominated ADRs, which are bought and sold in the United States and are issued
by domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in the domestic bank or a correspondent bank. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers, such as changes in foreign currency exchange rates. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Fund
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs. The Funds may also
invest in securities of foreign issuers in the form of European Depository
Receipts ("EDRs") and Global Depository Receipts ("GDRs") which are receipts
evidencing an arrangement with a European bank similar to that for ADRs and are
designed for use in the European and other foreign securities markets. EDRs and
GDRs are not necessarily denominated in the currency of the underlying security.
ADDITIONAL INVESTMENT INFORMATION. A Fund will not normally engage in the
trading of securities for the purpose of realizing short-term profits, but will
adjust its portfolio as considered advisable in view of prevailing or
anticipated market conditions and its investment objective. Accordingly, a Fund
may sell fixed income securities in anticipation of a rise in interest rates and
purchase such securities for inclusion in its portfolio in anticipation of a
decline in interest rates. Frequency of portfolio turnover will not be a
limiting factor should the investment
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manager deem it desirable to purchase or sell securities. The portfolio turnover
rates for the Funds (except the Opportunity Fund) are listed under "Financial
Highlights." It is anticipated that, under normal circumstances, the portfolio
turnover rate for the Opportunity Fund will not exceed 300%. High portfolio
turnover (over 100%) involves correspondingly greater brokerage commissions or
other transaction costs. Higher portfolio turnover may result in the realization
of greater net short-term capital gains. See "Dividends and Taxes" in the
Statement of Additional Information.
A Fund (other than the Adjustable Rate and Short-Intermediate Government Funds)
may take full advantage of the entire range of maturities of fixed income
securities and may adjust the average maturity of its portfolio from time to
time, depending upon its assessment of relative yields on securities of
different maturities and its expectations of future changes in interest rates.
Thus, the average maturity of a Fund's portfolio may be relatively short (under
5 years, for example) at some times and relatively long (over 10 years, for
example) at other times. Generally, since shorter term debt securities tend to
be more stable than longer term debt securities, the portfolio's average
maturity will be shorter when interest rates are expected to rise and longer
when interest rates are expected to fall. The effective Dollar-weighted average
portfolio maturity of the Adjustable Rate Fund generally will range from less
than one year to five years. The effective Dollar-weighted average portfolio
maturity of the Short-Intermediate Government Fund generally will be more than
two years but less than five years.
The Adjustable Rate, Mortgage and Short-Intermediate Government Funds each may
not borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its total
assets in order to meet redemption requests without immediately selling any
portfolio securities. If, for any reason, the current value of a Fund's total
assets falls below an amount equal to three times the amount of its indebtedness
from money borrowed, the Fund will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary. A Fund will not
borrow for leverage purposes. The Adjustable Rate Fund may pledge up to 15% of
its total assets to secure any such borrowings.
The Diversified, Government, High Yield and Income and Capital Funds may each
borrow money only for temporary or emergency purposes and not for leverage
purposes, and then only in an amount up to 5% of its assets, in order to meet
redemption requests without immediately selling any portfolio securities or
other assets. These Funds, except for the Government Fund, may not pledge their
assets in an amount exceeding the amount of the borrowings secured by such
pledge. The Government Fund may pledge up to 7 1/2% of its assets to secure any
such borrowings.
The maximum amount that the Opportunity Fund may borrow is one-third of the
value of its assets (including the amount borrowed). As a temporary measure for
extraordinary or emergency purposes, the Opportunity Fund may borrow money up to
one-third of the value of its total assets (including the amount borrowed) in
order to meet redemption requests without immediately selling any portfolio
securities. The Opportunity Fund may also borrow money up to 20% of the value of
its total assets (including the amount borrowed) for leverage purposes. See
"Investment Objectives, Policies and Risk Factors--Opportunity Fund" above.
A Fund will not purchase illiquid securities, including repurchase agreements
maturing in more than seven days, if, as a result thereof, more than 15% of the
Fund's net assets, valued at the time of the transaction, would be invested in
such securities, except that the Mortgage Fund may not purchase illiquid
securities if more than 10% of its total assets would be invested in such
securities. See "Investment Policies and Techniques--Over-the-Counter Options"
in the Statement of Additional Information for a description of the extent to
which over-the-counter traded options are in effect considered as illiquid for
purposes of a Fund's limit on illiquid securities. Each Fund may invest in
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933. This rule permits otherwise restricted securities to be sold to certain
institutional buyers, such as the Funds. Such securities may be illiquid and
subject to a Fund's limitation on illiquid securities. A "Rule 144A" security
may be treated as liquid, however, if so determined pursuant to procedures
adopted by the Board of Trustees. Investing in Rule 144A securities could have
the effect of increasing the level of illiquidity in a Fund to the extent that
qualified institutional buyers become uninterested for a time in purchasing Rule
144A securities.
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Each Fund has adopted certain fundamental investment restrictions which are
presented in the Statement of Additional Information and that, together with the
investment objective and policies of a Fund (for the Adjustable Rate and
Opportunity Funds, however, only those policies specifically designated in this
prospectus as fundamental), cannot be changed without approval by holders of a
majority of its outstanding voting shares. As defined in the Investment Company
Act of 1940 ("1940 Act"), this means the lesser of the vote of (a) 67% of the
shares of a Fund present at a meeting where more than 50% of the outstanding
shares are present in person or by proxy; or (b) more than 50% of the
outstanding shares of a Fund. Policies of the Adjustable Rate and Opportunity
Funds that are neither designated as fundamental nor incorporated into any of
the fundamental investment restrictions referred to above may be changed by the
Board of Trustees of the Fund without shareholder approval.
INTEREST RATE SWAPS AND SWAP-RELATED PRODUCTS. As stated above, the Adjustable
Rate and Opportunity Funds may engage in interest rate swaps and other
swap-related products. Swap agreements can take many different forms and are
known by a variety of names. The Adjustable Rate and Opportunity Funds are not
limited to any particular form of swap agreement if the investment manager
determines it is consistent with a fund's investment objective and policies.
Interest rate swaps are the exchange by the Fund with another party of their
respective commitments to pay or receive interest with respect to a notional
(agreed upon) principal amount, for example, an exchange of floating rate
payments for fixed rate payments. Interest rate swaps are generally entered into
to permit the party seeking a floating or fixed rate obligation, as the case may
be, the opportunity to acquire such obligation at a lower rate than is directly
available in the credit market. The success of such a transaction depends in
large part on the availability of fixed rate obligations at a low enough coupon
rate to cover the cost involved.
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 the 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.
Additional information concerning interest rate swaps and swap-related products
is contained in the Statement of Additional Information under "Investment
Policies and Techniques--Interest Rate Swaps and Swap-Related Products."
OPTIONS AND FINANCIAL FUTURES TRANSACTIONS. A Fund may deal in options on
securities and securities indexes, which options may be listed for trading on a
national securities exchange or traded over-the-counter. In connection with
their foreign securities investments, the Diversified, High Yield, Income and
Capital and Opportunity Funds may also purchase and sell foreign currency
options.
The Diversified and Mortgage Funds may write (sell) covered call options on up
to 100% of net assets and may write (sell) secured put options on up to 50% of
net assets. The Adjustable Rate, Government, High Yield, Income and Capital and
Opportunity Funds each may write (sell) covered call and secured put options on
up to 25% of its net assets. Each such Fund may purchase put and call options
provided that no more than 5% of its net assets may be invested in premiums on
such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security or other asset at the exercise price
during or at the end of the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security or
other asset at the exercise price during or at the end of the option period. The
writer of a covered call owns securities or other assets that are acceptable for
escrow and the writer of a secured put invests an amount not less than the
exercise price in eligible securities or other assets to the extent that it is
obligated as a writer. If a call written by a Fund is exercised, the Fund
foregoes any possible profit from an increase in the market price of the
underlying security or other asset over the exercise price plus the premium
received. In writing puts, there is a risk that a Fund may be required to take
delivery of the underlying security or other asset at a disadvantageous price.
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Over-the-counter traded options ("OTC options") differ from exchange traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer as a result of the insolvency of such dealer or otherwise, in which event
a Fund may experience material losses. However, in writing options the premium
is paid in advance by the dealer. OTC options are available for a greater
variety of securities and other assets, and a wider range of expiration dates
and exercise prices, than for exchange traded options.
A Fund may engage in financial futures transactions. Financial futures contracts
are commodity contracts that obligate the long or short holder to take or make
delivery of a specified quantity of a financial instrument, such as a security,
or the cash value of a securities index during a specified future period at a
specified price. A Fund will "cover" futures contracts sold by the Fund and
maintain in a segregated account certain liquid assets in connection with
futures contracts purchased by the Fund as described under "Investment Policies
and Techniques" in the Statement of Additional Information. In connection with
their foreign securities investments, the Diversified, High Yield, Income and
Capital and Opportunity Funds may also engage in foreign currency financial
futures transactions. A Fund will not enter into any futures contracts or
options on futures contracts if the aggregate of the contract value of the
outstanding futures contracts of the Fund and futures contracts subject to
outstanding options written by the Fund and, for each of the Adjustable Rate and
Opportunity Funds, the aggregate notional (agreed upon) principal amount of
interest rate swaps, would exceed 50% of the total assets of the Fund.
The Funds may engage in financial futures transactions and may use index options
as an attempt to hedge against market risks. For example, if a Fund owned
long-term bonds and interest rates were expected to rise, it could sell
financial futures contracts. If interest rates did increase, the value of the
bonds in the Fund would decline, but this decline would be offset in whole or in
part by an increase in the value of the Fund's futures contracts. If, on the
other hand, long-term interest rates were expected to decline, the Fund could
hold short-term debt securities and benefit from the income earned by holding
such securities, while at the same time the Fund could purchase futures
contracts on long-term bonds or the cash value of a securities index. Thus, the
Fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them. The futures contracts and short-term debt
securities could then be liquidated and the cash proceeds used to buy long-term
bonds.
Futures contracts entail risks. If the investment manager's judgment about the
general direction of interest rates, markets or exchange rates is wrong, the
overall performance may be poorer than if no such contracts had been entered
into. There may be an imperfect correlation between movements in prices of
futures contracts and portfolio assets being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. For example, if
participants in the futures market elect to close out their contracts rather
than meet margin requirements, distortions in the normal relationship between
the underlying assets and futures market could result. Price distortions also
could result if investors in futures contracts decide to make or take delivery
of underlying securities or other assets rather than engage in closing
transactions because of the resultant reduction in the liquidity of the futures
market. In addition, because, from the point of view of speculators, margin
requirements in the futures market are less onerous than margin requirements in
the cash market, increased participation by speculators in the futures market
could cause temporary price distortions. Due to the possibility of price
distortions in the futures market and because of the imperfect correlation
between movements in the prices of securities or other assets and movements in
the prices of futures contracts, a correct forecast of market trends by the
investment manager still may not result in a successful hedging transaction. If
any of these events should occur, a Fund could lose money on the financial
futures contracts and also on the value of its portfolio assets. The costs
incurred in connection with futures transactions could reduce a Fund's return.
Index options involve risks similar to those risks relating to transactions in
financial futures contracts described above. Also, an option purchased by a Fund
may expire worthless, in which case a Fund would lose the premium paid therefor.
29
<PAGE>
A Fund may engage in futures transactions only on commodities exchanges or
boards of trade. A Fund will not engage in transactions in index options,
financial futures contracts or related options for speculation, but only as an
attempt to hedge against changes in interest rates or market conditions
affecting the values of securities which the Fund owns or intends to purchase.
FOREIGN CURRENCY TRANSACTIONS. The Diversified, High Yield, Income and Capital
and Opportunity Funds may each invest a limited portion of its assets in
securities denominated in foreign currencies. These Funds may engage in foreign
currency transactions in connection with their investments in foreign securities
but will not speculate in foreign currency exchange.
The value of the foreign securities investments of a Fund measured in U.S.
Dollars may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. A Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded directly between currency traders (usually
large commercial banks) and their customers.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may want to establish the U.S. Dollar cost
or proceeds, as the case may be. By entering into a forward contract in U.S.
Dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the Fund is able to protect itself against a
possible loss between trade and settlement dates resulting from an adverse
change in the relationship between the U.S. Dollar and such foreign currency.
However, this tends to limit potential gains that might result from a positive
change in such currency relationships. A Fund may also hedge its foreign
currency exchange rate risk by engaging in foreign currency financial futures
and options transactions.
When the investment manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. Dollar, it may enter
into a forward contract to sell an amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. The forecasting of short-term currency market movement is extremely
difficult and whether such a short-term hedging strategy will be successful is
highly uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a contract. Accordingly, it may be
necessary for a Fund to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the security is less
than the amount of foreign currency the Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver.
A Fund will not enter into forward contracts or maintain a net exposure in such
contracts where the Fund would be obligated to deliver an amount of foreign
currency in excess of the value of the Fund's securities or other assets
denominated in that currency. The Diversified, High Yield, Income and Capital
and Opportunity Funds do not intend to enter into forward contracts for the
purchase of a foreign currency if they would have more than 15% of the value of
their total assets committed to such contracts. The Funds segregate cash or
liquid securities to the extent required by applicable regulation in connection
with forward foreign currency exchange contracts entered into for the purchase
of a foreign currency. A Fund generally does not enter into a forward contract
with a term longer than one year.
30
<PAGE>
DERIVATIVES. In addition to options and financial futures transactions,
consistent with its objective, each Fund may invest in a broad array of
financial instruments and securities in which the value of the instrument or
security is "derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate or a foreign currency
("derivatives"). Derivatives are most often used to manage investment risk, to
increase or decrease exposure to an asset class or benchmark (as a hedge or to
enhance return), or to create an investment position indirectly (often because
it is more efficient or less costly than direct investment). The types of
derivatives used by each Fund and the techniques employed by the investment
manager may change over time as new derivatives and strategies are developed or
regulatory changes occur.
SPECIAL RISK FACTORS--OPTIONS, FUTURES, FOREIGN CURRENCIES AND OTHER
DERIVATIVES. The Statement of Additional Information contains further
information about the characteristics, risks and possible benefits of options,
futures, foreign currency and other derivative transactions. See "Investment
Policies and Techniques" in the Statement of Additional Information. The
principal risks are: (a) possible imperfect correlation between movements in the
prices of options, currencies, futures or other derivatives contracts and
movements in the prices of the securities or currencies hedged, used for cover
or that the derivatives intended to replicate; (b) lack of assurance that a
liquid secondary market will exist for any particular option, futures, foreign
currency or other derivatives contract at any particular time; (c) the need for
additional skills and techniques beyond those required for normal portfolio
management; (d) losses on futures contracts resulting from market movements not
anticipated by the investment manager; and (e) the possible non-performance of
the counter-party to the derivative contract.
DELAYED DELIVERY TRANSACTIONS. Any of the Funds may purchase or sell portfolio
securities on a when-issued or delayed delivery basis. When-issued or delayed
delivery transactions involve a commitment by a Fund to purchase or sell
securities with payment and delivery to take place in the future (not to exceed
120 days from trade date for the Government Fund) in order to secure what is
considered to be an advantageous price or yield to the Fund at the time of
entering into the transaction. The value of fixed yield securities to be
delivered in the future will fluctuate as interest rates vary. Because a Fund is
required to set aside cash or other liquid securities to satisfy its commitments
to purchase when-issued or delayed delivery securities, flexibility to manage
the Fund's investments may be limited if commitments to purchase when-issued or
delayed delivery securities were to exceed 25% of the value of its assets.
To the extent a Fund engages in when-issued or delayed delivery transactions, it
will do so for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies. A Fund reserves the right to sell
these securities before the settlement date if deemed advisable.
In when-issued or delayed delivery transactions, delivery of the securities
occurs beyond normal settlement periods, but the Fund would not pay for such
securities or start earning interest on them until they are delivered. However,
when the Fund purchases securities on a when-issued or delayed delivery basis,
it immediately assumes the risks of ownership, including the risk of price
fluctuation. Failure to deliver a security purchased on a when-issued or delayed
delivery basis may result in a loss or missed opportunity to make an alternative
investment. Depending on market conditions, the Fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which its
total assets, including the value of when-issued and delayed delivery securities
it holds, exceed its net assets.
REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements, under
which it acquires ownership of a security and the broker-dealer or bank agrees
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the Fund's holding period. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
might have expenses in enforcing its rights, and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The securities underlying a repurchase agreement will be
marked-to-market every business day so that the value of such securities is at
least equal to the investment value of the repurchase agreement, including any
accrued interest thereon. In addition, the Fund must take physical possession of
the security or receive written confirmation of the purchase and a custodial or
safekeeping receipt from a third party or be recorded as the owner of the
security through the Federal
31
<PAGE>
Reserve Book-Entry System. Repurchase agreements will be limited to transactions
with financial institutions believed by the investment manager to present
minimal credit risk. The investment manager will monitor on an on-going basis
the creditworthiness of the broker-dealers and banks with which the Funds may
engage in repurchase agreements. Repurchase agreements maturing in more than
seven days will be considered as illiquid for purposes of the Funds' limitations
on illiquid securities.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Funds (other than the Government Fund) may lend securities
(principally to broker-dealers) without limit where such loans are callable at
any time and are continuously secured by segregated collateral (cash or other
liquid securities) equal to no less than the market value, determined daily, of
the securities loaned. The Funds will receive amounts equal to dividends or
interest on the securities loaned. The Funds will also earn income for having
made the loan. Any cash collateral pursuant to these loans will be invested in
short-term money market instruments. As with other extensions of credit, there
are risks of delay in recovery or even loss of rights in the collateral should
the borrower of the securities fail financially. However, the loans would be
made only to firms deemed by the investment manager to be of good standing, and
when the investment manager believes the potential earnings to justify the
attendant risk. Management will limit such lending to not more than one-third of
the value of a Fund's total assets.
COLLATERALIZED OBLIGATIONS. Subject to its investment objective and policies, a
Fund may purchase collateralized obligations, including interest only ("IO") and
principal only ("PO") securities. A collateralized obligation is a debt security
issued by a corporation, trust or custodian, or by a U.S. Government agency or
instrumentality, that is collateralized by a portfolio or pool of mortgages,
Mortgage-Backed Securities, U.S. Government Securities or other assets. The
issuer's obligation to make interest and principal payments is secured by the
underlying pool or portfolio of securities. Collateralized obligations issued or
guaranteed by a U.S. Government agency or instrumentality, such as the Federal
Home Loan Mortgage Corporation, are considered U.S. Government Securities for
purposes of this prospectus. Privately-issued collateralized obligations
collateralized by a portfolio of U.S. Government Securities are not direct
obligations of the U.S. Government or any of its agencies or instrumentalities
and are not considered U.S. Government Securities for purposes of this
prospectus. A variety of types of collateralized obligations are available
currently and others may become available in the future.
Since the collateralized obligations may be issued in classes with varying
maturities and interest rates, the investor may obtain greater predictability of
maturity than with direct investments in mortgage-backed securities. Classes
with shorter maturities may have lower volatility and lower yield while those
with longer maturities may have higher volatility and higher yield. This
provides the investor with greater control over the characteristics of the
investment in a changing interest rate environment. With respect to interest
only and principal only securities, an investor has the option to select from a
pool of underlying collateral the portion of the cash flows that most closely
corresponds to the investor's forecast of interest rate movements. These
instruments tend to be highly sensitive to prepayment rates on the underlying
collateral and thus place a premium on accurate prepayment projections by the
investor.
A Fund may invest in collateralized obligations whose yield floats inversely
against a specified index rate. These "inverse floaters" are more volatile than
conventional fixed or floating rate collateralized obligations and the yield
thereon, as well as the value thereof, will fluctuate in inverse proportion to
changes in the index upon which interest rate adjustments are based. As a
result, the yield on an inverse floater will generally increase when market
yields (as reflected by the index) decrease and decrease when market yields
increase. The extent of the volatility of inverse floaters depends on the extent
of anticipated changes in market rates of interest. Generally, inverse floaters
provide for interest rate adjustments based upon a multiple of the specified
interest index, which further increases their volatility. The degree of
additional volatility will be directly proportional to the size of the multiple
used in determining interest rate adjustments.
Additional information concerning collateralized obligations is contained in the
Statement of Additional Information under "Investment Policies and
Techniques--Collateralized Obligations."
32
<PAGE>
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Zurich Kemper Investments, Inc. ("ZKI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, is the investment manager of each Fund and
provides each Fund with continuous professional investment supervision. ZKI is
one of the largest investment managers in the country and has been engaged in
the management of investment funds for more than forty-nine years. ZKI and its
affiliates provide investment advice and manage investment portfolios for the
Kemper Funds, affiliated insurance companies and other corporate, pension,
profit-sharing and individual accounts representing approximately $89 billion
under management (including approximately $16 billion in U.S. Government
securities). ZKI acts as investment manager for 32 open-end and seven closed-end
investment companies, with 86 separate investment portfolios, representing more
than 2.5 million shareholder accounts. ZKI is an indirect subsidiary of Zurich
Insurance Company, a leading internationally recognized provider of insurance
and financial services in property/casualty and life insurance, reinsurance and
structured financial solutions as well as asset management.
Zurich Insurance Company ("Zurich") has entered into a definitive agreement with
Scudder, Stevens & Clark, Inc. ("Scudder") pursuant to which Zurich will acquire
approximately 70% of Scudder. Upon completion of the transaction, Scudder will
change its name to Scudder Kemper Investments, Inc. ("SKI"), and ZKI will be
combined with SKI. Because the transaction would constitute an assignment of the
Funds' investment management agreements with ZKI under the Investment Company
Act of 1940, ZKI sought approval of new agreements. The Funds' boards and
shareholders have approved new agreements with SKI. If any remaining
contingencies are timely met, the transaction is expected to close December 31,
1997. Zurich will own 69.5% of SKI and senior employees of SKI will hold the
remaining 30.5%. SKI will be headquartered in New York City and the chief
executive officer of SKI will be Edmond D. Villani, Scudder's president and
chief executive officer.
Responsibility for overall management of each Fund rests with its Board of
Trustees and officers. Professional investment supervision is provided by ZKI.
The investment management agreements provide that ZKI shall act as each Fund's
investment adviser, manage its investments and provide it with various services
and facilities. Zurich Investment Management Limited ("ZIML"), 1 Fleet Place,
London, U.K. EC4M 7RQ, an affiliate of ZKI, is the sub-adviser for the
Diversified, High Yield, Income and Capital and Opportunity Funds. ZIML is an
indirect subsidiary of Zurich Insurance Company and has served as sub-adviser
for mutual funds since December, 1996 and investment adviser for certain
institutional accounts since August, 1988. Under the terms of the Sub-Advisory
Agreement between ZIML and ZKI, ZIML renders investment advisory and management
services with regard to such portion of the Fund's portfolio as may be allocated
to ZIML by ZKI from time to time for management of foreign securities, including
foreign currency transactions and related investments. ZKI pays ZIML for its
services a sub-advisory fee, payable monthly at the annual rate of .30% of the
portion of the average daily net assets of the Fund allocated by ZKI to ZIML for
management. ZIML is not expected to continue as sub-adviser after the closing of
the acquisition of Scudder by Zurich.
Richard L. Vandenberg (since March, 1996) has been a portfolio manager of the
Government Fund, the Mortgage Fund and portfolio co-manager with Elizabeth A.
Byrnes of the Short-Intermediate Government Fund. Mr. Vandenberg (since March,
1996) and Elizabeth A. Byrnes (since 1994) are portfolio co-managers of the
Adjustable Rate Fund. Mr. Vandenberg joined ZKI in March, 1996 and is a Senior
Vice President of ZKI and a Vice President of the Government, Mortgage,
Adjustable Rate and Short-Intermediate Government Funds. Immediately prior to
joining ZKI, he was a senior vice president and portfolio manager of an
investment management firm. He received a B.B.A. and M.B.A., both in Finance,
Investments and Banking, from the University of Wisconsin, Madison, Wisconsin.
Ms. Byrnes joined ZKI in 1982 and is a First Vice President of ZKI and a Vice
President of the Adjustable Rate Fund. She received a B.A. from Miami
University, Oxford, Ohio.
Michael A. McNamara (since 1990) and Harry E. Resis, Jr. (since 1992) are the
portfolio co-managers of the High Yield Fund. Daniel J. Doyle (since 1997), Mr.
McNamara (since 1997) and Mr. Resis (since 1997) are the portfolio co-managers
of the Opportunity Fund. Mr. Doyle joined ZKI in February 1986 and is First Vice
33
<PAGE>
President of ZKI and a Vice President of the Opportunity Fund. He received a
B.S. in Finance from Northern Illinois University, Dekalb, Illinois, and an
M.B.A. in Finance from the University of Chicago, Chicago, Illinois. Mr. Doyle
is a Chartered Financial Analyst. Mr. McNamara joined ZKI in February 1972 and
is a Senior Vice President of ZKI and a Vice President of the High Yield and
Opportunity Funds. He received a B.S. in Business Administration from the
University of Missouri, St. Louis, Missouri, and an M.B.A. in Finance from
Loyola University, Chicago, Illinois. Mr. Resis joined ZKI in June, 1988 and is
currently a Senior Vice President of ZKI and a Vice President of the High Yield
and Opportunity Funds. He received a B.A. in Finance from Michigan State
University, East Lansing, Michigan.
Robert Cessine is the portfolio manager (since 1994) and a Vice President of the
Income and Capital Fund. Mr. Cessine joined ZKI in 1993 and is a Senior Vice
President of ZKI and director of investment grade corporate and sovereign bond
research. Before joining ZKI in 1993, Mr. Cessine was a senior corporate bond
analyst and chairman of the bond selection committee of an investment management
company. He received a B.S. in Economics from the University of Wisconsin,
Madison, Wisconsin, an M.S. in Agricultural and Resource Economics from the
University of Maryland, Baltimore/College Park, Maryland and an M.S. in Finance
from the University of Wisconsin, Madison, Wisconsin. Mr. Cessine is a Chartered
Financial Analyst.
Diversified Income Fund is managed by a team of portfolio managers who are
specialists in the basic sectors in which it invests. Messrs J. Patrick
Beimford, Jr., Robert S. Cessine, Michael A. McNamara, Harry E. Resis, Jr.,
Jonathan W. Trutter and Richard L. Vandenberg are the members of the team. Mr.
Beimford joined ZKI in April 1976 and is currently an Executive Vice President
of ZKI and a Vice President of the Diversified Fund. He received a B.S.I.M. in
Business from Purdue University, West Lafayette, Indiana, and an M.B.A. in
Finance from the University of Chicago, Chicago, Illinois. Mr. Beimford is a
Chartered Financial Analyst. Mr. Trutter has an A.B. with dual majors in East
Asian Languages and International Relations from the University of Southern
California, Los Angeles California and an M.B.A. from Kellogg Graduate School of
Management at Northwestern University, Chicago, Illinois. He is also a Certified
Public Accountant. See above for information on the background of Messrs.
Cessine, McNamara, Resis and Vandenberg.
The Funds pay ZKI investment management fees, payable monthly, at the annual
rates shown below.
<TABLE>
<CAPTION>
ADJUSTABLE RATE, INCOME DIVERSIFIED
AND CAPITAL, MORTGAGE AND
AVERAGE DAILY NET ASSETS AND SHORT-INTERMEDIATE GOV'T HIGH YIELD GOVERNMENT OPPORTUNITY
------------------------ ---------------------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
$0 - $250 million.......................... .55% .58% .45% .65%
$250 million - $1 billion.................. .52 .55 .43 .62
$1 billion - $2.5 billion.................. .50 .53 .41 .60
$2.5 billion - $5 billion.................. .48 .51 .40 .58
$5 billion - $7.5 billion.................. .45 .48 .38 .55
$7.5 billion - $10 billion................. .43 .46 .36 .53
$10 billion - $12.5 billion................ .41 .44 .34 .51
Over $12.5 billion......................... .40 .42 .32 .49
</TABLE>
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with each Fund, Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, a wholly owned
subsidiary of ZKI, is the principal underwriter and distributor of each Fund's
shares and acts as agent of each Fund in the sale of its shares. KDI bears all
its expenses of providing services pursuant to the distribution agreement,
including the payment of any commissions. KDI provides for the preparation of
advertising or sales literature and bears the cost of printing and mailing
prospectuses to persons other than shareholders. KDI bears the cost of
qualifying and maintaining the qualification of Fund shares for sale under the
securities laws of the various states and each Fund bears the expense of
registering its shares with the Securities and Exchange Commission. KDI may
enter into related selling group agreements with various broker-dealers,
34
<PAGE>
including affiliates of KDI, that provide distribution services to investors.
KDI also may provide some of the distribution services.
CLASS A SHARES. KDI receives no compensation from the Funds as principal
underwriter for Class A shares and pays all expenses of distribution of each
Fund's Class A shares under the distribution agreements not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays or
allows concessions or discounts to firms for the sale of each Fund's shares.
CLASS B SHARES. For its services under the distribution agreement, KDI receives
a fee from each Fund, payable monthly, at the annual rate of .75% of average
daily net assets of each Fund attributable to Class B shares. This fee is
accrued daily as an expense of Class B shares. KDI also receives any contingent
deferred sales charges. See "Redemption or Repurchase of Shares--Contingent
Deferred Sales Charge--Class B Shares." KDI currently compensates firms for
sales of Class B shares at a commission rate of 3.75%.
CLASS C SHARES. For its services under the distribution agreement, KDI receives
a fee from each Fund, payable monthly, at the annual rate of .75% of average
daily net assets of each Fund attributable to Class C shares. This fee is
accrued daily as an expense of Class C shares. KDI currently advances to firms
the first year distribution fee at a rate of .75% of the purchase price of Class
C shares. For periods after the first year, KDI currently pays firms for sales
of Class C shares a distribution fee, payable quarterly, at an annual rate of
.75% of net assets attributable to Class C shares maintained and serviced by the
firm and the fee continues until terminated by KDI or a Fund. KDI also receives
any contingent deferred sales charges. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Class C Shares."
RULE 12B-1 PLAN. Since each distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares. As of December 1997, each Fund's Rule 12b-1 Plan has
been separated from its distribution agreement. The table below shows amounts
paid in connection with each Fund's Rule 12b-1 Plan during its 1997 fiscal year
(except the Opportunity Fund, which commenced operations on October 1, 1997).
<TABLE>
<CAPTION>
DISTRIBUTION FEES CONTINGENT DEFERRED
DISTRIBUTION EXPENSES PAID BY FUND SALES CHARGES PAID
INCURRED BY UNDERWRITER TO UNDERWRITER TO UNDERWRITER
-------------------------- ---------------------- ----------------------
FUND CLASS B CLASS C CLASS B CLASS C CLASS B CLASS C
---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate................. $ 676,000 96,000 51,000 9,000 31,000 0
Diversified..................... $ 5,084,000 348,000 2,148,000 83,000 419,000 5,000
Government...................... $ 1,540,000 171,000 528,000 62,000 234,000 1,000
High Yield...................... $26,641,000 2,833,000 8,925,000 657,000 1,473,000 58,000
Income and Capital.............. $ 1,363,000 185,000 600,000 53,000 211,000 2,000
Mortgage........................ $ 1,121,000 60,000 6,685,000 16,000 1,362,000 1,000
Short-Intermediate Government... $ 558,000 155,000 1,071,000 34,000 327,000 3,000
</TABLE>
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of a Fund to make payments to KDI pursuant to the Plan will cease
and the Fund will not be required to make any payments past the termination
date. Thus, there is no legal obligation for the Fund to pay any expenses
incurred by KDI in excess of its fees under a Plan, if for any reason the Plan
is terminated in accordance with its terms. Future fees under the Plan may or
may not be sufficient to reimburse KDI for its expenses incurred.
ADMINISTRATIVE SERVICES. KDI also provides information and administrative
services for shareholders of each Fund pursuant to administrative services
agreements ("administrative agreements"). KDI may enter into related
arrangements with various broker-dealer firms and other service or
administrative firms ("firms"), that provide
35
<PAGE>
services and facilities for their customers or clients who are investors of the
Funds. Such administrative services and assistance may include, but are not
limited to, establishing and maintaining accounts and records, processing
purchase and redemption transactions, answering routine inquiries regarding each
Fund and its special features and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. KDI bears all its expenses of providing services pursuant to the
administrative agreement, including the payment of any service fees. For
services under the administrative agreements, each Fund pays KDI a fee, payable
monthly, at an annual rate of up to .25% of average daily net assets of Class A,
B and C shares of such Fund. With respect to Class A shares, KDI then pays each
firm a service fee at an annual rate of (a) up to .15% of net assets (.25% for
the Mortgage and Short-Intermediate Government Funds) of those accounts that it
maintains and services for each Fund attributable to shares acquired prior to
October 1, 1993, and (b) up to .25% of net assets of those accounts that it
maintains and services for each Fund attributable to Class A shares acquired on
or after October 1, 1993. With respect to Class B shares and Class C shares, KDI
pays each firm a service fee, normally payable quarterly, at an annual rate of
up to .25% of net assets of those accounts in the Fund that it maintains and
services attributable to Class B shares and Class C shares, respectively. Firms
to which service fees may be paid include affiliates of KDI.
CLASS A SHARES. For Class A shares, a firm becomes eligible for the service fee
based on assets in the accounts in the month following the month of purchase and
the fee continues until terminated by KDI or a Fund. The fees are calculated
monthly and normally paid quarterly.
CLASS B AND CLASS C SHARES. KDI currently advances to firms the first year
service fee at a rate of up to .25% of the purchase price of such shares. For
periods after the first year, KDI currently intends to pay firms a service fee
at a rate of up to .25% (calculated monthly and normally paid quarterly) of the
net assets attributable to Class B and Class C shares maintained and serviced by
the firm and the fee continues until terminated by KDI or the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreements not paid to firms to compensate
itself for administrative functions performed for each Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which a firm provides administrative services and it is intended
that KDI will pay all the administrative services fee that it receives from each
Fund to firms in the form of service fees. The effective administrative services
fee rate to be charged against all assets of each Fund while this procedure is
in effect will depend upon the proportion of Fund assets that is in accounts for
which a firm provides administrative services as well as, with respect to Class
A shares (except for the Mortgage and Short-Intermediate Government Funds), the
date when shares representing such assets were purchased. In addition, KDI may,
from time to time, from its own resources, pay certain firms additional amounts
for ongoing administrative services and assistance provided to their customers
and clients who are shareholders of the Funds.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary
Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105, as
custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of each Fund maintained in the United States. For Funds that invest in foreign
securities, The Chase Manhattan Bank, Chase MetroTech Center, Brooklyn, New York
11245, as custodian, has custody of all securities and cash of each Fund held
outside the United States. IFTC also is the Funds' transfer agent and
dividend-paying agent. Pursuant to a services agreement with IFTC, Kemper
Service Company ("KSvC"), an affiliate of ZKI, serves as "Shareholder Service
Agent" of the Funds and as such, performs all of IFTC's duties as transfer agent
and dividend-paying agent. For a description of shareholder service agent fees
payable to the Shareholder Service Agent, see "Investment Manager and
Underwriter" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS. ZKI and ZIML place all orders for purchases and sales of
a Fund's securities. Subject to seeking best execution of orders, ZKI and ZIML
may consider sales of shares of a Fund and other funds managed by ZKI or its
affiliates as a factor in selecting broker-dealers. See "Portfolio Transactions"
in the Statement of Additional Information.
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<PAGE>
DIVIDENDS AND TAXES
DIVIDENDS. Each Fund normally declares and distributes monthly dividends of net
investment income and distributes any net realized capital gains at least
annually.
Dividends paid by a Fund as 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
dividends per share (as a percentage of net asset value) will be lower for Class
B and Class C shares than for Class A shares primarily as a result of the
distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same amount for each
class.
Income dividends and capital gain dividends, if any, of a Fund will be credited
to shareholder accounts in full and fractional shares of the same class of that
Fund at net asset value, except that, upon written request to the Shareholder
Service Agent, a shareholder may select one of the following options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
(2) To receive income and capital gain dividends in cash.
Any dividends of a Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have dividends of a Fund
invested in shares of the same class of another Kemper Fund at the net asset
value of such class of such other fund. See "Special Features--Class A
Shares--Combined Purchases" for a list of such other Kemper Funds. To use this
privilege of investing dividends of a Fund in shares of another Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends. The Funds reinvest dividend checks (and future
dividends) in shares of that same Fund and class if checks are returned as
undeliverable. Dividends and other distributions in the aggregate amount of $10
or less are automatically reinvested in shares of the same Fund unless the
shareholder requests that such policy not be applied to the shareholder's
account.
TAXES. Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code (the "Code") and, if so
qualified, will not be liable for federal income taxes to the extent its
earnings are distributed. Dividends derived from net investment income and net
short-term capital gains are taxable to shareholders as ordinary income and
long-term capital gain dividends are taxable to shareholders as long-term
capital gain regardless of how long the shares have been held and whether
received in cash or shares. Long-term capital gain dividends received by
individual shareholders are taxed at a maximum rate of 20% on gains realized by
a Fund from securities held more than 18 months and at a maximum rate of 28% on
gains realized by a Fund from securities held more than 12 months but not more
than 18 months. Dividends declared in October, November or December to
shareholders of record as of a date in one of those months and paid during the
following January are treated as paid on December 31 of the calendar year
declared. A portion of the dividends paid by the Diversified, High Yield or
Opportunity Funds may qualify for the dividends received deduction available to
corporate shareholders. However, it is anticipated that only a small portion, if
any, of the dividends paid by such Funds will so qualify. No portion of the
dividends paid by the Adjustable Rate, Government, Income and Capital, Mortgage
or Short-Intermediate Government Funds will qualify for the dividends received
deduction.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, will be taxable to the shareholder. If the net asset value of
shares were reduced below the shareholder's cost by dividends representing gains
realized on sales of securities, such dividends would be a return of investment
though taxable as stated above.
Fund dividends that are derived from interest on direct (but not guaranteed)
obligations of the U.S. Government and certain of its agencies and
instrumentalities may be exempt from state and local taxes in certain states. In
other states, arguments can be made that such distributions should be exempt
from state and local taxes based on federal law, 31 U.S.C. Section 3124, and the
U.S. Supreme Court's interpretation of that provision in AMERICAN
37
<PAGE>
BANK AND TRUST CO. v. DALLAS COUNTY, 463 U.S. 855 (1983). Shareholders should
consult their tax advisers regarding the possible exclusion of such portion of
their dividends for state and local income tax purposes.
Each Fund is required by law to withhold 31% of taxable dividends and redemption
proceeds paid to certain shareholders who do not furnish a correct taxpayer
identification number (in the case of individuals, a social security number) and
in certain other circumstances. Trustees of qualified retirement plans and
403(b)(7) accounts are required by law to withhold 20% of the taxable portion of
any distribution that is eligible to be "rolled over." The 20% withholding
requirement does not apply to distributions from Individual Retirement Accounts
("IRAs") or any part of a distribution that is transferred directly to another
qualified retirement plan, 403(b)(7) account, or IRA. Shareholders should
consult with their tax advisers regarding the 20% withholding requirement.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving dividend reinvestment and periodic
investment and redemption programs. Information for income tax purposes,
including information regarding any foreign taxes and credits, will be provided
after the end of the calendar year. Shareholders are encouraged to retain copies
of their account confirmation statements or year-end statements for tax
reporting purposes, including information regarding any foreign taxes and
credits. However, those who have incomplete records may obtain historical
account transaction information at a reasonable fee.
When more than one shareholder resides at the same address, certain reports and
communications to be delivered to such shareholders may be combined in the same
mailing package, and certain duplicate reports and communications may be
eliminated. Similarly, account statements to be sent to such shareholders may be
combined in the same mailing package or consolidated into a single statement.
However, a shareholder may request that the foregoing policies not be applied to
the shareholder's account.
NET ASSET VALUE
For each Fund, the net asset value per share 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 the Class B and Class C shares of a Fund will generally be lower than that of
the Class A shares of the Fund because of the higher expenses borne by the Class
B and Class C shares. Fixed income securities are valued by using market
quotations, or independent pricing services that use prices provided by market
makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Portfolio securities
that are primarily traded on a domestic securities exchange or securities listed
on the NASDAQ National Market are valued at the last sale price on the exchange
or market where primarily traded or listed or, if there is no recent sale price
available, at the last current bid quotation. Portfolio securities that are
primarily traded on foreign securities exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges where
primarily traded. A security that is listed or traded on more than one exchange
is valued at the quotation on the exchange determined to be the primary market
for such security by the Board of Trustees or its delegates. Securities not so
traded or listed are valued at the last current bid quotation if market
quotations are available. Equity options are valued at the last sale price
unless the bid price is higher or the ask price is lower, in which event such
bid or asked price is used. Exchange traded fixed income options, financial
futures and options thereon are valued at the settlement price established each
day by the board of trade or exchange on which they are traded. Over-the-counter
traded options, swap agreements and swap-related products are valued based upon
current prices provided by market makers. Financial futures and options thereon
are valued at the settlement price established each day by the board of trade or
exchange on which they are traded. Other securities and assets are valued at
fair value as determined in good faith by the Board of Trustees. Because of the
need to obtain prices as of the close of trading on various exchanges throughout
the world, the calculation of net asset value of a Fund investing in foreign
securities does not necessarily take place contemporaneously with the
determination of the prices of the Fund's foreign securities, which may be made
prior to the determination of net asset value. For purposes of determining the
net asset value of a Fund investing
38
<PAGE>
in foreign securities, all assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of such currencies against U.S. Dollars as last
quoted by a recognized dealer. If an event were to occur, after the value of a
security was so established but before the net asset value per share was
determined, which was likely to materially change the net asset value, then that
security would be valued using fair value determinations by the Board of
Trustees or its delegates. On each day the New York Stock Exchange (the
"Exchange") is open for trading, the net asset value is determined as of the
earlier of 3:00 p.m. Chicago time or the close of the Exchange.
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of each Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
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, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of each Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. See,
also, "Summary of 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>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
---------------------------------- ------------------------ ----------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None Initial sales charge waived or
4.5% of the public offering price reduced for certain purchases
(3.5% for the Adjustable Rate and
Short-Intermediate Government
Funds)
Class B Maximum contingent deferred sales 0.75% Shares convert to Class A shares
charge of 4% of redemption six years after issuance
proceeds; declines to zero after
six years
Class C Contingent deferred sales charge 0.75% No conversion feature
of 1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
The minimum initial investment for each 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. In order to begin accruing income dividends as soon as
possible, purchasers may wire payment to United Missouri Bank of Kansas City,
N.A., 10th and Grand Avenue, Kansas City, Missouri 64106.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
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<PAGE>
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES. The public offering price of
Class A shares for purchasers of the Adjustable Rate and Short-Intermediate
Government Funds choosing the initial sales charge alternative is the net asset
value plus a sales charge, as set forth below.
ADJUSTABLE RATE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS
<TABLE>
<CAPTION>
Sales Charge
-------------------------------------------------------------
As a Allowed to
As a Percentage of Dealers as a
Percentage of Net Asset Percentage of
Offering Price Value* Offering Price
Amount of Purchase -------------- ------------- --------------
<S> <C> <C> <C>
Less than $100,000......................................... 3.50% 3.63% 3.00%
$100,000 but less than $250,000............................ 3.00 3.09 2.50
$250,000 but less than $500,000............................ 2.50 2.56 2.25
$500,000 but less than $1 million.......................... 2.00 2.04 1.75
$1 million and over........................................ .00** .00** ***
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
*** Commission is payable by KDI as discussed below.
The public offering price of Class A shares for purchasers of the Diversified,
Government, High Yield, Income and Capital, Mortgage and Opportunity Funds
choosing the initial sales charge alternative is the net asset value plus a
sales charge, as set forth below.
DIVERSIFIED, GOVERNMENT, HIGH YIELD, INCOME AND CAPITAL, MORTGAGE AND
OPPORTUNITY FUNDS
<TABLE>
<CAPTION>
Sales Charge
-------------------------------------------------------------
As a Allowed to
As a Percentage of Dealers as a
Percentage of Net Asset Percentage of
Offering Price Value* Offering Price
Amount of Purchase -------------- ------------- --------------
<S> <C> <C> <C>
Less than $100,000......................................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000............................ 3.50 3.63 3.00
$250,000 but less than $500,000............................ 2.60 2.67 2.25
$500,000 but less than $1 million.......................... 2.00 2.04 1.75
$1 million and over........................................ .00** .00** ***
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
*** Commission is payable by KDI as discussed below.
Each Fund receives the entire net asset value of all its Class A shares sold.
KDI, the Funds' principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow up to the full applicable sales charge, as
shown in the above table, during periods and for transactions specified in such
notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of a Fund may be purchased at net asset value to the extent that
the amount invested represents the net proceeds from a redemption of shares of a
mutual fund for which ZKI or an affiliate does not serve as investment manager
("non-Kemper Fund") provided that: (a) the investor has previously paid either
an initial sales charge in connection with the purchase of the non-Kemper Fund
shares redeemed or a contingent deferred
40
<PAGE>
sales charge in connection with the redemption of the non-Kemper Fund shares,
and (b) the purchase of Fund shares is made within 90 days after the date of
such redemption. To make such a purchase at net asset value, the investor or the
investor's dealer must, at the time of purchase, submit a request that the
purchase be processed at net asset value pursuant to this privilege. KDI may in
its discretion compensate firms for sales of Class A shares under this privilege
at a commission rate of .50% of the amount of Class A shares purchased. The
redemption of the shares of the non-Kemper fund is, for federal income tax
purposes, a sale upon which a gain or loss may be realized.
Class A shares of a Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in such Fund or other Kemper Mutual
Funds listed under "Special Features--Class A Shares--Combined Purchases" totals
at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features;" or (b) a participant-directed qualified
retirement plan described in Code Section 401(a) or a participant-directed
non-qualified deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 200 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of shares purchased under
the Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of a Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, .50% on the next $45 million and .25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount record keeping system made available
through KSvC. For purposes of determining the appropriate commission percentage
to be applied to a particular sale, KDI will consider the cumulative amount
invested by the purchaser in a Fund and other Kemper Mutual Funds listed under
"Special Features--Class A Shares--Combined Purchases," including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features referred to above. The privilege of purchasing Class A shares
of a Fund at net asset value under the Large Order NAV Purchase Privilege is not
available if another net asset value purchase privilege also applies.
Effective on February 1, 1996, Class A shares of a Fund or any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be purchased at net asset value in any amount by members of the plaintiff
class in the proceeding known as HOWARD AND AUDREY TABANKIN, ET AL. V. KEMPER
SHORT-TERM GLOBAL INCOME FUND, ET AL., Case No. 93 C 5231 (N.D. IL). This
privilege is generally non-transferrable and continues for the lifetime of
individual class members and for a ten year period for non-individual class
members. To make a purchase at net asset value under this privilege, the
investor must, at the time of purchase, submit a written request that the
purchase be processed at net asset value pursuant to this privilege specifically
identifying the purchaser as a member of the "Tabankin Class." Shares purchased
under this privilege will be maintained in a separate account that includes only
shares purchased under this privilege. For more details concerning this
privilege, class members should refer to the Notice of (1) Proposed Settlement
with Defendants; and (2) Hearing to Determine Fairness of Proposed Settlement,
dated August 31, 1995, issued in connection with the aforementioned court
proceeding. For sales of Fund shares at net asset value pursuant to this
privilege, KDI may at its discretion pay investment dealers and other financial
services firms a concession, payable quarterly, at an annual rate of up to .25%
of net assets attributable to such shares maintained and serviced by the firm. A
firm becomes eligible for the concession based upon assets in accounts
attributable to shares purchased under this privilege in the month after the
month of purchase and the concession continues until terminated by KDI. The
privilege of purchasing Class A shares of a Fund at net asset value under this
privilege is not available if another net asset value purchase privilege also
applies.
41
<PAGE>
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
a Fund, its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Funds,
for themselves or their spouses or dependent children; (c) shareholders who
owned shares of Kemper Value Fund, Inc. ("KVF") on September 8, 1995, and have
continuously owned shares of KVF (or a Kemper Fund acquired by exchange of KVF
shares) since that date, for themselves or members of their families, and (d)
any trust or pension, profit-sharing or other benefit plan for only such
persons. Class A shares may be sold at net asset value in any amount to selected
employees (including their spouses and dependent children) of banks and other
financial services firms that provide administrative services related to order
placement and payment to facilitate transactions in shares of the Funds for
their clients pursuant to an agreement with KDI or one of its affiliates. Only
those employees of such banks and other firms who as part of their usual duties
provide services related to transactions in Fund Class A shares may purchase
Fund shares at net asset value hereunder. Class A shares may be sold at net
asset value in any amount to unit investment trusts sponsored by Ranson &
Associates, Inc. In addition, unitholders of unit investment trusts sponsored by
Ranson & Associates, Inc. or its predecessors may purchase a Fund's Class A
shares at net asset value through reinvestment programs described in the
prospectuses of such trusts that have such programs. Class A shares of a Fund
may be sold at net asset value through certain investment advisers registered
under the Investment Advisers Act of 1940 and other financial services firms
that adhere to certain standards established by KDI, including a requirement
that such shares be sold for the benefit of their clients participating in an
investment advisory program under which such clients pay a fee to the investment
adviser or other firm for portfolio management and other services. Such shares
are sold for investment purposes and on the condition that they will not be
resold except through redemption or repurchase by the Funds. The Funds 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
shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of a Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of .50% of the
amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES. Investors choosing the
deferred sales charge 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. A contingent deferred sales charge may be imposed upon
42
<PAGE>
redemption of Class B shares. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of a Fund will automatically convert to Class A shares of the
same Fund six years after issuance on the basis of the relative net asset value
per share. Class B shareholders of the Funds who originally acquired their
shares as Initial Shares of Kemper Portfolios, formerly known as Kemper
Investment Portfolios ("KIP"), hold them subject to the same conversion period
schedule as that of their KIP Portfolio. Class B shares originally representing
Initial Shares of a KIP Portfolio will automatically convert to Class A shares
of the applicable Fund six years after issuance of the Initial Shares for shares
issued on or after February 1, 1991 and seven years after issuance of the
Initial Shares for shares issued before February 1, 1991. The purpose of the
conversion feature is to relieve holders of Class B shares from the distribution
services fee when they have been outstanding long enough for KDI to have been
compensated for distribution related expenses. For purposes of conversion to
Class A shares, shares purchased through the reinvestment of dividends and other
distributions paid with respect to Class B shares in a shareholder's Fund
account will be converted to Class A shares on a pro rata basis.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of a
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. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
C Shares." KDI currently advances to firms the first year distribution fee at a
rate of .75% of the purchase price of such shares. For periods after the first
year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of .75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
WHICH ARRANGEMENT IS BETTER FOR YOU? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. Orders for Class
B shares or Class C shares by employer sponsored employee benefit plans using
the subaccount record keeping system made available through the Shareholder
Service Agent will be invested instead in Class A shares at net asset value
where the combined subaccount value in a Fund or other Kemper Mutual Funds
listed under "Special Features--Class A Shares--Combined Purchases" is in excess
of $5 million including purchases pursuant to the "Combined Purchases," "Letter
of Intent" and "Cumulative Discount" features described under "Special
Features." For more information about the three sales arrangements, consult your
financial representative or the Shareholder Service Agent. Financial services
firms may receive different compensation depending upon which class of shares
they sell.
GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Fund for their clients, and KDI may pay them a transaction fee up to
the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be
43
<PAGE>
appropriate. KDI does not believe that termination of a relationship with a bank
would result in any material adverse consequences to a Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of a Fund sold by the firm under the following conditions: (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct "roll over" of a distribution from a qualified retirement plan
account maintained on a participant subaccount record keeping system provided by
KSvC, (iii) the registered representative placing the trade is a member of
ProStar, a group of persons designated by KSvC in acknowledgement of their
dedication to the employee benefit plan area and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell shares
of the Funds. Non-cash compensation includes luxury merchandise and trips to
luxury resorts. 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
Funds or other funds underwritten by KDI.
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day ("trade
date"). The Funds reserve the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly. Collection may take
significantly longer for a check drawn on a foreign bank than for a check drawn
on a domestic bank. Therefore, if an order is accompanied by a check drawn on a
foreign bank, funds must normally be collected before shares will be purchased.
See "Purchase and Redemption of Shares" in the Statement of Additional
Information.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Funds' 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 Funds' shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Funds' 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 Funds through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Funds through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
The Funds reserve the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders. Also, from time to time, each
Fund may temporarily suspend the offering of any class of its shares to new
investors. During the period of such suspension, persons who are already
shareholders of such class of the Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Shareholders should direct their inquiries to KSvC, 811 Main Street, Kansas
City, Missouri 64105-2005 or to the firm from which they received this
prospectus.
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<PAGE>
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require a Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Funds' transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. When certificates for shares have been
issued, they must be mailed to or deposited with the Shareholder Service Agent,
along with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption 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 redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
The redemption price for shares of a Fund will be the net asset value per share
of that Fund next determined following receipt by the Shareholder Service Agent
of a properly executed request with any required documents as described above.
Payment for shares redeemed will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request
accompanied by any outstanding share certificates in proper form for transfer.
When a Fund is asked to redeem shares for which it may not have yet received
good payment (i.e., purchases by check, EXPRESS-Transfer or Bank Direct
Deposit), it may delay transmittal of redemption proceeds until it has
determined that collected funds have been received for the purchase of such
shares, which will be up to 10 days from receipt by a Fund of the purchase
amount. The redemption within two years of Class A shares purchased at net asset
value under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"), the redemption of Class B shares within six years
may be subject to a contingent deferred sales charge (see "Contingent Deferred
Sales Charge--Class B Shares" below), and the redemption of Class C shares
within the first year following purchase may be subject to a contingent deferred
sales charge (see "Contingent Deferred Sales Charge--Class C Shares" below).
Because of the high cost of maintaining small accounts, effective January 1998,
the Funds may assess a quarterly fee of $9 on an account with a balance below
$1,000 for the quarter. The fee will not apply to accounts enrolled in an
automatic investment program, Individual Retirement Accounts or employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. A Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The SHAREHOLDER WILL BEAR THE RISK OF LOSS,
including loss resulting from fraudulent or unauthorized transactions, as long
as the reasonable verification procedures are followed. The verification
procedures include recording instructions, requiring certain identifying
information before acting upon instructions and sending written confirmations.
TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor
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<PAGE>
or guardian is named in the account registration. Other institutional account
holders and guardian account holders of custodial accounts for gifts and
transfers to minors may exercise this special privilege of redeeming shares by
telephone request or written request without signature guarantee subject to the
same conditions as individual account holders and subject to the limitations on
liability described under "General" above, provided that this privilege has been
pre-authorized by the institutional account holder or guardian account holder by
written instruction to the Shareholder Service Agent with signatures guaranteed.
Telephone requests may be made by calling 1-800-621-1048. Shares purchased by
check or through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed
under this privilege of redeeming shares by telephone request until such shares
have been owned for at least 10 days. This privilege of redeeming shares by
telephone request or by written request without a signature guarantee may not be
used to redeem shares held in certificated form and may not be used if the
shareholder's account has had an address change within 30 days of the redemption
request. During periods when it is difficult to contact the Shareholder Service
Agent by telephone, it may be difficult to use the telephone redemption
privilege, although investors can still redeem by mail. The Funds reserve the
right to terminate or modify this privilege at any time.
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which each Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of a Fund can be redeemed and proceeds sent by federal wire
transfer to a single previously designated account. Requests received by the
Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value of the Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption request of $250,000 or more may be delayed by the Fund for up to
seven days if ZKI deems it appropriate under then current market conditions.
Once authorization is on file, the Shareholder Service Agent will honor requests
by telephone at 1-800-621-1048 or in writing, subject to the limitations on
liability described under "General" above. The Funds are not responsible for the
efficiency of the federal wire system or the account holder's financial services
firm or bank. The Funds currently do not charge the account holder for wire
transfers. The account holder is responsible for any charges imposed by the
account holder's firm or bank. There is a $1,000 wire redemption minimum
(including any contingent deferred sales charge). To change the designated
account to receive wire redemption proceeds, send a written request to the
Shareholder Service Agent with signatures guaranteed as described above or
contact the firm through which shares of the Fund were purchased. Shares
purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may not be
redeemed by wire transfer until such shares have been owned for at least 10
days. Account holders may not use this privilege to redeem shares held in
certificated form. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the expedited
redemption privilege. The Funds reserve the right to terminate or modify this
privilege at any time.
CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and .50% if they
are redeemed during the second year following purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a) or a participant-directed non-qualified
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<PAGE>
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under a Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the commission applicable to such Large Order NAV Purchase.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED
AFTER SALES
PURCHASE CHARGE
- ---------- ----------
<S> <C> <C>
First................................................................. 4%
Second................................................................ 3%
Third................................................................. 3%
Fourth................................................................ 2%
Fifth................................................................. 2%
Sixth................................................................. 1%
</TABLE>
Class B shareholders who originally acquired their shares as Initial Shares of
Kemper Portfolios, formerly known as Kemper Investment Portfolios, hold them
subject to the same CDSC schedule that applied when those shares were purchased,
as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEAR OF ---------------------------------------------------------------------------------------
REDEMPTION SHARES PURCHASED ON OR AFTER
AFTER SHARES PURCHASED ON OR AFTER FEBRUARY 1, 1991 AND BEFORE SHARES PURCHASED BEFORE
PURCHASE MARCH 1, 1993 MARCH 1, 1993 FEBRUARY 1, 1991
---------- ---------------------------- ---------------------------- -----------------------
<S> <C> <C> <C>
First................... 4% 3% 5%
Second.................. 3% 3% 4%
Third................... 3% 2% 3%
Fourth.................. 2% 2% 2%
Fifth................... 2% 1% 2%
Sixth................... 1% 1% 1%
</TABLE>
The contingent deferred sales charge 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
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below) and (d) for redemptions 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 Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2;
and (e) for redemptions to satisfy required minimum distributions after age
70 1/2 from an IRA account (with the maximum amount subject to this waiver being
based only upon the shareholder's Kemper IRA accounts). The contingent deferred
sales charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to
47
<PAGE>
10% of the total value of plan assets invested in a Fund), (c) redemptions in
connection with distributions qualifying under the hardship provisions of the
Internal Revenue Code and (d) redemptions representing returns of excess
contributions to such plans.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (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
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features--Systematic Withdrawal Plan"), (d) for redemptions 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 Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions 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 redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
and (g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and 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.
CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of a 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 in appreciation to a total of $12,000. If the
investor were then to redeem the entire $12,000 in share value, the contingent
deferred sales charge 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 3% ($300) because
it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 1997 will be eligible for the second year's charge if redeemed on or
after December 1, 1998. In the event no specific order is requested, the
redemption will be made first from shares representing reinvested dividends and
then from the earliest purchase of shares. KDI receives any contingent deferred
sales charge directly.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of a Fund
or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
a Fund or of the other listed Kemper Mutual Funds. A shareholder of a Fund or
other Kemper Mutual Fund who redeems Class A shares purchased under the Large
Order NAV Purchase Privilege (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares") or Class B shares or Class C shares and incurs a
contingent deferred sales charge may reinvest up to the full amount redeemed at
net asset value at the time of the reinvestment in Class A shares, Class B
shares or Class C shares, as the case may be, of a Fund or of other Kemper
Mutual Funds. The amount of any contingent deferred sales charge also will be
reinvested. These reinvested shares will retain their original cost and purchase
date for purposes of the contingent deferred sales charge. Also, a holder of
Class B shares who has redeemed shares may reinvest up to the full amount
redeemed, less any applicable contingent deferred sales charge that may have
been imposed upon the redemption of such shares, at net asset value in Class A
shares of a Fund or of the other Kemper Mutual Funds listed under "Special
Features--Class A Shares--Combined Purchases." Purchases through
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<PAGE>
the reinvestment privilege are subject to the minimum investment requirements
applicable to the shares being purchased and may only be made for Kemper Mutual
Funds available for sale in the shareholder's state of residence as listed under
"Special Features--Exchange Privilege." The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the redemption. If a loss is realized on the redemption of a Funds'
shares, the reinvestment in the same Fund may be subject to the "wash sale"
rules if made within 30 days of the redemption, resulting in a postponement of
the recognition of such loss for federal income tax purposes. The reinvestment
privilege may be terminated or modified at any time.
SPECIAL FEATURES
CLASS A SHARES -- COMBINED PURCHASES. Each Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Diversified Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Adjustable Rate
U.S. Government Fund, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper
Target Equity Fund (series are subject to a limited offering period), Kemper
Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund, Kemper U.S.
Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper Value Fund,
Inc., Kemper Value+Growth Fund, Kemper Quantitative Equity Fund, Kemper Horizon
Fund, Kemper Europe Fund, Kemper Asian Growth Fund and Kemper Aggressive Growth
Fund ("Kemper Mutual Funds"). Except as noted below, there is no combined
purchase credit for direct purchases of shares of Zurich Money Funds, Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"),
which are not considered "Kemper Mutual Funds" for purposes hereof. For purposes
of the Combined Purchases feature described above as well as for the Letter of
Intent and Cumulative Discount features described below, employer sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent may include: (a) Money Market Funds as
"Kemper Mutual Funds," (b) all classes of shares of any Kemper Mutual Fund, and
(c) the value of any other plan investments, such as guaranteed investment
contracts and employer stock, maintained on such subaccount record keeping
system.
CLASS A SHARES -- LETTER OF INTENT. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation credit" toward the completion of the Letter, but
no price adjustment will be made on such shares. Only investments in Class A
shares of a Fund are included for this privilege.
CLASS A SHARES -- CUMULATIVE DISCOUNT. Class A shares of a Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a Fund being purchased, the value of all Class A shares of
the above mentioned Kemper Mutual Funds (computed at the maximum offering price
at the time of the purchase for which the discount is applicable) already owned
by the investor.
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<PAGE>
CLASS A SHARES -- AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.
CLASS A SHARES. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI.
Class A shares of a Fund purchased under the Large Order NAV Purchase Privilege
may be exchanged for Class A shares of another Kemper Mutual Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of the contingent deferred sales charge.
CLASS B SHARES. Class B shares of a Fund and Class B shares of any other Kemper
Mutual Fund listed under "Special Features --Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class B
shares may be exchanged without any contingent deferred sales charge being
imposed at the time of exchange. For purposes of the contingent deferred sales
charge that may be imposed upon the redemption of the Class B shares received on
exchange, amounts exchanged retain their original cost and purchase date.
CLASS C SHARES. Class C shares of a Fund and Class C shares of any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class C
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For determining whether there is a contingent deferred
sales charge that may be imposed upon the redemption of the Class C shares
received by exchange, they retain the cost and purchase date of the shares that
were originally purchased and exchanged.
GENERAL. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual 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"). For purposes of
determining whether the 15 Day Hold Policy applies to a particular exchange, the
value of the shares to be exchanged shall be computed by aggregating the value
of shares being exchanged for all accounts under common control, direction, or
advice, including without limitation, accounts administered by a financial
services firm offering market timing, asset allocation or similar services. The
total value of shares being exchanged must at least equal the minimum investment
requirement of the Kemper Fund into which they are being exchanged. Exchanges
are made based on relative dollar values of the shares involved in the exchange.
There is no service fee for an exchange; however, dealers or other firms may
charge for their services in effecting exchange transactions. Exchanges will be
effected by redemption of shares of the fund held and purchase of shares of the
other fund. For federal income tax purposes, any such exchange constitutes a
sale upon which a gain or loss may be realized, depending upon whether the value
of the shares being exchanged is more or less than the shareholder's adjusted
cost basis of such shares. Shareholders interested in exercising the exchange
privilege may obtain prospectuses of the other funds from dealers, other firms
or KDI. Exchanges may be accomplished by a written request to KSvC, Attention:
Exchange Department, P.O. Box 419557, Kansas City, Missouri 64141-6557, or by
telephone if the
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<PAGE>
shareholder has given authorization. Once the authorization is on file, the
Shareholder Service Agent will honor requests by telephone at 1-800-621-1048,
subject to the limitations on liability under "Redemption or Repurchase of
Shares -- General." Any share certificates must be deposited prior to any
exchange of such shares. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the telephone
exchange privilege. The exchange privilege is not a right and may be suspended,
terminated or modified at any time. Except as otherwise permitted by applicable
regulations, 60 days' prior written notice of any termination or material change
will be provided. Exchanges may only be made for funds that are available for
sale in the shareholder's state of residence. Currently, Tax-Exempt California
Money Market Fund is available for sale only in California and the portfolios of
Investors Municipal Cash Fund are available for sale only in certain states.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the other
Kemper Fund. Exchanges are subject to the terms and conditions described above
under "Exchange Privilege" except that the $1,000 minimum investment requirement
for the Kemper Fund acquired on exchange is not applicable. This privilege may
not be used for the exchange of shares held in certificated form.
EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in a Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from ANY PERSON to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling
Shareholder Services toll free at 1-800-621-1048 Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to KSvC, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination will become effective as soon as the Shareholder Service
Agent has had a reasonable time to act upon the request. EXPRESS-Transfer cannot
be used with passbook savings accounts or for tax-deferred plans such as
Individual Retirement Accounts ("IRAs").
BANK DIRECT DEPOSIT. A shareholder may purchase additional shares of a Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, investments are made automatically (minimum $50 maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder
authorizes the Fund and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to KSvC, 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. A Fund may
immediately terminate a shareholder's Plan in the event that any item is unpaid
by the shareholder's financial institution. The Funds may terminate or modify
this privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in a 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 a 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.) A Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
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<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of a Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount up to $50,000 to be paid to the owner or
a designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to Individual Retirement Accounts. The
minimum periodic payment is $100. The maximum annual rate at which Class B
shares may be redeemed (and Class A shares purchased under the Large Order NAV
Purchase Privilege and Class C shares in their first year following the
purchase) under a systematic withdrawal plan is 10% of the net asset value of
the account. Shares are redeemed so that the payee will receive payment
approximately the first of the month. Any income and capital gain dividends will
be automatically reinvested at net asset value. A sufficient number of full and
fractional shares will be redeemed to make the designated payment. Depending
upon the size of the payments requested and fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, a Fund will not knowingly permit additional investments of less
than $2,000 if the investor is at the same time making systematic withdrawals.
KDI will waive the contingent deferred sales charge on redemptions of Class A
shares purchased under the Large Order NAV Purchase Privilege, Class B shares
and Class C shares made pursuant to a systematic withdrawal plan. The right is
reserved to amend the systematic withdrawal plan on 30 days' notice. The plan
may be terminated at any time by the investor or the Funds.
TAX-SHELTERED RETIREMENT PLANS. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
- - Individual Retirement Accounts ("IRAs") with IFTC as custodian. This includes
Savings Incentive Match Plan for Employees of Small Employers ("SIMPLE"), IRA
accounts and Simplified Employee Pension Plan ("SEP") IRA accounts and
prototype documents.
- - 403(b)(7) Custodial Accounts also with IFTC as custodian. This type of plan is
available to employees of most non-profit organizations.
- - Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. The brochures for plans with IFTC as custodian describe the current
fees payable to IFTC for its services as custodian. Investors should consult
with their own tax advisers before establishing a retirement plan.
PERFORMANCE
A Fund may advertise several types of performance information for a class of
shares, including "yield" and "average annual total return" and "total return."
Performance information will be computed separately for Class A, Class B and
Class C shares. Each of these figures is based upon historical results and is
not representative of the future performance of any class of a Fund. A Fund with
fees or expenses being waived or absorbed by ZKI may also advertise performance
information before and after the effect of the fee waiver or expense absorption.
A Fund's yield is a measure of the net investment income per share earned over a
specific one month or 30-day period expressed as a percentage of the maximum
offering price of the Fund's shares at the end of the period. Yield is an
annualized figure, which means that it is assumed that a Fund generates the same
level of net
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<PAGE>
investment income over a one year period. Net investment income is assumed to be
compounded semiannually when it is annualized.
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 a 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 a 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 such periods have 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.
A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged bond indexes including, but not limited to, the Salomon
Brothers High Grade Corporate Bond Index, the Lehman Brothers Adjustable Rate
Index, the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Government/
Corporate Bond Index, the Salomon Brothers Long-Term High Yield Index, the
Salomon Brothers 30 Year GNMA Index and the Merrill Lynch Market Weighted Index
and may also be compared to the performance of other mutual funds or mutual fund
indexes with similar objectives and policies as reported by independent mutual
fund reporting services such as Lipper Analytical Services, Inc. ("Lipper").
Lipper performance calculations are based upon changes in net asset value with
all dividends reinvested and do not include the effect of any sales charges.
Information may be quoted from publications such as MORNINGSTAR, INC., THE WALL
STREET JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE,
USA TODAY, INSTITUTIONAL INVESTOR and REGISTERED REPRESENTATIVE. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit and other bank products, money market
funds and U.S. Treasury obligations. Bank product performance may be based upon,
among other things, the BANK RATE MONITOR National Index(TM) or various
certificate of deposit indexes. Money market fund performance may be based upon,
among other things, the IBC/Donoghue's Money Fund Report(R) or Money Market
Insight(R), reporting services on money market funds. Performance of U.S.
Treasury obligations may be based upon, among other things, various U.S.
Treasury bill indexes. Certain of these alternative investments may offer fixed
rates of return and guaranteed principal and may be insured. Economic indicators
may include, without limitation, indicators of market rate trends and cost of
funds, such as Federal Home Loan Bank Board 11th District Cost of Funds Index
("COFI").
A Fund may depict the historical performance of the securities in which the Fund
may invest over periods reflecting a variety of market or economic conditions
either alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A Fund may also describe its
portfolio holdings and depict its size or relative size compared to other mutual
funds, the number and make-up of its shareholder base and other descriptive
factors concerning the Fund.
The yield or price volatility of a Fund (particularly the Adjustable Rate Fund)
may be compared to various securities, such as U.S. Government Securities, or
indexes, such as the COFI referred to above or the Constant Maturity Treasury
Index ("CMT") published by the Federal Reserve Board. A Fund may include in its
sales literature and shareholder reports a quotation of the current
"distribution rate" for the Fund. Distribution rate is simply a measure of the
level of dividends distributed for a specified period. It differs from yield,
which is a measure of the income actually earned by the Fund's investments, and
from total return, which is a measure of the income actually earned by, plus the
effect of any realized and unrealized appreciation or depreciation of, such
investments during the period. Distribution rate is, therefore, not intended to
be a complete measure of performance. Distribution rate may sometimes be greater
than yield since, for instance, it may include gains from the sale of options or
other short-term and possibly long-term gains (which may be non-recurring) and
may not
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<PAGE>
include the effect of amortization of bond premiums. As reflected under
"Investment Objectives, Policies and Risk Factors--Additional Investment
Information," option writing can limit the potential for capital appreciation.
Class A shares of each Fund are sold at net asset value plus a maximum sales
charge of 4.5% of the offering price (3.5% for the Adjustable Rate and
Short-Intermediate Government Funds). While the maximum sales charge is normally
reflected in a Fund's Class A performance figures, certain total return
calculations may not include such charge and those results would be reduced if
it were included. Class B shares and Class C shares are sold at net asset value.
Redemptions of Class B shares within the first six years after purchase may be
subject to a contingent deferred sales charge that ranges from 4% during the
first year to 0% after six years. Redemption of Class C shares within the first
year after purchase may be subject to a 1% contingent deferred sales charge.
Average annual total return figures do, and total return figures may, include
the effect of the contingent deferred sales charge for the Class B shares and
Class C shares that may be imposed at the end of the period in question.
Performance figures for the Class B shares and Class C shares not including the
effect of the applicable contingent deferred sales charge would be reduced if it
were included.
Each Fund's returns and net asset value will fluctuate and shares of a Fund are
redeemable by an investor at the then current net asset value, which may be more
or less than original cost. Redemption of Class B shares and Class C shares may
be subject to a contingent deferred sales charge as described above. Additional
information concerning each Fund's performance appears in the Statement of
Additional Information. Additional information about each Fund's performance
also appears in its Annual Report to Shareholders, which is available without
charge from the applicable Fund.
CAPITAL STRUCTURE
The Adjustable Rate, Diversified, Government, Income and Capital Funds, and High
Yield Series are open-end management investment companies, organized as separate
business trusts under the laws of Massachusetts. The Adjustable Rate Fund was
organized as a business trust under the laws of Massachusetts on May 28, 1987.
Prior to January 1, 1992, the Fund was known as "Kemper Enhanced Government
Income Fund." The Diversified Fund was organized as a business trust under the
laws of Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
Option Income Fund, Inc., a Maryland corporation organized in 1977. Prior to
February 1, 1989, the Fund was known as "Kemper Option Income Fund." The
Government Fund was organized as a business trust under the laws of
Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
U.S. Government Securities Fund, Inc., a Maryland corporation (formerly known as
Kemper Fund For Government Guaranteed Securities, Inc.) organized in 1980 as
successor to a Pennsylvania business trust organized in 1977. The High Yield and
Opportunity Funds are separate series, or "Portfolios," of Kemper High Yield
Series. The High Yield Series was organized as a business trust under the laws
of Massachusetts on October 24, 1985 with a single portfolio. Effective January
31, 1986, that Trust, pursuant to a reorganization succeeded to the assets and
liabilities of Kemper High Yield Fund, Inc., a Maryland corporation organized in
1977. Prior to October 1, 1997, the Trust was known as Kemper High Yield Fund.
The Income and Capital Fund was organized as a business trust under the laws of
Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
Income and Capital Preservation Fund, Inc., a Maryland corporation organized in
1972. The Mortgage and Short-Intermediate Government Funds are separate series,
or "Portfolios", of Kemper Portfolios ("KP"), an open-end management investment
company organized as a business trust under the laws of Massachusetts on August
9, 1985. Effective November 20, 1987, KP pursuant to a reorganization succeeded
to the assets and liabilities of Investment Portfolios, Inc., a Maryland
corporation organized on March 26, 1982. After such reorganization, KP was known
as Investment Portfolios until February 1, 1991, and thereafter until May 28,
1994, as Kemper Investment Portfolios, when the name of KP became "Kemper
Portfolios." Until December 1, 1989, the Mortgage Fund was known as the
"Government Plus Portfolio" and prior to May 28, 1994, the Mortgage
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Fund was known as the "Government Portfolio." Prior to May 28, 1994, the
Short-Intermediate Government Fund was known as the Short-Intermediate
Government Portfolio.
Each Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having no par value, which may be divided by
the Board of Trustees into classes of shares. The Board of Trustees of each
Trust may authorize the issuance of additional classes and additional Portfolios
if deemed desirable, each with its own investment objective, policies and
restrictions. Since the Trusts may offer multiple Portfolios, each is known as a
"series company." Shares of a Portfolio have equal noncumulative voting rights
and equal rights with respect to dividends, assets and liquidation of such
Portfolio and are subject to any preferences, rights or privileges of any
classes of shares of the Portfolio. Currently, each Portfolio offers four
classes of shares. These are Class A, Class B and Class C shares, as well as
Class I shares, which have different expenses, that may affect performance, and
are available for purchase exclusively by the following investors: (a)
tax-exempt retirement plans of ZKI and its affiliates; and (b) the following
investment advisory clients of ZKI and its investment advisory affiliates that
invest at least $1 million in a Portfolio: (1) unaffiliated benefit plans, such
as qualified retirement plans (other than individual retirement accounts and
self-directed retirement plans); (2) unaffiliated banks and insurance companies
purchasing for their own accounts; and (3) endowment funds of unaffiliated
non-profit organizations. Shares of each Portfolio have equal noncumulative
voting rights except that Class B and Class C shares have separate and exclusive
voting rights with respect to each Portfolio's Rule 12b-1 Plan. Shares of each
class also have equal rights with respect to dividends, assets and liquidation
subject to any preferences (such as resulting from different Rule 12b-1
distribution fees), rights or privileges of any classes of shares of a
Portfolio. Shares of each Portfolio are fully paid and nonassessable when
issued, are transferable without restriction and have no preemptive or
conversion rights. The Trusts are not required to hold annual shareholder
meetings and do not intend to do so. However, they will hold special meetings as
required or deemed desirable for such purposes as electing trustees, changing
fundamental policies or approving an investment management agreement. Subject to
the Agreement and Declaration of Trust of each Trust, shareholders may remove
trustees. If shares of more than one Portfolio for any Trust are outstanding,
shareholders will vote by Portfolio and not in the aggregate or by class except
when voting in the aggregate is required under the 1940 Act, such as for the
election of trustees, or when voting by class is appropriate.
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APPENDIX--PORTFOLIO COMPOSITION OF HIGH YIELD BONDS
The table below reflects the composition by quality rating of the portfolios of
the Diversified, High Yield and Opportunity Funds. Percentages for each Fund
reflect the net asset weighted average of the percentage for each category on
the last day of each month in the twelve month period ended October 31, 1997
(the one-month period for the Opportunity Fund). The table reflects the
percentage of total net assets represented by fixed income securities rated by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P"), by unrated fixed income securities and by other assets. The percentage
shown reflects the higher of the Moody's or S&P rating. U.S. Government
securities, whether or not rated, are reflected as Aaa and AAA (highest
quality). Cash equivalents include money market instruments, repurchase
agreements, net payables and receivables, treasuries with a maturity of less
than one year and cash. Other assets include options, financial futures
contracts and equity securities. As noted under "Investment Objectives, Policies
and Risk Factors" the Diversified, High Yield and Opportunity Funds invest in
high yielding, fixed income securities without relying upon published ratings.
The allocations in the table are not necessarily representative of the
composition of the portfolios at other times. Portfolio composition will change
over time.
END OF THE MONTH COMPOSITION OF PORTFOLIO BY QUALITY AS AN AVERAGE PERCENTAGE OF
NET ASSETS (NOVEMBER 1, 1996-OCTOBER 31, 1997)
<TABLE>
<CAPTION>
MOODY'S/S&P RATING DIVERSIFIED HIGH YIELD OPPORTUNITY GENERAL DEFINITION OF
CATEGORY FUND FUND FUND BOND QUALITY
------------------ ----------- ---------- ----------- ---------------------
<S> <C> <C> <C> <C>
Cash Equivalents........................ (1)% 5% 12%
Aaa/AAA................................. 50 2 0 Highest quality
Aa/AA................................... 0 0 0 High quality
A/A..................................... 3 0 0 Upper medium grade
Baa/BBB................................. 4 1 0 Medium grade
Ba/BB................................... 11 16 8 Some speculative elements
B/B..................................... 27 68 75 Speculative
Caa/CCC................................. 1 3 0 More speculative
Ca/CC, C/C.............................. 0 0 0 Very speculative
D....................................... 0 0 0 In default
Not Rated............................... 3 4 4
Other Assets............................ 0 1 1
--- --- ---
Net Assets.............................. 100% 100% 100%
</TABLE>
The description of each bond quality category set forth in the table above is
intended to be a general guide and not a definitive statement as to how Moody's
and S&P define such rating category. A more complete description of the rating
categories is set forth under "Appendix--Ratings of Investments" in the
Statement of Additional Information. The ratings of Moody's and S&P represent
their opinions as to the quality of the securities that they undertake to rate.
It should be emphasized, however, that ratings are relative and subjective and
are not absolute standards of quality.
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PROSPECTUS
KEMPER INCOME FUNDS
DECEMBER 30, 1997
--------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND
KEMPER DIVERSIFIED INCOME FUND
KEMPER U.S. GOVERNMENT
SECURITIES FUND
KEMPER HIGH YIELD FUND
KEMPER HIGH YIELD
OPPORTUNITY FUND
KEMPER INCOME AND CAPITAL
PRESERVATION FUND
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE
GOVERNMENT FUND
--------------
KEMPER
[KEMPER LOGO]
[KEMPER LOGO] Investment Manager
Zurich Kemper Investments, Inc.
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
KFIF-1 (12/97) [RECYCLED PAPER LOGO]
KDI712237
