Filed electronically with the Securities and Exchange Commission
on December 10, 1999.
File No. 2-57937
File No. 811-2719
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 /___/
Pre-Effective Amendment No. /___/
Post-Effective Amendment No. 29 /_X_/
And --
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /___/
Amendment No .29 /_X_/
--
KEMPER U.S. GOVERNMENT SECURITIES FUND
--------------------------------------
(Exact Name of Registrant as Specified in Charter)
222 South Riverside Plaza, Chicago, Illinois 60606
--------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (312) 537-7000
Philip J. Collora, Vice President and Secretary
-----------------------------------------------
Kemper U.S. Government Securities Fund
--------------------------------------
222 South Riverside Plaza
-------------------------
Chicago, Illinois 60606
-----------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
<TABLE>
<CAPTION>
<S> <C>
/___/ Immediately upon filing pursuant to paragraph (b) /_X_/ On January 1, 2000 pursuant to paragraph (a) (1)
/___/ days after filing pursuant to paragraph (a) (2) /___/ On (date) pursuant to paragraph (b)
/___/ On ( date ) pursuant to paragraph (a) (1) /___/ On ________ pursuant to paragraph (a) (3) of Rule 485.
/_X_/ If Appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
</TABLE>
<PAGE>
Part A of this Post-Effective Amendment No.29 to the Registration Statement is
incorporated by reference in its entirety to Kemper U.S. Government Securities
Fund's Post-Effective Amendment No. 28 on Form N-1A filed on October 18, 1999.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
January 1, 2000
Kemper High Yield Fund (the "High Yield Fund")
Kemper High Yield Fund II (the "High Yield Fund II")
Kemper High Yield Opportunity Fund (the "Opportunity Fund")
Kemper Income and Capital Preservation Fund (the "Income and Capital Fund")
Kemper Short-Term U.S. Government Fund (the "Short-Term Government Fund")
Kemper Strategic Income Fund (the "Strategic Fund")
Kemper U.S. Government Securities Fund (the "Government Fund")
Kemper U.S. Mortgage Fund (the "Mortgage Fund")
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the combined
Statement of Additional Information for each of the funds (the "Funds") listed
above. It should be read in conjunction with the combined prospectus of the
Funds dated January 1, 2000. The prospectus may be obtained without charge from
the Funds by writing to Kemper Distributors, Inc., 222 South Riverside Plaza,
Chicago, IL 60606-5808 or calling 1-800-621-1048.
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS.......................................3
INVESTMENT POLICIES AND TECHNIQUES............................8
BROKERAGE COMMISSIONS........................................28
INVESTMENT MANAGER AND UNDERWRITER...........................29
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES................38
DIVIDENDS AND TAXES..........................................51
NET ASSET VALUE..............................................54
PERFORMANCE..................................................55
OFFICERS AND TRUSTEES........................................60
CAPITAL STRUCTURE............................................64
APPENDIX -- RATINGS OF INVESTMENTS...........................67
<PAGE>
The financial statements appearing in each Fund's 1999 Annual Report to
Shareholders are incorporated herein by reference. The Annual Report for the
Fund for which this Statement of Additional Information is requested accompanies
this document.
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<PAGE>
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental investment restrictions which cannot
be changed without approval of a majority of its outstanding voting shares. As
defined in the Investment Company Act of 1940, as amended (the "1940 Act") this
means the lesser of the vote of (a) 67% of the shares of the 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 the Fund.
Each Fund has elected to be classified as a diversified series of an open-end
investment company.
1. Make loans except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
2. Borrow money, except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
3. Concentrate its investments in a particular industry, as that term is used
in the 1940 Act, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
4. Purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investments secured by
real estate or interests therein, except that the Fund reserves freedom of
action to hold and to sell real estate acquired as a result of the Fund's
ownership of securities.
5. Engage in the business of underwriting securities, except to the extent
that a Fund may be deemed to be an underwriter in connection with the
disposition of portfolio securities.
6. Issue senior securities, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time.
7. Purchase physical commodities or contracts relating to physical
commodities.
Short-Term Government Fund (formerly Kemper Adjustable Rate U.S. Government
Fund)
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by its investment restriction in the latest fiscal
year and it has no present intention of borrowing during the current year.
The Fund has adopted the following non-fundamental restrictions, which may be
changed by the Board of Trustees without shareholder approval. The Adjustable
Rate Fund may not:
1. Invest for the purpose of exercising control or management of another
issuer.
2. Invest more than 15% of its net assets in illiquid securities.
3. Purchase securities on margin, except to obtain such short-term credits as
may be necessary for the clearance of transactions; however, the Fund may
make margin deposits in connection with options and financial futures
transactions.
4. Make short sales of securities or maintain a short position for the account
of the Fund unless at all times when a short position is open it owns an
equal amount of such securities or owns securities which, without payment
of any further consideration, are convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the securities
sold short and unless not more than 10% of the Fund's total assets is held
as collateral for such sales at any one time.
5. Pledge, hypothecate, mortgage or otherwise encumber more than 15% of its
total assets and then only to secure borrowings permitted by restriction 4
above. (The collateral arrangements with respect to options, financial
futures and delayed delivery transactions and any margin payments in
connection therewith are not deemed to be pledges or other encumbrances.)
6. Purchase more than 10% of any class of voting securities of any issuer.
3
<PAGE>
7. Purchase options, unless the aggregate premiums paid on all such options
held by the Fund at any time do not exceed 20% of its total assets; or sell
put options, if as a result, the aggregate value of the obligations
underlying such put options would exceed 50% of its total assets.
8. Enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect
to such futures contracts entered into on behalf of the Fund and the
premiums paid for such options on futures contracts does not exceed 5% of
the fair market value of the Fund's total assets; provided that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing the 5% limit.
Strategic Fund (formerly Kemper Diversified Income Fund)
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by its investment restriction in the latest fiscal
year, though it may borrow in the future as permitted by that investment
restriction. The Fund has adopted the following non-fundamental restrictions,
which may be changed by the Board of Trustees without shareholder approval. The
Strategic Fund may not:
1. Invest for the purpose of exercising control or management of another
issuer.
2. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets,
unless immediately thereafter not more than (i) 3% of the total outstanding
voting stock of such company would be owned by the Fund, (ii) 5% of the
Fund's total assets would be invested in any one such company, and (iii)
10% of the Fund's total assets would be invested in such securities.
3. Invest more than 15% of its net assets in illiquid securities.
4. Pledge the Fund's securities or receivables or transfer or assign or
otherwise encumber them in an amount exceeding the amount of the borrowing
secured thereby.
5. Engage in margin purchases except to obtain such short-term credits as may
be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with financial futures and options
transactions; nor may the Fund make short sales of securities or maintain a
short position unless, at all times when a short position is open, the Fund
owns an equal amount of such securities or securities convertible into or
exchangeable for securities, without payment of additional consideration,
which are equal in amount to and of the same issue as the securities sold
short and such securities are not subject to outstanding call options, and
unless not more than 10% of the Fund's net assets is held as collateral for
such sales at any one time. (Management does not intend to make such sales
except for the purpose of deferring realization of gain or loss for federal
income tax purposes.)
6. Purchase options, unless the aggregate premiums paid on all such options
held by the Fund at any time do not exceed 20% of its total assets; or sell
put options, if as a result, the aggregate value of the obligations
underlying such put options would exceed 50% of its total assets.
7. Enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect
to such futures contracts entered into on behalf of the Fund and the
premiums paid for such options on futures contracts does not exceed 5% of
the fair market value of the Fund's total assets; provided that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing the 5% limit.
Government Fund
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by its investment restriction in the latest fiscal
year and it has no present intention of borrowing during the current year. The
Government Fund has adopted the following non-fundamental restrictions which may
be changed by the Board of Trustees without shareholder approval. The Government
Fund may not:
4
<PAGE>
1. Invest more than 15% of its net assets in illiquid securities.
2. Mortgage, pledge or hypothecate any assets except in connection with any
such borrowing and in amounts not in excess of 7 1/2% of the value of the
Fund's assets at the time of such borrowing.
3. Purchase options, unless the aggregate premiums paid on all such options
held by the Fund at any time do not exceed 20% of its total assets; or sell
put options, if as a result, the aggregate value of the obligations
underlying such put options would exceed 50% of its total assets.
4. Enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect
to such futures contracts entered into on behalf of the Fund and the
premiums paid for such options on futures contracts does not exceed 5% of
the fair market value of the Fund's total assets; provided that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing the 5% limit.
High Yield Fund
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 3 in the latest
fiscal year; though it may borrow in the future as permitted by that investment
restriction. The Fund has adopted the following non-fundamental restrictions,
which may be changed by the Board of Trustees without shareholder approval. The
High Yield Fund may not:
1. Invest for the purpose of exercising control or management of another
issuer.
2. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets,
unless immediately thereafter not more than (i) 3% of the total outstanding
voting stock of such company would be owned by the Fund, (ii) 5% of the
Fund's total assets would be invested in any one such company, and (iii)
10% of the Fund's total assets would be invested in such securities.
3. Invest more than 15% of its net assets in illiquid securities.
4. Invest more than 25% of the Fund's total assets in fixed income securities
which are payable in currencies other than United States Dollars.
(Investments in such securities may involve risks which differ from
investments in securities of U.S. issuers, such as future political and
economic developments, the possible imposition of governmental restrictions
and taxes, as well as currency fluctuation.)
5. Pledge the Fund's securities or receivables or transfer or assign or
otherwise encumber them in an amount exceeding the amount of the borrowing
secured thereby.
6. Engage in margin purchases except to obtain such short-term credits as may
be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with financial futures and options
transactions; nor may the Fund make short sales of securities or maintain a
short position unless, at all times when a short position is open, the Fund
owns an equal amount of such securities or securities convertible into or
exchangeable for securities, without payment of additional consideration,
which are equal in amount to and of the same issue as the securities sold
short and such securities are not subject to outstanding call options, and
unless not more than 10% of the Fund's net assets is held as collateral for
such sales at any one time. (Management does not intend to make such sales
except for the purpose of deferring realization of gain or loss for federal
income tax purposes.)
7. Purchase options, unless the aggregate premiums paid on all such options
held by the Fund at any time do not exceed 20% of its total assets; or sell
put options, if as a result, the aggregate value of the obligations
underlying such put options would exceed 50% of its total assets.
8. Enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect
to such futures contracts entered into on behalf of the Fund and the
premiums paid for such options on futures contracts does not exceed 5% of
the fair market value of the Fund's total assets; provided that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing the 5% limit.
5
<PAGE>
High Yield Fund II
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 2 in the latest
fiscal year; though it may borrow in the future as permitted by that investment
restriction. The Fund has adopted the following non-fundamental restriction,
which may be changed by the Board of Trustees without shareholder approval. The
High Yield Fund II may not:
1. Invest more than 15% of the value of its net assets in illiquid securities.
Income and Capital Fund
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 5 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Fund has adopted the following non-fundamental restrictions, which may
be changed by the Board of Trustees without shareholder approval. The Income and
Capital Fund may not:
1. Invest for the purpose of exercising control or management of another
issuer.
2. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
3. Invest more than 15% of its net assets in illiquid securities.
4. Invest in securities other than those specified under "The Fund's Strategy"
in the prospectus. This restriction does not prevent the Fund from holding
common stocks or other corporate securities not qualifying as debt
obligations if such securities are acquired through conversion provisions
of debt securities or from corporate reorganizations. Nor does it prevent
the holding of debt securities whose quality rating is reduced by the
rating services below those specified under "The Fund's Strategy" after
purchase by the Fund.
5. Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
6. Pledge the Fund's securities or receivables or transfer or assign or
otherwise encumber them in an amount exceeding the amount of the borrowing
secured thereby.
7. Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and options transactions.
8. Purchase options, unless the aggregate premiums paid on all such options
held by the Fund at any time do not exceed 20% of its total assets; or sell
put options, if as a result, the aggregate value of the obligations
underlying such put options would exceed 50% of its total assets.
9. Enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect
to such futures contracts entered into on behalf of the Fund and the
premiums paid for such options on futures contracts does not exceed 5% of
the fair market value of the Fund's total assets; provided that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing the 5% limit.
Mortgage Fund
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or total assets will not be considered a violation. The Fund
did not borrow money as permitted by investment restriction number 7 in the
latest fiscal year, and it has no present intention of borrowing
6
<PAGE>
during the current year. The Fund has adopted the following non-fundamental
restrictions, which may be changed by the Board of Trustees without shareholder
approval. The Mortgage Fund may not:
1. Purchase securities or make investments other than in accordance with its
investment objective and policies.
2. Invest more than 5% of the Fund's total assets in securities of issuers
(other than obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities) which with their predecessors have a record
of less than three years continuous operation, except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund.
3. Enter into repurchase agreements if more than 10% of the Fund's net assets
valued at the time of the transaction would be subject to repurchase
agreements maturing in more than seven days.
4. Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
5. Invest more than 5% of the Fund's total assets in securities restricted as
to disposition under the federal securities laws (except commercial paper
issued under Section 4(2) of the Securities Act of 1933) and no more than
10% of its assets will be invested in securities which are considered
illiquid, except that all or substantially all of the assets of the Fund
may be invested in another registered investment company having the same
investment objective and substantially similar investment policies as the
Fund. (Repurchase agreements maturing in more than 7 days are considered
illiquid for purposes of this restriction.)
6. Invest for the purpose of exercising control or management of another
issuer.
7. Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest
in or sponsor such programs.
8. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets,
except that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the same
investment objective and substantially similar investment policies as the
Fund.
9. Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and option transactions.
10. Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of Kemper Portfolios or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and
together they own more than 5% of the securities of such issuer, except
that all or substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment objective
and substantially similar investment policies as the Fund.
11. Purchase options, unless the aggregate premiums paid on all such options
held by the Fund at any time do not exceed 20% of its total assets; or sell
put options, if as a result, the aggregate value of the obligations
underlying such put options would exceed 50% of its total assets.
12. Enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect
to such futures contracts entered into on behalf of the Fund and the
premiums paid for such options on futures contracts does not exceed 5% of
the fair market value of the Fund's total assets; provided that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing the 5% limit.
Opportunity Fund
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation except as
otherwise provided for in restriction number (3) above. The Fund has adopted the
following non-fundamental restrictions, which may be changed by the Board of
Trustees without shareholder approval. The Opportunity Fund may not:
1. Invest for the purpose of exercising control or management of another
issuer.
7
<PAGE>
2. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets,
unless immediately thereafter not more than (i) 3% of the total outstanding
voting stock of such company would be owned by the Fund, (ii) 5% of the
Fund's total assets would be invested in any one such company, and (iii)
10% of the Fund's total assets would be invested in such securities.
3. Invest more than 15% of its net assets in illiquid securities.
4. Engage in margin purchases except to obtain such short-term credits as may
be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with financial futures and options
transactions; nor may the Fund make short sales of securities or maintain a
short position unless, at all times when a short position is open, the Fund
owns an equal amount of such securities or securities convertible into or
exchangeable for securities, without payment of additional consideration,
which are equal in amount to and of the same issue as the securities sold
short and such securities are not subject to outstanding call options, and
unless not more than 10% of the Fund's net assets is held as collateral for
such sales at any one time. (Management does not intend to make such sales
except for the purpose of deferring realization of gain or loss for federal
income tax purposes.)
5. Purchase options, unless the aggregate premiums paid on all such options
held by the Fund at any time do not exceed 20% of its total assets; or sell
put options, if as a result, the aggregate value of the obligations
underlying such put options would exceed 50% of its total assets.
6. Enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect
to such futures contracts entered into on behalf of the Fund and the
premiums paid for such options on futures contracts does not exceed 5% of
the fair market value of the Fund's total assets; provided that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in computing the 5% limit.
Master/feeder fund structure. The Board of Trustees has the discretion to retain
the current distribution arrangement for the Funds while investing in a master
fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
INVESTMENT POLICIES AND TECHNIQUES
U.S. Government Securities. 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 "Zero Coupon
8
<PAGE>
Government Securities" below 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 Funds 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 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.
Collateralized Obligations. A Fund will currently invest in only those
collateralized obligations that are fully collateralized and that meet the
quality standards otherwise applicable to the Fund's investments. Fully
collateralized means that the collateral will generate cash flows sufficient to
meet obligations to holders of the collateralized obligations under even the
most conservative prepayment and interest rate projections. Thus, the
collateralized obligations are structured to anticipate a worst case prepayment
condition and to minimize the reinvestment rate risk for cash flows between
coupon dates for the collateralized obligations. A worst case prepayment
condition generally assumes immediate prepayment of all securities purchased at
a premium and zero prepayment of all securities purchased at a discount.
Reinvestment rate risk may be minimized by assuming very conservative
reinvestment rates and by other means such as by maintaining the flexibility to
increase principal distributions in a low interest rate environment. The
effective credit quality of the collateralized obligations in such instances is
the credit quality of the issuer of the collateral. The requirements as to
collateralization are determined by the issuer or sponsor of the collateralized
obligation in order to satisfy rating agencies, if rated. In addition to
investing in a pool of mortgages, Mortgage-Backed Securities or U.S. Government
Securities, no Fund currently intends to invest more than 20% of its total
assets in collateralized obligations that are collateralized by a pool of credit
card or automobile receivables or other types of assets. The receivables would
include amounts charged for goods and services, finance charges, late charges
and other related fees and charges. Collection of receivables may be affected by
various social, legal and economic factors affecting the use of credit and
repayment patterns, such as changes in consumer protection laws, the rate of
inflation, unemployment levels and relative interest rates. Currently, none of
the Funds intends to invest more than 10% of its total assets in inverse
floaters.
Zero Coupon Government Securities. Subject to its investment objective and
policies, a Fund may invest in zero coupon U.S. Government Securities. Zero
coupon bonds are purchased at a discount from the face amount. The buyer
receives only the right to receive a fixed payment on a certain date in the
future and does not receive any periodic interest payments. These securities may
include those created directly by the U.S. Treasury and those created as
collateralized obligations through various proprietary custodial, trust or other
relationships. The effect of owning instruments which do not make current
interest payments is that a fixed yield is earned not only on the original
investment but also, in effect, on all discount accretion during the life of the
obligation. This implicit reinvestment of earnings at the same rate eliminates
the risk of being unable to reinvest distributions at a rate as high as the
implicit yield on the zero coupon bond, but at the same time eliminates any
opportunity to reinvest earnings at higher rates. For this reason, zero coupon
bonds are subject to substantially greater price fluctuations during periods of
changing market interest rates than those of comparable securities that pay
interest currently, which fluctuation is greater as the period to maturity is
longer. Zero coupon bonds created as collateralized obligations are similar to
those created through the U.S. Treasury, but the former investments do not
provide absolute certainty of maturity or of cash flows after prior classes of
the collateralized obligations are retired. No Fund currently intends to invest
more than 20% of its net assets in zero coupon U.S. Government Securities during
the current year.
High Yield (High Risk) Bonds. The Strategic Fund may, and the High Yield, High
Yield II 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, the Income and Capital Fund may invest up to
20% of its assets in such securities. Such
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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 Strategic, High
Yield, High Yield II 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 Strategic, High Yield, High Yield II 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, 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.
Adjustable Rate Securities. The interest rates paid on the adjustable rate
securities in which a Fund invests generally are readjusted at intervals of one
year or less to an increment over some predetermined interest rate index. There
are three main
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categories of indices: those based on U.S. Treasury securities, those derived
from a calculated measure such as a cost of funds index or those based on a
moving average of mortgage rates. Commonly used indices include the one-year,
three-year and five-year constant maturity Treasury rates, the three-month
Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term
Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the
National Median Cost of Funds, the one-month, three-month, six-month or one-year
London Interbank Offered Rate ("LIBOR"), the prime rate of a specific bank or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury rate, closely mirror changes in market interest rate levels. Others,
such as the 11th District Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels and tend to be somewhat less volatile.
The Mortgage-Backed Securities either issued or guaranteed by GNMA, FHLMC or
FNMA ("Certificates") are called pass-through Certificates because a pro rata
share of both regular interest and principal payments (less GNMA's FHLMC's or
FNMA's fees and any applicable loan servicing fees), as well as unscheduled
early prepayments on the underlying mortgage pool, are passed through monthly to
the holder of the Certificate (i.e., the Fund). The principal and interest on
GNMA securities are guaranteed by GNMA and backed by the full faith and credit
of the U.S. Government. FNMA guarantees full and timely payment of all interest
and principal, while FHLMC guarantees timely payment of interest and ultimate
collection of principal. Mortgage-Backed Securities from FNMA and FHLMC are not
backed by the full faith and credit of the United States; however, they are
generally considered to offer minimal credit risks. The yields provided by these
Mortgage-Backed Securities have historically exceeded the yields on other types
of U.S. Government Securities with comparable maturities in large measure due to
the prepayment risk discussed below.
If prepayments of principal are made on the underlying mortgages during periods
of rising interest rates, a Fund generally will be able to reinvest such amounts
in securities with a higher current rate of return. However, a Fund will not
benefit from increases in interest rates to the extent that interest rates rise
to the point where they cause the current coupon of adjustable rate mortgages
held as investments by a Fund to exceed the maximum allowable annual or lifetime
reset limits (or "cap rates") for a particular mortgage. Also, a Fund's net
asset value could vary to the extent that current yields on Mortgage-Backed
Securities are different than market yields during interim periods between
coupon reset dates.
During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower yields to a 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.
One additional difference between adjustable rate mortgages and fixed rate
mortgages is that for certain types of adjustable rate mortgage securities, the
rate of amortization of principal, as well as interest payments, can and does
change in accordance with movements in a specified, published interest rate
index. The amount of interest due to an adjustable rate mortgage security holder
is calculated by adding a specified additional amount, the "margin," to the
index, subject to limitations or "caps" on the maximum and minimum interest that
is charged to the mortgagor during the life of the mortgage or to maximum and
minimum changes to that interest rate during a given period. It is these special
characteristics that are unique to adjustable rate mortgages that a Fund
believes make them attractive investments in seeking to accomplish a Fund's
objective.
Foreign Securities. The Strategic, High Yield, High Yield II, 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
Strategic Fund and 25% of total assets in the case of the High Yield, High Yield
II, 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.
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.
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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.
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 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.
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.
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Many of the risks described herein 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 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.
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.
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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' 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
operate effectively 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.
Kemper High Yield Opportunity Fund may invest a portion of its assets in
Standard & Poor's Depository Receipts ("SPDRs"). SPDRs typically trade like a
share of common stock and provide investment results that generally correspond
to the price and yield performance of the component common stocks of the S&P 500
Index. There can be no assurance that this can be accomplished, as it may not be
possible for the Fund to maintain exactly the composition and relative
weightings of the S&P 500 Index securities. SPDRs are subject to the risks of an
investment in a broadly based portfolio of common stocks, including the risk
that the general level of stock prices may decline, thereby adversely affecting
the value of such investment. SPDRs are also subject to risks other than those
associated with an investment in a broadly-based portfolio of common stocks in
that the selection of the stocks included in the Fund may affect trading in
SPDRs, as compared with trading in a broadly based portfolio of common stocks.
Strategic Transactions and Derivatives. Each Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of the fixed-income securities in each Fund's portfolio or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, a Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (subject to
certain limits imposed by the 1940 Act) to attempt to protect against possible
changes in the market value of securities held in or to be purchased for a
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect a Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of a Fund's portfolio, or to
establish a position in the derivatives markets as a substitute for purchasing
or selling particular securities. Some Strategic Transactions may also be used
to enhance potential gain although no more than 5% of a Fund's assets will be
committed to Strategic Transactions entered into for non-hedging purposes. Any
or all of these investment techniques may be used at any time and in any
combination, and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of a Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. Each
Fund will comply with applicable regulatory requirements when implementing these
strategies, techniques
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and instruments. Strategic Transactions will not be used to alter fundamental
investment purposes and characteristics of the Fund, and the Fund will segregate
assets (or as provided by applicable regulations, enter into certain offsetting
positions) to cover its obligations under options, futures and swaps to limit
leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Fund can realize on its
investments or cause a Fund to hold a security it might otherwise sell. The use
of currency transactions can result in a Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
a Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. Each Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
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A Fund's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. Each
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting a Fund to require the Counterparty to
sell the option back to a Fund at a formula price within seven days. Each Fund
expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, a Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. Each Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Adviser. The staff of the
Securities and Exchange Commission (the "SEC") currently takes the position that
OTC options purchased by a Fund, and portfolio securities "covering" the amount
of a Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
each Fund's limitation on investing no more than 15% of its net assets in
illiquid securities.
If a Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase a Fund's income. The sale of put options can also provide income.
Each Fund may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the over-the-counter markets, and on
securities indices, currencies and futures contracts. All calls sold by a Fund
must be "covered" (i.e., a Fund must own the securities or futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though a Fund will receive the
option premium to help protect it against loss, a call sold by a Fund exposes
that Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument and may require that Fund to hold a security or instrument which it
might otherwise have sold.
Each Fund may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible
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securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. Each Fund will not sell put options if, as a result, more than 50%
of a Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that a Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. Each Fund may enter into futures contracts
or purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management, and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed,
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
Each Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires a Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of a Fund. If a Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
Each Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of that Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. Each Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of
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days from the date of the contract agreed upon by the parties, at a price set at
the time of the contract. A currency swap is an agreement to exchange cash flows
based on the notional difference among two or more currencies and operates
similarly to an interest rate swap, which is described below. Each Fund may
enter into currency transactions with Counterparties which have received (or the
guarantors of the obligations which have received) a credit rating of A-1 or P-1
by S&P or Moody's, respectively, or that have an equivalent rating from a NRSRO
or (except for OTC currency options) are determined to be of equivalent credit
quality by the Adviser.
Each Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of a Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
Each Fund generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
Each Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which that Fund has or in which that Fund
expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, each Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of that Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
a Fund holds securities denominated in schillings and the Adviser believes that
the value of schillings will decline against the U.S. dollar, the Adviser may
enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to a Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that a Fund is engaging in proxy hedging. If a Fund
enters into a currency hedging transaction, that Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. Each Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in
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the best interests of a Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which
each Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. Each Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. Each Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream a Fund may be
obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
Each Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Adviser and the Funds believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. Each Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. Each Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Funds might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and
fixed-income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Funds segregate cash or liquid
assets with its custodian to the extent that obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by a Fund to pay
or deliver securities or assets must be covered at all times by the securities,
instruments or
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currency required to be delivered, or, subject to any regulatory restrictions,
an amount of cash or liquid assets at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by a Fund will require that Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate cash or liquid assets sufficient to purchase and
deliver the securities if the call is exercised. A call option sold by a Fund on
an index will require that Fund to own portfolio securities which correlate with
the index or to segregate cash or liquid assets equal to the excess of the index
value over the exercise price on a current basis. A put option written by a Fund
requires that Fund to segregate cash or liquid assets equal to the exercise
price.
Except when a Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates a Fund to buy or sell currency
will generally require that Fund to hold an amount of that currency or liquid
assets denominated in that currency equal to that Fund's obligations or to
segregate liquid assets equal to the amount of that Fund's obligation.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Fund sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by a Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when a Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, that Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by a Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and that Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, a Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to a Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash or
liquid assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, a Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by that Fund. Moreover, instead of segregating assets if a Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
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Delayed Delivery Transactions. 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. When the Fund enters into a delayed delivery
transaction, it becomes obligated to purchase securities and it has all of the
rights and risks attendant to ownership of a security, although delivery and
payment occur at a later date. The value of fixed income securities to be
delivered in the future will fluctuate as interest rates vary. At the time a
Fund makes the commitment to purchase a security on a when-issued or delayed
delivery basis, it will record the transaction and reflect the liability for the
purchase and the value of the security in determining its net asset value.
Likewise, at the time a Fund makes the commitment to sell a security on a
delayed delivery basis, it will record the transaction and include the proceeds
to be received in determining its net asset value; accordingly, any fluctuations
in the value of the security sold pursuant to a delayed delivery commitment are
ignored in calculating net asset value so long as the commitment remains in
effect. The Fund generally has the ability to close out a purchase obligation on
or before the settlement date, rather than take delivery of the security.
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 purchases, 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.
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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
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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 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 forms 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.
Borrowing Money. The Short-Term Government and Mortgage 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 Short-Term Government Fund may pledge up to
15% of its total assets to secure any such borrowings. The Strategic,
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% 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.
Money borrowed by High Yield Fund II for leveraging purposes shall be limited to
20% of total assets, including the amount borrowed.
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 manager deem it desirable to purchase or
sell securities. The portfolio turnover rates for the Funds are listed under
"Financial Highlights" in the Funds' prospectus. 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.
A Fund (other than the Short-Term Government Fund) 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.
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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. 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.
Trustees' Power to Change Objectives and Policies. Except as specifically stated
to the contrary, the objectives and policies of the Funds may be changed by the
Trustees without a vote of the shareholders.
BROKERAGE COMMISSIONS
Allocation of brokerage is supervised by the Advisor.
The primary objective of the Adviser in placing orders for the purchase and sale
of securities for the Funds is to obtain the most favorable net results, taking
into account such factors as price, commission where applicable, size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Adviser seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through the familiarity of Scudder Investor
Services, Inc. ("SIS") with commissions charged on comparable transactions, as
well as by comparing commissions paid by each Fund to reported commissions paid
by others. The Adviser routinely reviews commission rates, execution and
settlement services makingperformed and makes internal and external comparisons.
The Funds' purchases and sales of fixed-income securities are generally placed
by the Adviser with primary market makers for these securities on a net basis,
without any brokerage commission being paid by the Portfolio. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or each
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or the Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser may place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through SIS which is a corporation registered
as a broker/dealer and a subsidiary of the Adviser; SIS place orders on behalf
of the Fund with issuers, underwriters or other brokers and dealers. SIS will
not receive any commission, fee or other remuneration from the Fund for this
service.
Although certain research services from broker/dealers may be useful to the Fund
and to the Adviser, it is the opinion of the Adviser that such information only
supplements the Adviser's own research effort since the information must still
be analyzed, weighed, and reviewed by the Adviser's staff. Such information may
be useful to the Adviser in providing services to clients other than the Funds,
and not all such information is used by the Adviser in connection with the Fund.
28
<PAGE>
Conversely, such information provided to the Adviser by broker/dealers through
whom other clients of the Adviser effect securities transactions may be useful
to the Adviser in providing services to the Fund.
The Trustees review, from time to time, whether the recapture for the benefit of
the Fund of some portion of the brokerage commissions or similar fees paid by
the Funds on portfolio transactions is legally permissible and advisable.
The table below shows total brokerage commissions paid by each Fund for the last
three fiscal years (except the Opportunity Fund which commenced operations on
October 1, 1997 and High Yield Fund II which commenced operations on November
30, 1998) and for the most recent fiscal year, the portion thereof that was
allocated to firms based upon research information provided.
Allocated to Firms
Based on Research in
--------------------
<TABLE>
<CAPTION>
Fund Fiscal 1999 Fiscal 1998 Fiscal 1997
- ---- ----------- ----------- -----------
<S> <C> <C> <C>
Short-Term Government $ $4,000 $8,000
Strategic $ $5,155,000 $3,860,000
Government $ $769,000 $887,000
High Yield $ $64,235,000 $43,566,000
High Yield II $ N/A N/A
Income and Capital $ $619,000 $2,156,000
Mortgage $ $679,000 $570,000
Opportunity $ $752,000 N/A
</TABLE>
INVESTMENT MANAGER AND UNDERWRITER
Investment Manager. Scudder Kemper Investments, Inc., 345 Park Avenue, New York,
New York, is each Fund's investment manager. Scudder Kemper is approximately 70%
owned by Zurich Financial Services, a newly formed global insurance and
financial services company. The balance of the Advisor is owned by its officers
and employees. Pursuant to investment management agreements, Scudder Kemper acts
as each Fund's investment adviser, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services, and permits any of its officers or employees to
serve without compensation as trustees or officers of a Fund if elected to such
positions. Each investment management agreement provides that each Fund pays the
charges and expenses of its operations, including the fees and expenses of the
trustees (except those who are affiliated with Scudder Kemper), independent
auditors, counsel, custodian and transfer agent and the cost of share
certificates, reports and notices to shareholders, brokerage commissions or
transaction costs, costs of calculating net asset value and maintaining all
accounting records thereto, taxes and membership dues. Each Fund bears the
expenses of registration of its shares with the Securities and Exchange
Commission, and, effective January 1, 2000, the cost of qualifying and
maintaining the qualification of each Fund's shares for sale under the
securities laws of the various states ("Blue Sky Expense"). Prior to January 1,
2000, Kemper Distributors, Inc. ("KDI"), 222 South Riverside Plaza, Chicago,
Illinois, 60606, as principal underwriter, paid the Blue Sky expense. Scudder
Kemper has agreed to reimburse the Government Fund should all operating expenses
of the Fund, including the compensation of Scudder Kemper, but excluding taxes,
interest, distribution services fee, extraordinary expenses and brokerage
commissions or transaction costs, exceed 1% of average daily net assets of the
fund on an annual basis.
The investment management agreements provide that Scudder Kemper shall not be
liable for any error of judgment or of law, or for any loss suffered by a Fund
in connection with the matters to which the agreements relate, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Scudder Kemper in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under each agreement.
Each Fund's investment management agreement continues in effect from year to
year so long as its continuation is approved at least annually by (a) a majority
of the trustees who are not parties to such agreement or interested persons of
any such party except in their capacity as trustees of the Fund and (b) by the
shareholders or the Board of Trustees of the Fund. Each Fund's investment
management agreement may be terminated at any time upon 60 days' notice by
either party, or by a majority vote of the outstanding shares of the Fund, and
will terminate automatically upon assignment. If additional Funds
29
<PAGE>
become subject to an investment management agreement, the provisions concerning
continuation, amendment and termination shall be on a Fund by Fund basis.
Additional Funds may be subject to a different agreement.
Responsibility for overall management of each Fund rests with its Board of
Trustees and officers. Professional investment supervision is provided by
Scudder Kemper. The investment management agreements provide that Scudder Kemper
shall act as each Fund's investment adviser, manage its investments and provide
it with various services and facilities.
In certain cases, the investments for each Fund are managed by the same
individuals who manage one or more other mutual funds advised by the Advisor,
that have similar names, objectives and investment styles. You should be aware
that each Fund is likely to differ from these other mutual funds in size, cash
flow pattern and tax matters. Accordingly, the holdings and performance of each
Fund can be expected to vary from those of these other mutual funds.
On December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder") and Zurich Insurance Company ("Zurich") formed a new
global organization by combining Scudder with Zurich Kemper Investments, Inc., a
former subsidiary of Zurich and the former investment manager to each Fund, and
Scudder changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owned approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in Scudder Kemper) and the financial services businesses of B.A.T Industries
p.l.c. ("B.A.T") were combined to form a new global insurance and financial
services company known as Zurich Financial Services, Inc. By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, each Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement with Scudder Kemper, which is substantially identical to the current
investment management agreement, except for the date of execution and
termination. This agreement became effective upon the termination of the then
current investment management agreement and was approved by shareholders at a
special meeting in December 1998.
The current investment management fee rates are payable monthly, at the annual
rates shown below.
<TABLE>
<CAPTION>
Short-Term
Government, Income
and Capital and Strategic and High High Yield II and
Average Daily Net Assets Mortgage Yield Government Opportunity
- ------------------------ -------- ----- ---------- -----------
<S> <C> <C> <C> <C>
$0-$250 million 0.55% 0.58% 0.45% 0.65%
$250 million-$1 billion 0.52 0.55 0.43 0.62
$1 billion-$2.5 billion 0.50 0.53 0.41 0.60
$2.5 billion-$5 billion 0.48 0.51 0.40 0.58
$5 billion-$7.5 billion 0.45 0.48 0.38 0.55
$7.5 billion-$10 billion 0.43 0.46 0.36 0.53
$10 billion-$12.5 billion 0.41 0.44 0.34 0.51
Over $12.5 billion 0.40 0.42 0.32 0.49
</TABLE>
The investment management fees paid by each Fund for its last three fiscal years
are shown in the table below. (The Opportunity Fund commenced operations on
October 1, 1997. The High Yield Fund II commenced operations on November 30,
1998.)
<TABLE>
<CAPTION>
Fund 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Short-Term Government $415,000 493,000
Strategic $4,986,000 4,664,000
Government $14,451,000 15,888,000
30
<PAGE>
Fund 1999 1998 1997
- ---- ---- ---- ----
High Yield $27,887,000 23,419,000
High Yield II -- --
Income and Capital $3,472,000 3,162,000
Mortgage $11,862,000 13,793,000
Opportunity $102,000 --
</TABLE>
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts 02110, a subsidiary of Scudder
Kemper, is responsible for determining the daily net asset value per share of
the Funds and maintaining all accounting records related thereto. Currently,
SFAC receives no fee for its services to the Funds except from High Yield Fund
II. High Yield Fund II pays SFAC an annual fee equal to 0.0250% of the first
$150 million of average daily net assets, 0.0075% of the next $850 million of
average daily net assets and 0.0045% of such assets in excess of $1 billion,
plus holding and transaction charges for this service. For the period from
November 30, 1998 (commencement of operations) until September 30, 1999, High
Yield Fund II paid SFAC $____________ for its services to the Fund.
Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois, 60606, a wholly owned
subsidiary of Scudder Kemper, is the principal underwriter and distributor for
the shares of each Fund and acts as agent of each Fund in the continuous
offering of its shares. KDI bears all its expenses of providing services
pursuant to the distribution agreement, including the payment of any
commissions. Each Fund pays the cost for the prospectus and shareholder reports
to be set in type and printed for existing shareholders, and KDI, as principal
underwriter, pays for the printing and distribution of copies thereof used in
connection with the offering of shares to prospective investors. KDI also pays
for supplementary sales literature and advertising costs.
Each distribution agreement continues in effect from year to year so long as
such continuance is approved for each class at least annually by a vote of the
Board of Trustees of the Fund, including the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
agreement. Each agreement automatically terminates in the event of its
assignment and may be terminated for a class at any time without penalty by a
Fund or by KDI upon 60 days notice. Termination by a Fund with respect to a
class may be by vote of a majority of the Board of Trustees, or a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the agreement, or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
1940 Act. The agreement may not be amended for a class to increase the fee to be
paid by a Fund with respect to such class without approval by a majority of the
outstanding voting securities of such class of the Fund and all material
amendments must in any event be approved by the Board of Trustees in the manner
described above with respect to the continuation of the agreement. The
provisions concerning the continuation, amendment and termination of the
distribution agreement are on a Fund by Fund basis and for each Fund on a class
by class basis.
Class A Shares. KDI receives no compensation from the Trusts as principal
underwriter for Class A shares and pays all expenses of distribution of each
Fund's Class A shares under the distribution agreement not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase,
Repurchase and Redemption 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. The following information concerns the underwriting
commissions paid in connection with the distribution of each Fund's Class A
shares for the fiscal years noted.
<TABLE>
<CAPTION>
Commissions Commissions KDI Commissions Paid to KDI
Class A Shares Fiscal Year Retained by KDI Paid to All Firms Affiliated Firms
- -------------- ----------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Short-Term Government 1999
1998 $8,000 91,000 0
1997 $8,000 58,000 0
31
<PAGE>
Commissions Commissions KDI Commissions Paid to KDI
Class A Shares Fiscal Year Retained by KDI Paid to All Firms Affiliated Firms
- -------------- ----------- --------------- ----------------- ----------------
Strategic 1999
1998 $151,000 1,236,000 0
1997 $178,000 1,166,000 0
Government 1999
1998 $227,000 1,665,000 8,000
1997 $221,000 1,410,000 10,000
High Yield 1999
1998 $1,521,000 12,060,000 174,000
1997 $1,714,000 11,779,000 181,000
1999
High Yield II
Income and Capital 1999
1998 $70,000 578,000 0
1997 $53,000 1,283,000 0
Mortgage 1999
1998 $35,000 272,000 0
1997 $29,000 201,000 0
Opportunity 1999
1998 $187000 26,000 0
</TABLE>
Class B Shares and Class C Shares. Since the distribution agreement provides for
fees charged to Class B and Class C shares that are used by KDI to pay for
distribution services , the agreement (the "Plan"), is approved and renewed
separately for the Class B and 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 expenses of distributing its shares. As of
December 1997, each Fund's Rule 12b-1 Plan has been separated from its
distribution agreement.
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.
For its services under the distribution agreement, KDI receives a fee from each
Fund pursuant to the Rule 12b-1 Plan, payable monthly, at the annual rate of
0.75% 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 "Purchase, Repurchase and Redemption 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%.
For its services under the distribution agreement, KDI receives a fee from each
Fund pursuant to the Rule 12b-1 Plan, payable monthly, at the annual rate of
0.75% 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 0.75% 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 0.75% 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 "Purchase, Repurchase and Redemption of Shares -- Contingent
Deferred Sales Charges -- Class C Shares".
32
<PAGE>
Expenses of the Funds and of KDI in connection with the Rule 12b-1 plans for the
Class B and Class C shares are set forth below (The Opportunity Fund commenced
operations on October 1, 1997). A portion of the marketing, sales and operating
expenses shown below could be considered overhead expense.
33
<PAGE>
<TABLE>
<CAPTION>
Other Distribution Expenses paid by KDI
---------------------------------------
Contingent Total Distribution
Distribution Deferred Distribution Paid by
Fees Paid Sales Fees Paid KDI to KDI Advertising Marketing Misc.
Class B Fiscal by Fund Charges by KDI to Affiliated and Prospectus and Sales Operating Interest
Shares Year to KDI Paid to KDI Firms Firms Literature Printing Expenses Expenses Expenses
- ------ ---- ------ ----------- ----- ----- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-Term 1999
Government 1998 $53,000 31,000 78,000 0 10,243 742 20,074 18,228 87,819
1997 $51,000 31,000 112,000 0 10,000 1,000 25,000 492,000 36,000
Strategic 1999
1998 $2,208,000 502,000 2,939,000 0 359,087 42,027 741,917 131,028 814,441
1997 $2,148,000 419,000 2,911,000 0 368,000 26,000 1,018,000 121,000 640,000
Government 1999
1998 $677,000 186,000 1,288,000 0 105,653 14,079 226,194 45,628 489,426
1997 $528,000 234,000 665,000 0 116,000 8,000 303,000 43,000 405,000
High Yield 1999
1998 $10,804,000 2,203,000 18,022,000 0 2,242,157 191,602 4,538,360 682,073 3,001,886
1997 $8,925,000 1,473,000 16,578,000 0 2,127,000 153,000 5,700,000 583,000 1,500,000
High Yield II 1999
Income and 1999
Capital 1998 $705,000 199,000 1,001,000 0 94,710 11,383 200,587 42,317 441,045
1997 $600,000 211,000 588,000 0 97,000 7,000 254,000 39,000 378,000
Mortgage 1999
1998 $3,968,000 734,000 542,000 0 78,207 6,758 153,532 46,272 -955,066
1997 $6,685,000 1,362,000 640,000 0 116,000 8,000 300,000 57,000 -0-
Opportunity 1999
1998 $52,000 6,000 487,000 0 46,797 3,897 89,792 38,890 27,289
</TABLE>
<TABLE>
<CAPTION>
Other Distribution Expenses Paid by KDI
---------------------------------------
Total Distribution
Distribution Contingent Distribution Paid by
Fees Paid Deferred Fees paid KDI to KDI Advertising Marketing Misc.
Class C Fiscal by Fund to Sales KDI by KDI to Affiliated and Prospectus and Sales Operating Interest
Shares Year KDI Charges Firms Firms Literature Printing Expenses Expenses Expenses
- ------ ---- --- ------- ----- ----- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-Term 1999
Government 1998 $10,000 1,000 14,000 0 5,131 373 9,366 14,033 19,184
1997 $9,000 0 8,000 0 4,000 0 11,000 61,000 12,000
Strategic 1999
34
<PAGE>
Other Distribution Expenses Paid by KDI
---------------------------------------
Total Distribution
Distribution Contingent Distribution Paid by
Fees Paid Deferred Fees paid KDI to KDI Advertising Marketing Misc.
Class C Fiscal by Fund to Sales KDI by KDI to Affiliated and Prospectus and Sales Operating Interest
Shares Year KDI Charges Firms Firms Literature Printing Expenses Expenses Expenses
- ------ ---- --- ------- ----- ----- ---------- -------- -------- -------- --------
1998 $175,000 16,000 225,000 0 66,838 8,554 146,568 32,759 14,435
1997 $83,000 5,000 106,000 0 49,000 4,000 136,000 24,000 29,000
Government 1999
1998 $105,000 2,000 149,000 0 26,880 4,121 59,658 19,821 11,029
1997 $62,000 1,000 72,000 0 16,000 1,000 44,000 8,000 30,000
High Yield 1999
1998 $1,298,000 83,000 1,432,000 0 491,828 41,776 1,002,114 163,164 384,393
1997 $ 657,000 58,000 944,000 0 411,000 29,000 1,111,000 128,000 210,000
High Yield II 1999
Income and 1999
Capital 1998 $93,000 2,000 114,000 0 27,577 3,411 58,411 19,627 9,491
1997 $53,000 2,000 60,000 0 23,000 2,000 60,000 16,000 24,000
Mortgage 1999
1998 $24,000 - 26,000 0 5,808 443 11,282 12,512 11,791
1997 $16,000 1,000 21,000 0 7,000 0 19,000 5,000 8,000
Opportunity 1999
1998 $9,000 1,000 19,000 0 7,173 595 15,074 13,590 1,048
</TABLE>
Administrative Services. Administrative services are provided to each Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all its expenses of providing services pursuant to the administrative
agreement between KDI and the Fund, including the payment of service fees. For
the services under the administrative agreement, each Fund pays KDI an
administrative services fee, payable monthly, at the annual rate of up to 0.25%
of average daily net assets of each class of the Fund.
KDI has entered into related arrangements with various broker-dealer firms and
other service or administrative firms ("firms"), that provide services and
facilities for their customers or clients who are investors of the Fund. The
firms provide such office space and equipment, telephone facilities and
personnel as is necessary or beneficial for providing information and services
to their clients. Such services and assistance may include, but are not limited
to, establishing and maintaining accounts and records, processing purchase and
redemption transactions, answering routine inquiries regarding the Fund,
assistance to clients in changing dividend and investment options, account
designations and addresses and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. With respect to Class A shares, KDI pays each firm a service fee,
normally payable quarterly, at an annual rate of (a) up to 0.15% (0.25% for the
Mortgage Fund) of the net assets in Fund accounts that it maintains and services
attributable to Class A shares acquired prior to October 1, 1993, and (b) up to
0.25% of net assets of those accounts that it maintains and services
attributable to Class A shares acquired on or after October 1, 1993, in each
case commencing with the month after investment. With respect to Class B shares
and Class C shares, KDI currently advances to firms the first-year service fee
at a rate of up to 0.25% of the purchase price of such shares. For periods after
the first year, KDI currently intends to pay firms a service
35
<PAGE>
fee at an annual rate of up to 0.25% (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. Firms to which service fees may be paid include affiliates of
KDI.
The following information concerns the administrative services fee paid by each
Fund to KDI for fiscal years ended 1998, 1997 and 1996 (except the Opportunity
Fund which commenced operations on October 1, 1997 and the High Yield Fund II,
which commenced operations on November 30, 1998).
<TABLE>
<CAPTION>
Administrative Service Fees Paid by Fund
----------------------------------------
Total Service Fees Service Fees Paid by KDI
Fund Fiscal Year Class A Class B Class C Paid by KDI to Firms to KDI Affiliated Firms
- ---- ----------- ------- ------- ------- -------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Short-Term 1999
Government 1998 $141,000 17,000 3,000 165,000 0
1997 $169,000 17,000 3,000 188,000 0
Strategic 1999
1998 $1,244,000 719,000 58,000 2,074,000 7,000
1997 $1,131,000 705,000 28,000 1,930,000 9,000
Government 1999
1998 $6,413,000 222,000 35,000 6,718,000 0
1997 $6,821,000 173,000 19,000 7,053,000 35,000
High Yield 1999
1998 $8,011,000 3,506,000 428,000 12,147,000 54,000
1997 $6,462,000 2,917,000 217,000 10,067,000 49,000
High Yield II 1999
Income and 1999
Capital 1998 $1,147,000 229,000 30,000 1,434,000 0
1997 $992,000 199,000 18,000 1,207,000 6,000
Mortgage 1999
1998 $4,254,000 1,256,000 8,000 5,521,000 53,000
1997 $4,354,000 2,139,000 5,000 6,503,000 73,000
Opportunity 1999
1998 $14,000 17,000 3,000 57,000 0
</TABLE>
36
<PAGE>
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for a Fund. Currently, the
administrative services fee payable to KDI is payable at the annual rate of
0.25% based upon Fund assets in accounts for which a firm provides
administrative services and _____________ at the annual rate of 0.15% based upon
Fund costs in account for which there is no firm (other than KDI) listed on the
Fund's records. The effective administrative services fee rate to be charged
against all assets of a Fund while this procedure is in effect will depend upon
the proportion of Fund assets that is in accounts for which a firm of record
provides administrative services, as well as (except for the Mortgage Fund),
with respect to Class A shares, the date when shares representing such assets
were purchased. The Board of Trustees of a Fund, in its discretion, may approve
paying the fee to KDI at the 0.25% annual rate on all Fund assets in the future.
Certain trustees or officers of the Funds are also directors or officers of
Scudder Kemper or KDI as indicated under "Officers and Trustees."
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company ("State Street"), 225 Franklin Street, Boston, Massachusetts
02110, as custodian, has custody of all securities and cash of the Fund. State
Street attends to the collection of principal and income, and payment for and
collection of proceeds of securities bought and sold by each Fund.
Pursuant to an agency agreement between Kemper High Yield Fund II and Kemper
Service Company ("KSvC"), 811 Main Street, Kansas City, Missouri, an affiliate
of Scudder Kemper, KSvC serves as transfer agent, dividend paying agent, and
"Shareholder Service Agent" of the Fund. Currently, KSvC receives as transfer
agent as follows: annual account fees of $14.00 ($23.00 for retirement accounts)
plus set up charges, annual fees associated with the contingent deferred sales
charge (Class B only), an asset-based fee of 0.05% and out-of-pocket
reimbursement. For the Kemper High Yield Fund II's 1999 fiscal year, KSvC
received sharedholder service fees of $_____________.
For all Funds except Kemper High Yield Fund II, Investors Fiduciary Trust
Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105, serves
as transfer agent and dividend-paying agent. Pursuant to a services agreement
with IFTC, KSvC serves as "Shareholder Service Agent" of each Fund and, as such,
performs all of IFTC's duties as transfer agent and dividend paying agent. IFTC
receives as transfer agent, and pays to KSvC as follows: prior to January 1,
1999, annual account fees at a maximum rate of $6 per account plus account set
up, transaction, and maintenance charges, annual fees associated with the
contingent deferred sales charge (Class B shares only) and out-of-pocket expense
reimbursement and effective January 1, 1999 annual account fees of $14.00
($23.00 for retirement accounts) plus set up charges, annual fees associated
with the contingent deferred sales charge (Class B shares only), an asset-based
fee of 0.05% and out-of-pocket reimbursement. The following shows for each
Fund's 1999 fiscal year the shareholder service fees IFTC remitted to KSvC.
Fund Fees to KSvC
- ---- ------------
Short-Term Government $
Strategic $
Government $
High Yield $
Income and Capital $
Mortgage $
Opportunity Fund $
Independent Auditors and Reports to Shareholders. The Funds' independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Funds' annual financial statements, review certain
regulatory reports and the Funds' federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Funds. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
Legal Counsel. Vedder, Price, Kaufmann & Kammholz, 222 North LaSalle Street,
Chicago, Illinois 60601, serves as legal counsel to each Fund other than High
Yield Fund II. Dechert Price & Rhoads, Ten Post Office Square South, Boston,
Massachusetts 02109, serves as legal counsel for High Yield Fund II.
37
<PAGE>
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
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. Class I shares are
offered at net asset value without an initial sales charge and are not subject
to a contingent deferred sales charge or a Rule 12b-1 distribution fee. When
placing purchase orders, investors must specify whether the order is for Class
A, Class B, Class C or Class I 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. 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 4.5% None Initial sales charge waived or
of the public offering price (3.5% for reduced for certain purchases
the Short-Term Government Fund)
Class B Maximum contingent deferred sales 0.75% Shares convert to Class A shares six
charge of 4% of redemption proceeds; years after issuance
declines to zero after six years
Class C Contingent deferred sales charge of 1% 0.75% No conversion feature
of redemption proceeds for redemptions
made during first year after purchase
Class I None None
</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).
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.
38
<PAGE>
Short-Term Government Fund
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of as a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<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 0.00** 0.00** ***
</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 Strategic,
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.
<TABLE>
<CAPTION>
Strategic, Government, High Yield, High Yield II, Income and Capital, Mortgage and Opportunity Funds
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of as a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<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 0.00** 0.00** ***
</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 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
39
<PAGE>
subject to a contingent deferred sales charge. See "Purchase, Repurchase and
Redemption 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, 0.50% on the next $45 million and 0.25% 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. No compensation will be paid pursuant to
this paragraph with respect to plans within the KemStar(TM) program. 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-transferable 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 0.25%
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.
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 Series, Inc. ("KVS") on September 8, 1995, and have
continuously owned shares of KVS (or a Kemper Fund acquired by exchange of KVS
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
acting solely as agent for their clients, 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 or
agency commission program under which such clients pay a fee to the investment
adviser or other firm for portfolio management or agency brokerage services.
Such shares are sold for investment purposes and on the condition that they will
not be resold except through 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
40
<PAGE>
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 0.50% 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 redemption of
Class B shares. See "Purchase, Repurchase and Redemption 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. 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 "Purchase, Repurchase and Redemption of Shares -- Contingent Deferred Sales
Charge -- Class C Shares." KDI currently advances to firms the first year
distribution fee at a rate of 0.75% 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 0.75%
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."
Purchase of Class I Shares. Class I shares are offered at net asset value
without an initial sales charge and are not subject to a contingent deferred
sales charge or a Rule 12b-1 distribution fee. Also, there is no administration
services fee charged to Class I shares. As a result of the relatively lower
expenses for Class I shares, the level of income dividends per share (as a
percentage of net asset value) and, therefore, the overall investment value,
will typically be higher for Class I shares than for Class A, Class B, or Class
C shares.
41
<PAGE>
Class I shares are available for purchase exclusively by the following
categories of institutional investors: (1) tax-exempt retirement plans (Profit
Sharing, 401(k), Money Purchase Pension and Defined Benefit Plans) of Scudder
Kemper Investments, Inc. ("Scudder Kemper") and its affiliates and rollover
accounts from those plans; (2) the following investment advisory clients of
Scudder Kemper and its investment advisory affiliates that invest at least $1
million in a Fund: unaffiliated benefit plans, such as qualified retirement
plans (other than individual retirement accounts and self-directed retirement
plans); unaffiliated banks and insurance companies purchasing for their own
accounts; and endowment funds of unaffiliated non-profit organizations; (3)
investment-only accounts for large qualified plans, with at least $50 million in
total plan assets or at least 1000 participants; (4) trust and fiduciary
accounts of trust companies and bank trust departments providing fee based
advisory services that invest at least $1 million in a Fund on behalf of each
trust; (5) policy holders under Zurich-American Insurance Group's collateral
investment program investing at least $200,000 in a Fund; and (6) investment
companies managed by Scudder Kemper that invest primarily in other investment
companies. Class I shares currently are available for purchase only from Kemper
Distributors, Inc. ("KDI"), principal underwriter for the Funds, and, in the
case of category (4) above, selected dealers authorized by KDI. Share
certificates are not available for Class I shares.
General. As described in the Funds' prospectus, shares of a Fund are sold at
their public offering price, which is the net asset value per share of the Fund
next determined after an order is received in proper form plus, with respect to
Class A shares of each Fund, an initial sales charge. The minimum initial
investment is $1,000 and the minimum subsequent investment is $100 but such
minimum amounts may be changed at any time. An order for the purchase of shares
that is accompanied by a check drawn on a foreign bank (other than a check drawn
on a Canadian bank in U.S. Dollars) will not be considered in proper form and
will not be processed unless and until the Fund determines that it has received
payment of the proceeds of the check. The time required for such a determination
will vary and cannot be determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by the Fund at the applicable net asset value
per share of such Fund as described in the Funds' prospectus.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemption of Class B or Class C shares by certain classes of persons or through
certain types of transactions are provided because of anticipated economies in
sales and sales related efforts.
A Fund may suspend the right of redemption or delay payment more than seven days
(a) during any period when the New York Stock Exchange ("Exchange") is closed
other than customary weekend and holiday closings or during any period in which
trading on the Exchange is restricted, (b) during any period when an emergency
exists as a result of which (i) disposal of a Fund's investments is not
reasonably practicable, or (ii) it is not reasonably practicable for the Fund to
determine the value of its net assets, or (c) for such other periods as the
Securities and Exchange Commission may by order permit for the protection of a
Fund's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to each Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date.
The Fund has authorized certain members of the National Association of
Securities Dealers, Inc. ("NASD"), other than Kemper Distributors, Inc. ("KDI")
to accept purchase and redemption orders for the Fund's shares. Those brokers
may also designate other parties to accept purchase and redemption orders on the
Fund's behalf. Orders for purchase or redemption will be deemed to have been
received by the Fund when such brokers or their authorized designees accept the
orders. Subject to the terms of the contract between the Fund and the broker,
ordinarily orders will be priced as the Fund's net asset value next computed
after acceptance by such brokers or their authorized designees. Further, if
purchases or redemptions of the Fund's shares are arranged and settlement is
made at an investor's election through any other authorized NASD member, that
member may, at its discretion, charge a fee for that service. The Board of
Trustees or Directors as the case may be ("Board") of the Fund and KDI each has
the right to limit the amount of purchases by, and to refuse to sell to, any
person. The Board and KDI may suspend or terminate the offering of shares of the
Fund at any time for any reason.
42
<PAGE>
REPURCHASE AND REDEMPTION 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, Repurchase and Redemption 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, 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 guardian and custodial account
holders, provided the trustee, executor guardian or custodian is named in the
account registration. Other institutional account holders 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
43
<PAGE>
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 Scudder Kemper 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 0.50% 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
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 or its affiliates;
(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.
44
<PAGE>
Contingent Deferred
Year of Redemption After Purchase Sales Charge
--------------------------------- ------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
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
--------------------------------
Shares Purchases on or
Shares Purchases after February 1, 1991 Shares Purchased
Year of Redemption on or after and Before Before
After 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 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
45
<PAGE>
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 (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, and (f) redemption of shares purchased
through a dealer-sponsored asset allocation program maintained on an omnibus
record-keeping system provided the dealer of record had waived the advance of
the first year administrative services and distribution fees applicable to such
shares and has agreed 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, 1998 will be eligible for the second year's charge if redeemed on or
after December 1, 1999. 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, Repurchase and Redemption 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 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 Aggressive Growth Fund, Kemper Asian Growth Fund, Kemper
Blue Chip Fund, Kemper California Tax-Free Income Fund, Kemper Cash Reserves
Fund, Kemper Contrarian Fund, Kemper Emerging Markets Growth Fund, Kemper
Emerging Markets Income Fund, Kemper Europe Fund, Kemper Florida Tax-Free Income
Fund, Kemper Global Blue Chip Fund, Kemper Global Income Fund, Kemper Growth
Fund, Kemper High Yield Fund, Kemper High Yield Opportunity, Kemper Horizon 10+
Portfolio, Kemper Horizon 20+ Portfolio, Kemper Horizon 5 Portfolio, Kemper
Income And Capital Preservation Fund, Kemper Intermediate Municipal Bond, Kemper
International Fund, Kemper International
46
<PAGE>
Growth and Income Fund, Kemper Large Company Growth Fund (currently available
only to employees of Scudder Kemper Investments, Inc.; not available in all
states), Kemper Latin America Fund, Kemper Municipal Bond Fund, Kemper New York
Tax-Free Income Fund, Kemper Ohio Tax-Free Income Fund, Kemper Research Fund
(currently available only to employees of Scudder Kemper Investments, Inc.; not
available in all states), Kemper Retirement Fund -- Series I, Kemper Retirement
Fund -- Series II, Kemper Retirement Fund -- Series III, Kemper Retirement Fund
- -- Series IV, Kemper Retirement Fund -- Series V, Kemper Retirement Fund --
Series VI, Kemper Retirement Fund -- Series VII, Kemper Short-Term U.S.
Government Fund, Kemper Small Cap Value Fund, Kemper Small Cap Value+Growth Fund
(currently available only to employees of Scudder Kemper Investments, Inc.; not
available in all states), Kemper Small Capitalization Equity Fund, Kemper Small
Cap Relative Value Fund, Kemper Strategic Income Fund, Kemper Technology Fund,
Kemper Total Return Fund, Kemper U.S. Government Securities Fund, Kemper U.S.
Growth and Income Fund, Kemper U.S. Mortgage Fund, Kemper Value+Growth Fund,
Kemper Worldwide 2004 Fund, Kemper-Dreman High Return Equity Fund, Kemper-Dreman
Financial Services 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 or its affiliates
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.
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
47
<PAGE>
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"). In addition, shares
of a Kemper fund with a value of $1,000,000 or less (except Kemper Cash Reserves
Fund) acquired by exchange from another Kemper fund, or from a money market
fund, may not be exchanged thereafter until they have been owned for 15 days,
if, in the Adviser's judgment, the exchange activity may have an adverse effect
on the fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to the Kemper fund and therefore may be
subject to the 15-Day Hold Policy. For purposes of determining whether the 15
Day Hold Policy applies to a particular exchange, the value of the shares to be
exchanged shall be computed by aggregating the value of shares being exchanged
for all accounts under common control, 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
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 "Purchase, Repurchase and
Redemption 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
48
<PAGE>
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 "Purchase, Repurchase and Redemption 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.
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.
49
<PAGE>
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.
ADDITIONAL TRANSACTION INFORMATION
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 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
Kemper Service Company ("KSvC"), (iii) the registered representative placing the
trade is a member of ProStar, a group of persons designated by KSvC in
acknowledgment of their dedication to the employee benefit plan area and (iv)
the purchase is not otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Funds. 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."
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
50
<PAGE>
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
Statement of Additional Information 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 Statement of Additional Information 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 Statement
of Additional Information.
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.
A Fund may at any time vary its foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and
long-term capital gains as the Board of Trustees of the Fund determines
appropriate under the then current circumstances. In particular, and without
limiting the foregoing, a Fund may make additional distributions of net
investment income or capital gain net income in order to satisfy the minimum
distribution requirements contained in the Internal Revenue Code (the "Code").
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. 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 Code and, if so qualified, will not be liable
for federal income taxes to the extent its earnings are distributed. A Fund's
options, futures and foreign currency transactions are subject to special tax
provisions that may accelerate or defer recognition of certain gains or losses,
change the character of certain gains or losses, or alter the holding periods of
certain of the Fund's securities.
The mark-to-market rules of the Code may require a Fund to recognize unrealized
gains and losses on certain options and futures held by the Fund at the end of
the fiscal year. Under these provisions, 60% of any capital gain or loss
recognized will generally be treated as long-term and 40% as short-term.
However, although certain forward contracts on foreign currency are
marked-to-market, the gain or loss is generally ordinary under Section 988 of
the Code. In addition, the straddle rules of the Code would require deferral of
certain losses realized on positions of a straddle to the extent that the Fund
had unrealized gains in offsetting positions at year end.
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<PAGE>
Gains and losses attributable to fluctuations in the value of foreign currencies
will be characterized generally as ordinary gain or loss under Section 988 of
the Code. For example, if a Fund sold a foreign bond and part of the gain or
loss on the sale was attributable to an increase or decrease in the value of a
foreign currency, then the currency gain or loss may be treated as ordinary
income or loss. If such transactions result in greater net ordinary income, the
dividends paid by the Fund will be increased; if the result of such transactions
is lower net ordinary income, a portion of dividends paid could be classified as
a return of capital.
[TO BE UPDATED At August 31, 1998 the Short-Term Government Fund had an
accumulated net realized capital loss for federal income tax purposes of
approximately $9,652,000, which is available to offset future taxable capital
gains. If not applied, the carryover expires during the period 1999 through
2006. In addition, from November 1, 1997 through August 31, 1998, the Fund
incurred approximately $125,000 of net realized losses. As permitted by tax
regulations, the Fund intends to elect to defer these losses and treat them as
arising in the fiscal year ending August 31, 1999. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At October 31, 1998, the Strategic Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $54,943,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 2002 through 2006. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At October 31, 1998, the Government Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $606,764,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 2002 through 2004. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At October 31, 1998, the Income and Capital Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $7,984,000, which
is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 2002 through 2003. The Fund does not intend
to distribute realized capital gains until the capital loss carryover is
exhausted.
At September 30, 1998, the High Yield Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $45,015,000, which
is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 1999 through 2004. The Fund does not intend
to distribute realized capital gains until the capital loss carryover is
exhausted.
At September 30, 1998, the Mortgage Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $612,745,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 2000 through 2005. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is
exhausted.]
A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. The required
distribution is the sum of 98% of a Fund's net investment income for the
calendar year plus 98% of its capital gain net income for the one-year period
ending October 31, plus any undistributed net investment income from the prior
calendar year, plus any undistributed capital gain net income from the one-year
period ended October 31 in the prior calendar year, minus any overdistribution
in the prior calendar year. For purposes of calculating the required
distribution, foreign currency gains or losses occurring after October 31 are
taken into account in the following calendar year. Each Fund intends to declare
or distribute dividends during the appropriate periods of an amount sufficient
to prevent imposition of the 4% excise tax.
A shareholder who redeems shares of a Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the adjusted cost basis of the shares. Any loss
recognized on the redemption of Fund shares held six months or less will be
treated as long-term capital loss to the extent that the shareholder has
received any long-term capital gain dividends on such shares. A shareholder who
has redeemed shares of a Fund (other than shares of the Kemper Cash Reserves
Fund not acquired by exchange from another Kemper Mutual Fund) or other Kemper
Mutual Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" may reinvest the amount redeemed at net asset value at the time of
the reinvestment in shares of any Fund or in shares of a Kemper Mutual Fund
within six months of the redemption as described in the prospectus"." If
redeemed shares were purchased after October 3, 1989 and were held less than 91
days, then the lesser of (a) the sales charge waived on the reinvested shares,
or (b) the sales charge incurred on the redeemed shares, is included in the
basis of the
52
<PAGE>
reinvested shares and is not included in the basis of the redeemed shares. If a
shareholder realized a loss on the redemption or exchange of a Fund's shares and
reinvests in shares of the same Fund within 30 days before or after the
redemption or exchange, the transactions may be subject to the wash sale rules
resulting in a postponement of the recognition of such loss for federal income
tax purposes. An exchange of a Fund's shares for shares of another fund is
treated as a redemption and reinvestment for federal income tax purposes upon
which gain or loss may be recognized.
A Fund's investment income derived from foreign securities and certain American
Depositary Receipts may be subject to foreign income taxes withheld at the
source. Because the amount of a Fund's investments in various countries will
change from time to time, it is not possible to determine the effective rate of
such taxes in advance.
Shareholders who are non-resident aliens are subject to U.S. withholding tax on
ordinary income dividends (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by any applicable tax treaty. 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 12 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 Strategic, 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 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.
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<PAGE>
NET ASSET VALUE
The net asset value per share of a Fund is the value of one share and is
determined separately for each class by dividing the value of a Fund's net
assets attributable to the class by the number of shares of that class
outstanding. The per share net asset value of each of Class B and Class C shares
of the Fund will generally be lower than that of the Class A shares of a Fund
because of the higher expenses borne by the Class B and Class C shares. The net
asset value of shares of a Fund is computed as of the close of regular trading
(the "value time") on the New York Stock Exchange (the "Exchange") on each day
the Exchange is open for trading. The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.
With respect to the Funds with securities listed primarily on foreign exchanges,
such securities may trade on days when the Fund's net asset value is not
computed; and therefore, the net asset value of a Fund may be significantly
affected on days when the investor has no access to the Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the investment manager of the particular fund may calculate the price
of that debt security, subject to limitations established by the Board.
An exchange-traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate on the
valuation date.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board of Trustees, the
value of a portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the portfolio asset, the value of
the portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner which, in the discretion of the Valuation Committee, most fairly
reflects market value of the property on the valuation date.
Following the valuations of securities or other portfolios assets in terms of
the currency in which the market quotation used is expressed ("Local Currency"),
the value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
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<PAGE>
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 each class. 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 Scudder Kemper may also advertise performance information
before and after the effect of the fee waiver or expense absorption.
Performance results for Funds receiving a waiver of fees or absorption of
expenses may be shown with and without the effect of this waiver and expense
absorption. Performance results not giving effect to waivers and expense
absorptions will be lower.
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 a Fund's shares at the end of the period. Average annual total return
and total return measure both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of, the
underlying investments in the Fund's portfolio.
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 yield is computed in accordance with a standardized method prescribed
by rules of the Securities and Exchange Commission. Each Fund's yield shown
below is based on the one-month period ended as noted.
<TABLE>
<CAPTION>
Fund (Period Ended) Class A Shares Class B Shares Class C Shares
- ------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Short-Term Government (8/31/99)
Strategic (10/31/99)
Government (10/31/99)
High Yield (9/30/99)
High Yield II (9/30/99)
Income and Capital (10/31/99)
Mortgage (9/30/99)
Opportunity Fund (9/30/99)
</TABLE>
Each Fund's yield is computed by dividing the net investment income per share
earned during the specified one month or 30-day period by the maximum offering
price per share (which is net asset value for Class B and Class C shares) on the
last day of the period, according to the following formula:
YIELD = 2 [ (a-b +1 )^6 - 1]
---
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on
the last day of the period (which is net
asset value for Class B and Class C
shares).
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<PAGE>
In computing the foregoing yield, each Fund follows certain standardized
accounting practices specified by Securities and Exchange Commission rules.
These practices are not necessarily consistent with those that each Fund uses to
prepare its annual and interim financial statements in conformity with generally
accepted accounting principles. Each Fund's average annual total return
quotation is computed in accordance with a standardized method prescribed by
rules of the Securities and Exchange Commission. The average annual total return
for a Fund for a specific period is found by first taking a hypothetical $1,000
investment ("initial investment") in the Fund's shares on the first day of the
period, adjusting to deduct the maximum sales charge (in the case of Class A
shares), and computing the "redeemable value" of that investment at the end of
the period. The redeemable value in the case of Class B shares or Class C shares
includes the effect of the applicable contingent deferred sales charge that may
be imposed at the end of the period. The redeemable value is then divided by the
initial investment, and this quotient is taken to the Nth root (N representing
the number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Average annual total return may
also be calculated without deducting the maximum sales charge.
Calculation of a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the Fund's "Financial Highlights" table
in the Fund's financial statements and prospectus. Total return performance for
a specific period is calculated by first taking a hypothetical investment
("initial investment") in a Fund's shares on the first day of the period, either
adjusting or not adjusting to deduct the maximum sales charge (in the case of
Class A shares), and computing the "ending value" of that investment at the end
of the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The ending value
in the case of Class B and Class C shares may or may not include the effect of
the applicable contingent deferred sales charge that may be imposed at the end
of the period. The calculation assumes that all income and capital gains
dividends paid by the Fund have been reinvested at net asset value on the
reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge would be
reduced if such charge were included.
A Fund's performance figures are based upon historical results and are not
representative of future performance. Each Fund's Class A shares 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). Class B, Class C
and Class I shares are sold at net asset value. Redemptions of Class B shares
may be subject to a contingent deferred sales charge that is 4% in the first
year following the purchase, declines by a specified percentage each year
thereafter and becomes zero after six years. Redemption of Class C shares may be
subject to a 1% contingent deferred sales charge in the first year following
purchase. 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. Returns and net asset value will fluctuate. Factors
affecting each Fund's performance include general market conditions, operating
expenses and investment management. Any additional fees charged by a dealer or
other financial services firm would reduce the returns described in this
section. Shares of each Fund are redeemable at the then current net asset value,
which may be more or less than original cost.
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
56
<PAGE>
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.
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 about each Fund's performance also appears in its Annual Report to
Shareholders, which is available without charge from the applicable 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 include the effect of amortization of bond premiums.
Comparative information with respect to certain indices may be included. Please
note the differences and similarities between the investments which a Fund may
purchase and the investments measured by the applicable indices. The Consumer
Price Index is generally considered to be a measure of inflation. The Lehman
Brothers Adjustable Rate Index generally represents the performance of
adjustable rate mortgages during various market conditions. The Lehman Brothers
Aggregate Bond Index generally represents the performance of intermediate and
long-term government bonds and investment grade corporate debt securities and
mortgage-backed securities during various market conditions. The Lehman Brothers
Government/Corporate Bond Index generally represents the performance of
intermediate and long-term government and investment grade corporate debt
securities during various market conditions. The Merrill Lynch Market Weighted
Index generally represents the performance of short- and intermediate-term
Treasury and GNMA securities during various market conditions. The Salomon
Brothers High Grade Corporate Bond Index generally represents the performance of
high grade long-term corporate bonds during various market conditions. The
Salomon Brothers Long-Term High Yield Index generally represents the performance
of high yield debt securities during various market conditions. The Salomon
Brothers 30 Year GNMA Index generally represents the performance of GNMA 30-year
pass-through mortgages. The foregoing bond indices are unmanaged. The market
prices and yields of corporate and government bonds will fluctuate. The net
asset values and returns of each class of shares of the Funds will also
fluctuate.
SHORT-TERM GOVERNMENT FUND -- AUGUST 31, 1999
AVERAGE Fund Fund Fund
ANNUAL TOTAL RETURN Class A Class B Class C
TABLE Shares Shares Shares
- ----- ------ ------ ------
Life of Fund(+++) -- --
Life of Fund(+++ +++) -- 3.82% 4.28%
Five Years N/A N/A
One Year
57
<PAGE>
(+++) Since September 1, 1987 for Class A Shares.
(+++ +++) Since May 31, 1994 for Class B and Class C Shares.
STRATEGIC FUND -- OCTOBER 31, 1999
AVERAGE Fund Fund Fund
ANNUAL TOTAL RETURN Class A Class B Class C
TABLE Shares Shares Shares
- ----- ------ ------ ------
Life of Fund(+++) -- --
Life of Fund(+++ +++) --
Ten Years N/A N/A
Five Years N/A N/A
One Year
(+++) Since June 23, 1977 for Class A Shares.
(+++ +++) Since May 31, 1994 for Class B and Class C Shares.
GOVERNMENT FUND -- OCTOBER 31, 1999
AVERAGE Fund Fund Fund
ANNUAL TOTAL RETURN Class A Class B Class C
TABLE Shares Shares Shares
- ----- ------ ------ ------
Life of Fund(+++) -- --
Life of Fund(+++ +++) --
Ten Years N/A N/A
Five Years N/A N/A
One Year
(+++) Since October 1, 1979 for Class A Shares (when ZKI assumed
investment advisory responsibilities for the Fund; prior to that
date, the Fund was managed by another investment adviser that was
not affiliated with ZKI)
(+++ +++) Since May 31, 1994 for Class B and Class C Shares.
HIGH YIELD FUND -- SEPTEMBER 30, 1999
AVERAGE Fund Fund Fund
ANNUAL TOTAL RETURN Class A Class B Class C
TABLE Shares Shares Shares
- ----- ------ ------ ------
Life of Fund(+++) -- --
Life of Fund (+++ +++) --
Ten Years N/A N/A
Five Years N/A N/A
One Year
(+++) Since January 26, 1978 for Class A Shares.
(+++ +++) Since May 31, 1994 for Class B and Class C Shares.
58
<PAGE>
HIGH YIELD FUND II -- SEPTEMBER 30, 1999
AVERAGE Fund Fund Fund
ANNUAL TOTAL RETURN Class A Class B Class C
TABLE Shares Shares Shares
- ----- ------ ------ ------
Life of Fund(+++) -- --
(+++) Since November 30, 1998
INCOME AND CAPITAL FUND -- OCTOBER 31, 1999
AVERAGE Fund Fund Fund
ANNUAL TOTAL RETURN Class A Class B Class C
TABLE Shares Shares Shares
- ----- ------ ------ ------
Life of Fund(+++) -- --
Life of Fund(+++ +++) --
Ten Years N/A N/A
Five Years N/A N/A
One Year
(+++) Since April 15, 1974 for Class A Shares.
(+++ +++) Since May 31, 1994 for Class B and Class C Shares.
MORTGAGE FUND -- SEPTEMBER 30, 1999
AVERAGE Fund Fund Fund
ANNUAL TOTAL RETURN Class A Class B Class C
TABLE Shares Shares Shares
- ----- ------ ------ ------
Life of Fund(+++) -- --
Life of Fund(+++ +++) -- --
Life of Fund(+++ +++ +++) -- --
Ten Years N/A N/A
Five Years N/A
One Year
(+++) Since January 10, 1992 for Class A Shares.
(+++ +++) Since October 26, 1984 for Class B Shares.
(+++ +++ +++) Since May 31, 1994 for Class C Shares.
OPPORTUNITY FUND -- SEPTEMBER 30, 1999
AVERAGE Fund Fund Fund
ANNUAL TOTAL RETURN Class A Class B Class C
TABLE Shares Shares Shares
- ----- ------ ------ ------
59
<PAGE>
Life of Fund(+++) -3.96% -3.93% -1.11%
Five Years
One Year
(+++) Since 10/01/97.
There may be quarterly periods following the periods reflected in the
performance bar chart in the fund's prospectus which may be higher or lower than
those included in the bar chart.
Investors may want to compare the performance of a Fund to that of certificates
of deposit issued by banks and other depository institutions. Certificates of
deposit represent an alternative income producing product. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution. The
shares of a Fund are not insured and net asset value as well as yield will
fluctuate. Shares of a Fund are redeemable at net asset value which may be more
or less than original cost. The bonds in which the Funds invest are generally of
longer term than most certificates of deposit and may reflect longer term market
interest rate fluctuations.
Investors also may want to compare the performance of a Fund to that of U.S.
Treasury bills, notes or bonds because such instruments represent alternative
income producing products. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. As noted in the prospectus, the government guarantee of the bonds in
the Short-Term Government, Government and Mortgage Funds does not guarantee the
market value of their respective shares. The net asset value of a Fund will
fluctuate. Shares of a Fund are redeemable at net asset value which may be more
or less than original cost. Each Fund's yield will also fluctuate.
From time to time, the Short-Term Government Fund may compare its yield or price
volatility to various securities, such as U.S. Government Securities, or to
certain indices including, but not limited to, the J.P. Morgan one-, three-, and
five-year constant maturity Treasury yield indices, which are based on estimated
Treasury security yields adjusted to constant maturity and the Federal Home Loan
Bank Board 11th District Cost of Funds Index (COFI), which represents the
weighted average cost of funds for savings institutions in Arizona, California
and Nevada and is based on the one month annualized yield of savings deposits,
Federal Home Loan Advances and other borrowings, such as repurchase agreements.
OFFICERS AND TRUSTEES
The officers and trustees of the Funds, their birthdates, their principal
occupations and their affiliations, if any, with the Adviser and KDI, are listed
below. All persons named as officers and trustees also serve in similar
capacities for other funds advised by the Adviser.
JOHN W. BALLANTINE (2/16/46), Trustee, 1500 North Lake Shore Drive, Chicago,
Illinois; First Chicago NBD Corporation/The First National Bank of Chicago:
1996-1998 Executive Vice President and Chief Risk Management Officer; 1995-1996
Executive Vice President and Head of International Banking; 1992-1995 Executive
Vice President, Chief Credit and Market Risk Officer.
LEWIS A. BURNHAM (1/8/33), Trustee, 16410 Avila Boulevard, Tampa, Florida;
Retired; formerly, Partner, Business Resources Group; formerly, Executive Vice
President, Anchor Glass Container Corporation.
DONALD L. DUNAWAY (3/8/37), Trustee, 7011 Green Tree Drive, Naples, Florida;
Retired; formerly, Executive Vice President, A.O. Smith Corporation (diversified
manufacturer).
ROBERT B. HOFFMAN (12/11/36), Trustee, 1530 North State Parkway, Chicago,
Illinois; Chairman, Harnischfeger Industries, Inc. (machinery for the mining and
paper industries); formerly, Vice Chairman and Chief Financial Officer, Monsanto
Company (agricultural, pharmaceutical and nutritional/food products); formerly,
Vice President, Head of International Operations, FMC Corporation (manufacturer
of machinery and chemicals).
60
<PAGE>
DONALD R. JONES (1/17/30), Trustee, 182 Old Wick Lane, Inverness, Illinois;
Retired; Director, Motorola, Inc. (manufacturer of electronic equipment and
components); formerly, Executive Vice President and Chief Financial Officer,
Motorola, Inc.
THOMAS W. LITTAUER (4/26/55), Trustee and Vice President*, Two International
Place, Boston, Massachusetts; Managing Director, Adviser; formerly, Head of
Broker Dealer Division of an unaffiliated investment management firm during
1997; prior thereto, President of Client Management Services of an unaffiliated
investment management firm from 1991 to 1996.
SHIRLEY D. PETERSON (9/3/41), Trustee, 401 Rosemont Avenue, Frederick, Maryland;
President, Hood College; formerly, Partner, Steptoe & Johnson (attorneys); prior
thereto, Commissioner, Internal Revenue Service; prior thereto, Assistant
Attorney General (Tax), U.S.
Department of Justice; Director, Bethlehem Steel Corp.
CORNELIA M. SMALL (7/28/44), Trustee*, 345 Park Avenue, New York, NY; Managing
Director, Scudder Kemper.
WILLIAM P. SOMMERS (7/22/33), Trustee, 24717 Harbour View Drive, Ponte Vedra
Beach, Florida; Consultant and Director, SRI Consulting; prior thereto,
President and Chief Executive Officer, SRI International (research and
development); prior thereto, Executive Vice President, Iameter (medical
information and educational service provider); prior thereto, Senior Vice
President and Director, Booz, Allen & Hamilton Inc. (management consulting
firm); Director, PSI Inc., Evergreen Solar, Inc. and Litton Industries.
MARK S. CASADY (9/21/60), President*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser; formerly, Institutional Sales Manager
of an unaffiliated mutual fund distributor.
PHILIP J. COLLORA (11/15/45), Vice President and Secretary*, 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President and Assistant Secretary,
Adviser.
ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser.
ROBERT C. PECK, JR. (10/1/46), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser; formerly, Executive Vice
President and Chief Investment Officer with an unaffiliated investment
management firm from 1988 to June 1997.
KATHRYN L. QUIRK (12/3/52), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Adviser.
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
JOHN R. HEBBLE (6/27/58), Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
BRENDA LYONS (2/21/63), Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Senior Vice President, Adviser; formerly, Associate,
Dechert Price & Rhoads (law firm) 1989 to 1997.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Adviser; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior thereto,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
Additional Officers for Short-Term Government Fund:
RICHARD L. VANDENBERG (11/16/49), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser; formerly, Executive Vice
President and Senior Portfolio Manager with an unaffiliated investment
management firm.
Additional Officers for Strategic Fund:
J. PATRICK BEIMFORD, JR. (5/25/50), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser
Additional Officers for High Yield Fund and High Yield Opportunity Fund:
MICHAEL A. McNAMARA, see above.*
61
<PAGE>
HARRY E. RESIS, JR., see above*
Additional Officers for High Yield Fund II:
KATHRYN L. QUIRK, Trustee, see above*
MICHAEL A. MCNAMARA, see above*
HARRY E. RESIS, JR., see above*
Additional Officers for Income and Capital Preservation Fund:
ROBERT S. CESSINE (1/5/50), Vice President*, 222 South Riverside Plaza, Chicago,
Illinois; Managing Director, Adviser; formerly, Vice President, Wellington
Management Company.
Additional Officers for Mortgage Fund (Kemper Portfolios):
FRANK J. RACHWALSKI, JR. (3/26/45), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser
RICHARD L. VANDENBERG, see above,*
* Interested persons as defined in the 1940 Act.
The trustees and officers who are "interested persons" as designated above
receive no compensation from a Fund. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during
each Fund's 1999 fiscal year except that the information in the last column is
for calendar year 1998.
<TABLE>
<CAPTION>
Aggregate Compensation From
---------------------------
Total
Short-Term High Income & Compensation
Government Strategic Government Yield Capital Income Kemper Kemper Funds Paid
Name of Trustee Fund Fund Fund Series Fund Trust Portfolios+++ to Trustees**
- --------------- ---- ---- ---- ------ ---- ----- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John W.
Ballantine
Lewis A.
Burnham
Donald L.
Dunaway*
Robert B.
Hoffman
Donald R. Jones
Shirley D.
Peterson
William P.
Sommers
</TABLE>
62
<PAGE>
+ Includes Kemper Cash Reserves Fund, Mortgage Fund and
Short-Intermediate Government Fund. The Kemper Short-Intermediate
Government Fund was reorganized into Kemper Adjustable Rate U.S.
Government Fund on February 5, 1999. The Adjustable Rate Fund was then
renamed Kemper Short-Term U.S. Government Fund.
* Includes deferred fees. Pursuant to deferred compensation agreements
with Kemper Funds, deferred amounts accrue interest monthly at a rate
equal to the yield of Zurich Money Funds -- Zurich Money Market Fund.
Total deferred amounts , (including interest thereon) payable from the
Funds are $________, $________, $________, $________, $_______ and
$_______ for Mr. Dunaway for the Short-Term Government Fund, Strategic
Fund, Government Fund, High Yield Fund, Income and Capital Fund and
Kemper Portfolios+, respectively.
** Includes compensation for service on the boards of 25 Kemper funds with
41 fund portfolios. Each trustee currently serves as a trustee of 26
Kemper Funds with 48 fund portfolios.
As of November 30, 1999, the officers and trustees of the Funds, as a group,
owned less than 1% of the then outstanding shares of each Fund. No person owned
of record 5% or more of the outstanding shares of any class of any Fund, except
that the following owned of record shares of the following Funds:
<TABLE>
<CAPTION>
Kemper Short-Term U.S. Government Fund (formerly Kemper Adjustable Rate U.S. Government Fund)
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
Kemper U.S. Government Securities Fund
Name and Address Class Percentage
- ---------------- ----- ----------
Kemper High Yield Fund
Name and Address Class Percentage
- ---------------- ----- ----------
Kemper High Yield Fund II
Name and Address Class Percentage
- ---------------- ----- ----------
63
<PAGE>
Kemper Strategic Income Fund (formerly Kemper Diversified Income Fund)
Name and Address Class Percentage
- ---------------- ----- ----------
Kemper High Yield Opportunity Fund
Name and Address Class Percentage
- ---------------- ----- ----------
Kemper Income & Capital Preservation Fund
Name and Address Class Percentage
- ---------------- ----- ----------
Kemper U.S. Mortgage Fund
Name and Address Class Percentage
- ---------------- ----- ----------
</TABLE>
CAPITAL STRUCTURE
The Short-Term Government, Strategic, 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 Short-Term
Government Fund was organized as a business trust under the laws of
Massachusetts on May 28, 1987. Prior to February 5, 1999, the Fund was known as
"Kemper Adjustable Rate U.S. Government Fund." Effective February 5, 1999, that
Fund pursuant to a reorganization succeeded to the assets and liabilities of
Kemper Short-Intermediate Government Fund, a series, or "Portfolio", of Kemper
Portfolios. Prior to January 1, 1992, the Fund was known as "Kemper Enhanced
Government Income Fund." The Strategic Fund was organized as a business trust
under the laws of Massachusetts on October 24, 1985. Prior to February 5, 1999,
the Fund was known as "Kemper Diversified Income Fund." 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 Fund is (and the Short-Intermediate Government Fund was) a
separate series, or "Portfolio", 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 Fund
64
<PAGE>
was known as the "Government Portfolio." High Yield Fund II is a series of
Kemper Income Trust, a business trust organized under the laws of Massachusetts
on August 27, 1998. Each Fund is a diversified, open-end management investment
company.
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 Scudder Kemper and its affiliates; and (b) the
following investment advisory clients of Scudder Kemper 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.
The Funds generally are not required to hold meetings of their shareholders.
Under the Agreement and Declaration of Trust of each Fund ("Declaration of
Trust"), however, shareholder meetings will be held in connection with the
following matters: (a) the election or removal of trustees if a meeting is
called for such purpose; (b) the adoption of any contract for which shareholder
approval is required by the 1940 Act ("1940 Act"); (c) any termination of the
Fund or a class to the extent and as provided in the Declaration of Trust; (d)
any amendment of the Declaration of Trust (other than amendments changing the
name of the Fund, supplying any omission, curing any ambiguity or curing,
correcting or supplementing any defective or inconsistent provision thereof);
(e) (with respect to the Mortgage and Short-Intermediate Government Funds only)
as to whether a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class on behalf of the Fund or the
shareholders, to the same extent as the stockholders of a Massachusetts business
corporation; and (f) such additional matters as may be required by law, the
Declaration of Trust, the By-laws of the Fund, or any registration of the Fund
with the Securities and Exchange Commission or any state, or as the trustees may
consider necessary or desirable. The shareholders also would vote upon changes
in fundamental investment objectives, policies or restrictions.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) each Fund will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of a Fund stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, each
Fund has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
65
<PAGE>
Each Fund's Declaration of Trust provides that the presence at a shareholder
meeting in person or by proxy of at least 30% of the shares entitled to vote on
a matter shall constitute a quorum. Thus, a meeting of shareholders of a Fund
could take place even if less than a majority of the shareholders were
represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
auditors. Some matters requiring a larger vote under the Declaration of Trust,
such as termination or reorganization of a Fund and certain amendments of the
Declaration of Trust, would not be effected by this provision; nor would matters
which under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act.
Each Fund's Declaration of Trust specifically authorizes the Board of Trustees
to terminate the Fund or any Portfolio or class by notice to the shareholders
without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of a
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of each Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by a
Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of a Fund and each Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by Scudder Kemper remote
and not material, since it is limited to circumstances in which a disclaimer is
inoperative and such Fund itself is unable to meet its obligations.
66
<PAGE>
APPENDIX -- RATINGS OF INVESTMENTS
COMMERCIAL PAPER RATINGS
Commercial paper rated by Standard & Poor's Ratings Services ("S&P") has the
following characteristics: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated "A" or better. The issuer has
access to at least two additional channels of borrowing. Basic earnings and cash
flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1 or A-2.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service, Inc. ("Moody's"). Among the factors
considered by it in assigning ratings are the following: (1) evaluation of the
management of the issuer; (2) economic evaluation of the issuer's industry or
industries and an appraisal of speculative-type risks which may be inherent in
certain areas; (3) evaluation of the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the issuer;
and (8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations. Relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated Prime-1 or 2.
CORPORATE BONDS
Standard & Poor's Ratings Services Bond Ratings
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Moody's Investors Service, Inc. Bond Ratings
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
67
<PAGE>
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
68
<PAGE>
KEMPER U.S. GOVERNMENT SECURITIES FUND
PART C
OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23 Exhibits
- ------- --------
<S> <C> <C>
(a) Amended and Restated Agreement and Declaration of Trust.
(Incorporated by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement Filed on Form N-1A on November
30, 1995.)
(b) By-Laws.
(Incorporated by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement Filed on Form N-1A on November
30, 1995.)
(c)(1) Text of Share Certificate.
(Incorporated by reference to Post-Effective Amendment No. 23 to
the Registrant's Registration Statement on Form N-1A which was
filed on November 30, 1995.)
(c)(2) Amended and Restated Written Instrument Establishing and
Designating Separate Classes of Shares.
(Incorporated by reference to Post-Effective Amendment No. 14 to
the Registrant's Registration Statement on Form N-1A which was
filed on February 17, 1989.)
(d)(1) Revised Investment Management Agreement between the Registrant and
Scudder Kemper Investments, Inc., dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 28 to
the Registrant's Registration Statement on Form N-1A which was
filed on October 18, 1999.)
(e)(1) Underwriting and Distribution Services Agreement between the
Registrant and Kemper Distributors, Inc., dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement Filed on Form N-1A on December
30, 1998.)
(f) Inapplicable.
(g)(1) Custodian Contract between Registrant and State Street Bank and
Trust Company dated April 5, 1999. (Incorporated by reference to
Post-Effective Amendment No. 28 to the Registrant's Registration
Statement on Form N-1A which was filed on October 18, 1999.)
(h)(1) Agency Agreements.
(Incorporated by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement Filed on Form N-1A on November
30, 1995.)
(h)(2) Supplement to Agency Agreement.
(Incorporated by reference to Post-Effective Amendment No. 25 to
Registrant's Registration Statement Filed on Form N-1A on
<PAGE>
December 30, 1997.)
(h)(3) Administrative Service Agreement.
(Incorporated by reference to Post-Effective Amendment No. 25 to
Registrant's Registration Statement Filed on Form N-1A on December
30, 1997.)
(h)(4) Fund Accounting Services Agreement between the Registrant and
Scudder Fund Accounting Corp., dated December 31, 1997.
(Incorporated by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement Filed on Form N-1A on December
30, 1998.)
(i) To be filed by amendment.
(j) To be filed by amendment.
(k) Inapplicable
(l) Inapplicable
(m)(1) Amended and Restated 12b-1 Plan between the Registrant (Class B
shares) and Kemper Distributors, Inc., dated August 1, 1998.
(Incorporated by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement Filed on Form N-1A on December
30, 1998.)
(m)(2) Amended and Restated 12b-1 Plan between the Registrant (Class C
shares) and Kemper Distributors, Inc., dated August 1, 1998.
(Incorporated by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement Filed on Form N-1A on December
30, 1998.)
(n) Inapplicable.
(o) Multi-System Distribution Plan.
(Incorporated by reference to Post-Effective Amendment No. 24 to
Registrant's Registration Statement Filed on Form N-1A on December
20, 1996.)
</TABLE>
Item 24. Persons Controlled by or Under Common Control with Registrant
- -------- -------------------------------------------------------------
Not applicable.
Item 25. Indemnification
- -------- ---------------
Article VIII of the Registrant's Agreement and Declaration of Trust
(Exhibit 1 hereto, which is incorporated herein by reference) provides in effect
that the Registrant will indemnify its officers and trustees under certain
circumstances. However, in accordance with Section 17(h) and 17(i) of the
Investment Company Act of 1940 and its own terms, said Article of the Agreement
and Declaration of Trust does not protect any person against any liability to
the Registrant or its shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or
<PAGE>
otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such trustee, officer, or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question as to
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
On June 26, 1997, Zurich Insurance Company ("Zurich"), ZKI Holding
Corp. ("ZKIH"), Zurich Kemper Investments, Inc. ("ZKI"), Scudder, Stevens &
Clark, Inc. ("Scudder") and the representatives of the beneficial owners of the
capital stock of Scudder ("Scudder Representatives") entered into a transaction
agreement ("Transaction Agreement") pursuant to which Zurich became the majority
stockholder in Scudder with an approximately 70% interest, and ZKI was combined
with Scudder ("Transaction"). In connection with the trustees' evaluation of the
Transaction, Zurich agreed to indemnify the Registrant and the trustees who were
not interested persons of ZKI or Scudder (the "Independent Trustees") for and
against any liability and expenses based upon any action or omission by the
Independent Trustees in connection with their consideration of and action with
respect to the Transaction. In addition, Scudder has agreed to indemnify the
Registrant and the Independent Trustees for and against any liability and
expenses based upon any misstatements or omissions by Scudder to the Independent
Trustees in connection with their consideration of the Transaction.
Item 26. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 28.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, ZKI Holding Corporation xx
Steven Gluckstern Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Zurich Holding Company of America o
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
<PAGE>
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Director, Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
</TABLE>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Item 27. Principal Underwriters.
(a) Kemper Distributors, Inc. acts as principal
underwriter of the Registran"s shares and acts as
principal underwriter of the Kemper Funds.
<PAGE>
(b) Information on the officers and directors of Kemper
Distributors, Inc., principal underwriter for the
Registrant is set forth below. The principal business
address is 222 South Riverside Plaza, Chicago,
Illinois 60606.
<TABLE>
<CAPTION>
(1) (2) (3)
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
<S> <C> <C> <C>
James L. Greenawalt President None
Thomas W. Littauer Director, Chief Executive Officer Vice President
Kathryn L. Quirk Director, Secretary, Chief Legal Vice President
Officer and Vice President
James J. McGovern Chief Financial Officer and Vice None
President
Linda J. Wondrack Vice President and Chief Compliance Vice President
Officer
Paula Gaccione Vice President None
Michael E. Harrington Vice President None
Robert A. Rudell Vice President None
William M. Thomas Vice President None
Elizabeth C. Werth Vice President None
Todd N. Gierke Assistant Treasurer None
Philip J. Collora Assistant Secretary Vice President and Secretary
Paul J. Elmlinger Assistant Secretary None
Diane E. Ratekin Assistant Secretary None
Mark S. Casady Director, Vice Chairman None
Stephen R. Beckwith Director None
</TABLE>
(c) Not applicable.
Item 28. Location of Accounts and Records
Accounts, books and other documents are maintained at the offices of
the Registrant, the offices of Registran"s investment adviser, Scudder Kemper
Investments, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, at the
offices of the Registran"s principal underwriter, Kemper Distributors, Inc., 222
South Riverside Plaza, Chicago, Illinois 60606 or, in the case of records
concerning custodial functions, at the offices of the custodian, Investors
Fiduciary Trust Company ""IFT""), 801 Pennsylvania Avenue, Kansas City, Missouri
64105 or, in the case of records concerning transfer agency functions, at the
offices of IFTC
<PAGE>
and of the shareholder service agent, Kemper Service Company, 811 Main Street,
Kansas City, Missouri 64105.
Item 29. Management Services
Not applicable.
Item 30 Undertakings
Not applicable.
.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(a) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chicago and State of Illinois, on the 10th day
of December, 1999.
By: /s/ Mark S. Casady
Mark S. Casady, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 10th day of December, 1999
on behalf of the following persons in the capacities indicated.
SIGNATURE TITLE
- --------- -----
/s/ Thomas W. Littauer Chairman and Trustee
- --------------------------------------
Thomas W. Littauer*
/s/ John W. Ballantine Trustee
- --------------------------------------
John W. Ballantine*
/s/ Lewis A. Burham Trustee
- --------------------------------------
Lewis A. Burnham*
/s/ Donald L. Dunaway Trustee
- --------------------------------------
Donald L. Dunaway*
/s/ Robert B. Hoffman Trustee
- --------------------------------------
Robert B. Hoffman*
/s/ Donald R. Jones Trustee
- --------------------------------------
Donald R. Jones*
/s/ Shirley D. Peterson Trustee
- --------------------------------------
Shirley D. Peterson*
/s/ Cornelia M. Small Trustee
- --------------------------------------
Cornelia M. Small*
/s/ William P. Sommers
- --------------------------------------
William P. Sommers* Trustee
/s/ John R. Hebble Treasurer (Principal Financial
- -------------------------------------- and Accounting Officer)
John R. Hebble
*By: /s/ Philip J. Collora
Philip J. Collora**
** Attorney-in-fact pursuant to powers of attorney incorporated by
reference to the Registrant's Post Effective Amendment to the
Registration Statement
<PAGE>
No. 27 filed on October 30, 1998, Post Effective Amendment to the
Registration Statement No. 28 filed October 18, 1999 and with this Post
Effective Amendment No. 29.
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Caroline Pearson, Maureen E. Kane, and Philip J. Collora and any of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement of Kemper U.S.
Government Securities Fund, a Massachusetts business trust, on Form N-1A under
the Securities Act of 1933, as amended, and the Investment Company Act of 1940,
as amended, and any or all amendments thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
DATED: June 30, 1999
/s/ Thomas W. Littauer
----------------------
Thomas W. Littauer
Trustee
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Caroline Pearson, Maureen E. Kane, and Philip J. Collora and any of
them, her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for her and in her name, place and stead, in
any and all capacities to sign the Registration Statement of Kemper U.S.
Government Securities Fund, a Massachusetts business trust, on Form N-1A under
the Securities Act of 1933, as amended, and the Investment Company Act of 1940,
as amended, and any or all amendments thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
DATED: October 26, 1999
/s/ Cornelia M. Small
---------------------
Cornelia M. Small
Trustee
<PAGE>
File No. 2-57937
File No. 811-2719
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 29
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 29
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
KEMPER U.S. GOVERNMENT SECURITIES FUND
<PAGE>
KEMPER U.S. GOVERNMENT SECURITIES FUND
EXHIBIT INDEX
None
