Filed electronically with the Securities and Exchange Commission on
October 18, 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. 28 /_X_/
And --
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /___/
Amendment No .28 /_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. Colora, 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>
KEMPER INCOME FUNDS
Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund*
Kemper Strategic Income Fund**
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund
SUPPLEMENT TO PROSPECTUS
DATED JANUARY 1, 2000
------------------------
CLASS I SHARES
------------------------
* On February 5, 1999, Kemper Short-Intermediate Government Fund was
reorganized into Kemper Adjustable Rate U.S. Government Fund. Kemper
Adjustable Rate U.S. Government Fund was then renamed Kemper Short-Term
U.S. Government Fund, and its objective and policies were changed
accordingly.
** Formerly Kemper Diversified Income Fund
The above funds currently offer four classes of shares to provide investors with
different purchasing options. These are Class A, Class B and Class C shares,
which are described in the funds' prospectus, and Class I shares, which are
described in the prospectus as supplemented hereby. When placing purchase
orders, investors must specify whether the order is for Class A, Class B, Class
C or Class I shares.
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.
<PAGE>
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.
The primary distinctions among the classes of each Fund's shares lie in their
initial and contingent deferred sales charge schedules and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. 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 administrative 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 return, typically will be
higher for Class I shares than for Class A, Class B and Class C shares.
The following information supplements the indicated sections of the prospectus.
PAST PERFORMANCE
The charts and tables contained in the accompanying prospectus provide some
indication of the risks of investing in the funds by illustrating how the funds
have performed from year to year, and comparing this information to a broad
measure of market performance. Of course, past performance is not necessarily an
indication of future performance. Additional financial information for those
funds which currently have Class I shares outstanding is set forth below.
Average Annual Total Returns -- Class I shares
For periods ended Inception of
December 31, 1998 One Year Life of Class Class
- ----------------- -------- ------------- -----
Kemper High Yield Fund _____% _____% 12/29/94
Salomon Brothers
Long-Term High Yield
Bond Index* _____% _____%** --
- -----------
* The Salomon Brothers Long-Term High Yield Bond Index is on a total return
basis and is comprised of high yield bonds with a par value of $50 million
or higher and a remaining maturity of ten years or longer rated BB+ or lower
by Standard & Poor's Corporation or Ba1 or lower by Moody's Investors
Service, Inc. This index is unmanaged. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or
sales charges.
** For the period of 12/31/94 through 12/31/98.
<PAGE>
For periods ended Inception
December 31, 1998 One Year Life of Class of Class
- ----------------- -------- ------------- --------
Kemper Income And Capital
Preservation Fund _____% _____% 7/3/95
Lehman Brothers Aggregate
Bond Index* _____% _____%** --
- -----------
* The Lehman Brothers Aggregate Bond Index is an unmanaged index generally
representative of intermediate-term government bonds, investment grade
corporate debt securities, and mortgage backed securities. Index returns
assume reinvestment of dividends and, unlike fund returns, do not reflect
any fees, expenses, or sales charges.
** For the period of 6/30/95 through 12/31/98.
For periods ended Inception
December 31, 1998 One Year Life of Class of Class
- ----------------- -------- ------------- --------
Kemper U.S. Government
Securities Fund _____% _____% 7/3/95
Salomon Brothers
30-Year GNMA Index* _____% _____%** --
- -----------
* The Salomon Brothers 30-Year GNMA Index is unmanaged, is on a total-return
basis with all dividends reinvested and is comprised of GNMA 30-year pass
throughs of single family and graduated payment mortgages. In order for a
GNMA coupon to be included in the index, it must have at least $200 million
of outstanding coupon product. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or
sales charges.
** For the period of 6/30/95 through 12/31/98.
<PAGE>
EXPENSE INFORMATION
The sales charge on purchases is deducted from your investment, and is shown as
a percentage of the offering price. The contingent deferred sales charge is
deducted from the proceeds when you sell, and is figured as a percentage of your
initial cost or the value at the time you sell, whichever is less. The funds
also have annual operating expenses, and as a shareholder, you pay them
indirectly.
Shareholder fees: Fees paid directly from your investment.
Maximum
Sales Maximum Maximum
Charge Deferred Sales
(Load) Sales Charge
Imposed on Charge (Load)
Purchases (Load) Imposed on
(as a % of (as a % of Reinvested
offering redemption Dividends/ Redemption Exchange
price) proceeds) Distributions Fee Fee
------ --------- ------------- --- ---
Kemper High
Yield Fund None None None None None
Kemper High
Yield Fund II None None None None None
Kemper High
Yield
Opportunity Fund None None None None None
Kemper Income
And Capital
Preservation
Fund None None None None None
Kemper
Short-Term U.S.
Government Fund None None None None None
Kemper
Strategic
Income Fund None None None None None
Kemper U.S.
Government
Securities Fund None None None None None
Kemper U.S.
Mortgage Fund None None None None None
<PAGE>
Annual fund operating expenses: Expenses that are deducted from fund assets.
Total Annual
Fund
Management Distribution Other Operating
Fee (12b-1) Fees Expenses* Expenses*
--- ------------ --------- ---------
Kemper High
Yield Fund % None % %
Kemper High
Yield Fund II % None % %
Kemper High Yield
Opportunity Fund % None % %
Kemper Income And
Capital
Preservation Fund % None % %
Kemper Short-Term
U.S. Government Fund % None % %
Kemper Strategic
Income Fund % None % %
Kemper U.S.
Government
Securities Fund % None % %
Kemper U.S.
Mortgage Fund % None % %
- -----------
* Estimated for Kemper Short-Term U.S. Government Fund, Kemper Strategic
Income Fund, Kemper High Yield Opportunity Fund, Kemper High Yield Fund II
and Kemper U.S. Mortgage Fund since no Class I shares were issued as of the
respective fiscal year ends.
<PAGE>
Example
This example is to help you compare the cost of investing in a fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Kemper High Yield Fund $ $ $ $
Kemper High Yield
Opportunity Fund $ $ $ $
Kemper Income And Capital
Preservation Fund $ $ $ $
Kemper Short-Term
U.S. Government Fund $ $ $ $
Kemper Strategic
Income Fund $ $ $ $
Kemper U.S. Government
Securities Fund $ $ $ $
Kemper U.S.
Mortgage Fund $ $ $ $
<PAGE>
FINANCIAL HIGHLIGHTS
No financial information is presented for Class I shares of Kemper Short-Term
U.S. Government Fund, Kemper Strategic Income Fund, Kemper High Yield
Opportunity Fund, Kemper High Yield Fund II and Kemper U.S. Mortgage Fund, since
no Class I shares were issued as of the respective fiscal year ends of the
funds.
Kemper High Yield Fund
December
29, 1994 to
September
Year ended September 30, 30,
CLASS I 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------
Per share operating performance
Net asset value,
beginning of period $ 8.50 8.23 8.01 7.55
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income .76 .78 .78 .66
- ----------------------------------------------------------------------------
Net realized and
unrealized gain (loss) (.78) .31 .23 .39
- ----------------------------------------------------------------------------
Total from investment
operations (.02) 1.09 1.01 1.05
- ----------------------------------------------------------------------------
Less distribution
from net investment income .80 .82 .79 .59
- ----------------------------------------------------------------------------
Net asset value, end
of period $ 7.68 8.50 8.23 8.01
- ----------------------------------------------------------------------------
Total return
(not annualized) % (.66) 13.96 13.32 14.37
- ----------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses % .60 .62 .61 .61
- ----------------------------------------------------------------------------
Net investment income % 9.38 9.44 9.72 10.70
- ----------------------------------------------------------------------------
Year ended September 30,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of
year (in thousands) $ 4,784,262 4,939,302 4,096,939 3,527,954
- ----------------------------------------------------------------------------
Portfolio turnover
rate % 92 91 102 99
- ----------------------------------------------------------------------------
Note: Total return does not reflect the effect of any sales charges.
<PAGE>
Kemper Income And Capital Preservation Fund
July 3
to
October
Year ended October 31, 31,
CLASS I 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period $ 8.53 8.45 8.61 8.52
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income .56 .59 .60 .19
- ----------------------------------------------------------------------------
Net realized and
unrealized gain (loss) .15 .08 (.15) .12
- ----------------------------------------------------------------------------
Total from investment
operations .71 .67 .45 .31
- ----------------------------------------------------------------------------
Less distribution from net
investment income .57 .59 .61 .22
- ----------------------------------------------------------------------------
Net asset value, end of
period $ 8.67 8.53 8.45 8.61
- ----------------------------------------------------------------------------
Total return (not annualized) % 8.62 8.26 5.45 3.65
- ----------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses % .66 .70 .72 .62
- ----------------------------------------------------------------------------
Net investment income % 6.52 7.02 7.14 6.87
- ----------------------------------------------------------------------------
Year ended October 31,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end
of year
(in thousands) $ 694,057 613,470 572,998 649,427
- ----------------------------------------------------------------------------
Portfolio turnover
rate % 121 164 74 182
- ----------------------------------------------------------------------------
Note: Total return does not reflect the effect of any sales charges.
<PAGE>
Kemper U.S. Government Securities Fund
July 3
to
October
Year ended October 31, 31,
CLASS I 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period $ 8.81 8.74 8.92 8.88
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income .59 .66 .64 .22
- ----------------------------------------------------------------------------
Net realized and
unrealized gain (loss) .07 .06 (.17) .04
- ----------------------------------------------------------------------------
Total from investment
operations .66 .72 .47 .26
- ----------------------------------------------------------------------------
Less distribution from net
investment income .62 .65 .65 .22
- ----------------------------------------------------------------------------
Net asset value, end of
period $ 8.85 8.81 8.74 8.92
- ----------------------------------------------------------------------------
Total return (not annualized) % 7.75 8.60 5.56 3.02
- ----------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses % .57 .60 .59 .53
- ----------------------------------------------------------------------------
Net investment income % 6.73 7.52 7.35 7.07
- ----------------------------------------------------------------------------
Year ended October 31,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of
year (in thousands) $ 3,442,212 3,642,027 4,163,157 4,738,415
- ----------------------------------------------------------------------------
Portfolio turnover
rate % 150 261 391 362
- ----------------------------------------------------------------------------
Note: Total return does not reflect the effect of any sales charges. Per share
data were determined based on average shares outstanding during the year ended
October 31, 1998.
<PAGE>
SPECIAL FEATURES
Shareholders of a Fund's Class I shares may exchange their shares for (i) shares
of Zurich Money Funds -- Zurich Money Market Fund if the shareholders of Class I
shares have purchased shares because they are participants in tax-exempt
retirement plans of Scudder Kemper and its affiliates and (ii) Class I shares of
any other "Kemper Mutual Fund" listed in the prospectus. Conversely,
shareholders of Zurich Money Funds -- Zurich Money Market Fund who have
purchased shares because they are participants in tax-exempt retirement plans of
Scudder Kemper and its affiliates may exchange their shares for Class I shares
of "Kemper Mutual Funds" to the extent that they are available through their
plan. Exchanges will be made at the relative net asset values of the shares.
Exchanges are subject to the limitations set forth in the prospectus.
January 1, 2000
<PAGE>
LONG-TERM
INVESTING
IN A
SHORT-TERM
WORLD(SM)
January 1, 2000
Prospectus
Kemper Income Funds
Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income And Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper U.S. Government Securities Fund
Kemper Strategic Income Fund
Kemper U.S. Mortgage Fund
[LOGO] KEMPER FUNDS
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
HOW THE FUNDS WORK
5 Kemper High Yield Fund
12 Kemper High Yield Fund II
20 Kemper High Yield Opportunity Fund
28 Kemper Income And Capital Preservation Fund
34 Kemper Short-Term U.S. Government Fund
41 Kemper U.S. Government Securities Fund
47 Kemper Strategic Income Fund
55 Kemper U.S. Mortgage Fund
61 Other Policies And Risks
63 Financial Highlights
INVESTING IN THE FUNDS
65 Choosing A Share Class
71 How To Buy Shares
72 How To Exchange Or Sell Shares
73 Policies You Should Know About
79 Understanding Distributions And Taxes
<PAGE>
How The Funds Work
These funds invest mainly in bonds and other types of debt securities.
Taken as a group, they represent a spectrum of approaches to investing for
income, from a conservative approach that emphasizes preservation of capital to
a more aggressive (and more risky) approach that focuses on higher levels of
income and total return. Each fund has its own objective.
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other organization. Their share prices
will go up and
<PAGE>
down, so be aware that you could lose money.
4
<PAGE>
TICKER SYMBOLS CLASS: A)KHYAX B) KHYBX C) KHYCX
Kemper
High Yield Fund
The fund seeks the highest level of current income obtainable from a diversified
portfolio of fixed income securities which the fund's investment manager
considers consistent with reasonable risk. As a secondary objective, the fund
will seek capital gain where consistent with its primary objective.
5
<PAGE>
- --------------------------------------------------------------------------------
The Fund's Strategy
The fund invests mainly in lower rated, higher yielding corporate bonds, often
called junk bonds. Generally, most are from U.S. issuers, but up to 25 percent
of total assets could be in bonds from foreign issuers.
In deciding which securities to buy and sell, the portfolio managers rely on
extensive independent analysis, favoring the bonds of companies whose credit is
gaining strength or whom they believe are unlikely to default.
Based on their analysis of economic and market trends, the managers may favor
bonds from different segments of the economy at different times, while still
maintaining variety in terms of the types of bonds, companies and industries
represented. For example, the managers typically favor subordinated debt (which
has higher risks and pays higher returns), but may emphasize senior debt if they
expect an economic slowdown.
Although the managers may adjust the duration (a measure of sensitivity to
interest rate movements) of the fund's portfolio, they generally intend to keep
it between 0.0 and 0.0 years. Also, while they're permitted to use various types
of derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments, and might not use them at all.
- --------------------------------------------------------------------------------
[ICON] CREDIT QUALITY POLICIES
This fund normally invests primarily in junk bonds, which are those below the
fourth credit grade (i.e., grade BB/Ba and below).
Compared to investment-grade bonds, junk bonds generally pay higher yields and
have higher volatility and higher risk of default on payments.
6
<PAGE>
- --------------------------------------------------------------------------------
The Risks Of Investing In The Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
For this fund, the main factor is the economy. Because the companies that issue
high yield bonds may be in uncertain financial health, the prices of their bonds
can be more vulnerable to bad economic news than investment-grade bonds. This
may affect a company, an industry or the high yield market as a whole. In some
cases, bonds may decline in credit quality or go into default. This risk is
higher with foreign bonds.
Another factor is market interest rates. A rise in interest rates generally
means a fall in bond prices - and, in turn, a fall in the value of your
investment. An increase in the portfolio's duration could make the fund more
sensitive to this risk.
Because the economy has a strong impact on corporate bond performance, the fund
will tend to perform less well than other types of bond funds when the economy
is weak. To the extent that the fund emphasizes bonds from any given industry,
it could be hurt if that industry does not do well. Also, negative corporate
news may have a significant impact on individual bond prices.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
issuers, industries or other matters
o some types of bonds could be paid off earlier than expected, which
would hurt the fund's performance
o currency fluctuations could cause foreign investments to lose value
o derivatives could produce disproportionate losses
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
Investors who seek high current income and can accept risk of loss of principal
may be interested in this fund.
- --------------------------------------------------------------------------------
7
<PAGE>
o at times, it could be hard to value some investments or to get an
attractive price for them
8
<PAGE>
- --------------------------------------------------------------------------------
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. (The chart doesn't
include sales charges, which would reduce returns.) The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A shares
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE:
BAR CHART DATA:
1989 00.00
1990 00.00
1991 00.00
1992 00.00
1993 00.00
1994 00.00
1995 00.00
1996 00.00
1997 00.00
1998 00.00
Best quarter: 0.00%, Q0 1990 YTD return as of 9/30/1999: 0.00%
Worst quarter: -0.00%, Q0 1900
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 6/30/92 Since 12/31/70
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- --------------------------------------------------------------------------------
Class A 00.00% 00.00% -- 00.00% 00.00%
- --------------------------------------------------------------------------------
Class B 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
Class C 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
[Appropriate Index to be updated]
- --------------------------------------------------------------------------------
00.00% 00.00% 00.00% 00.00% 00.00%
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
How Much Investors Pay
The sales charge on purchases is deducted from your investment, and is shown as
a percentage of the offering price. The contingent deferred sales charge is
deducted from the proceeds when you sell, and is figured as a percentage of your
initial cost or the value at the time you sell, whichever is less. The fund also
has annual operating expenses, and as a shareholder, you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- --------------------------------------------------------------------------------
Maximum Sales Charge On Purchases 4.50% None None
- --------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge None 4.00% 1.00%
- --------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- --------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- --------------------------------------------------------------------------------
Other Expenses* 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- --------------------------------------------------------------------------------
* Includes costs of shareholder servicing, custody, accounting services
and similar expenses, which may vary with fund size and other factors.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY 10154-0010. Scudder Kemper has more than 70 years
of experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
10
<PAGE>
Based on the figures at left (including one year of capped expenses in each
period), this example is designed to help you compare the expenses of each share
class to those of other funds. The example assumes you invested $10,000, earned
5% annual returns and reinvested all dividends and distributions. This is only
an example; actual expenses will be different.
- --------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Expenses, assuming you kept your shares
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ICON] FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Harry E. Resis, Jr. Daniel J. Doyle
Lead Portfolio Manager o Began investment career
o Began investment career in [YEAR]
in [YEAR] o Joined the advisor in
o Joined the advisor in [YEAR]
1988 o Joined the fund team in
o Joined the fund team in [YEAR]
1992
Michael A. McNamara
o Began investment career
in [YEAR]
o Joined the advisor in
1972
o Joined the fund
team in 1990
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together
to develop the fund's investment strategies.
- --------------------------------------------------------------------------------
11
<PAGE>
TICKER SYMBOLS CLASS: A) KHIAX B KHIBX C) KHICX
Kemper
High Yield Fund II
The fund seeks the highest level of current income obtainable from a
professionally managed, diversified portfolio of fixed income securities that
the fund's investment manager considers consistent with reasonable risk. As a
secondary objective, the fund will seek capital gain where consistent with its
primary objective.
12
<PAGE>
- --------------------------------------------------------------------------------
The Fund's Strategy
The fund invests mainly in lower rated, higher yielding corporate bonds, often
called junk bonds. Generally, most are from U.S. issuers, but up to 25 percent
of total assets could be in bonds from foreign issuers. The fund may also invest
up to 20 percent of total assets in common stocks and other equities, including
preferred stocks, convertible securities and real estate investment trusts
(REITs).
In deciding which securities to buy and sell, the portfolio managers rely on
extensive independent analysis, favoring the bonds of companies whose credit is
gaining strength or whom they believe are unlikely to default.
Based on their analysis of economic and market trends, the managers may favor
bonds from different segments of the economy at different times, while still
maintaining variety in terms of the types of bonds, companies and industries
represented. For example, the managers typically favor subordinated debt (which
has higher risks and pays higher returns), but may emphasize senior debt if they
expect an economic slowdown.
Although the managers may adjust the duration (a measure of sensitivity to
interest rate movements) of the fund's portfolio, they generally intend to keep
it between 0.0 and 0.0 years. Also, while they're permitted to use various types
of derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments, and might not use them at all.
- --------------------------------------------------------------------------------
[ICON] CREDIT QUALITY POLICIES
This fund normally invests primarily in junk bonds, which are those below the
fourth credit grade (i.e., grade BB/Ba and below).
13
<PAGE>
Compared to investment-grade bonds, junk bonds generally pay higher yields and
have higher volatility and higher risk of default on payments.
14
<PAGE>
- --------------------------------------------------------------------------------
The Risks Of Investing In The Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
For this fund, the main factor is the economy. Because the companies that issue
high yield bonds may be in uncertain financial health, the prices of their bonds
can be more vulnerable to bad economic news than investment-grade bonds. This
may affect a company, an industry or the high yield market as a whole. In some
cases, bonds may decline in credit quality or go into default. This risk is
higher with foreign bonds.
Another factor is market interest rates. A rise in interest rates generally
means a fall in bond prices - and, in turn, a fall in the value of your
investment. An increase in the portfolio's duration could make the fund more
sensitive to this risk.
Because the economy has a strong impact on corporate bond performance, the fund
will tend to perform less well than other types of bond funds when the economy
is weak. To the extent that the fund emphasizes bonds from any given industry,
it could be hurt if that industry does not do well. Also, negative corporate
news may have a significant impact on individual bond prices.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
issuers, industries or other matters
o some types of bonds could be paid off earlier than expected, which
would hurt the fund's performance
o currency fluctuations could cause foreign investments to lose value
o derivatives could produce disproportionate losses
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
Investors who seek high current income and can accept risk of loss of principal
may be interested in this fund.
- --------------------------------------------------------------------------------
15
<PAGE>
o at times, it could be hard to value some investments or to get an
attractive price for them
16
<PAGE>
- --------------------------------------------------------------------------------
Performance
Because this is a new fund, it did not have a full calendar year of performance
to report as of the date of this prospectus.
17
<PAGE>
- --------------------------------------------------------------------------------
How Much Investors Pay
The sales charge on purchases is deducted from your investment, and is shown as
a percentage of the offering price. The contingent deferred sales charge is
deducted from the proceeds when you sell, and is figured as a percentage of your
initial cost or the value at the time you sell, whichever is less. The fund also
has annual operating expenses, and as a shareholder, you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- --------------------------------------------------------------------------------
Maximum Sales Charge On Purchases 4.50% None None
- --------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge None 4.00% 1.00%
- --------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- --------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- --------------------------------------------------------------------------------
Other Expenses* 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Expense Reimbursement 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Net Annual Operating Expenses** 0.00 0.00 0.00
- --------------------------------------------------------------------------------
* Includes costs of shareholder servicing, custody, accounting services
and similar expenses, which may vary with fund size and other factors.
** By content, total operating expenses are capped at 0.25% through
00/00/0000.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY 10154-0010. Scudder Kemper has more than 70 years
of experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
18
<PAGE>
Based on the figures at left (including one year of capped expenses in each
period), this example is designed to help you compare the expenses of each share
class to those of other funds. The example assumes you invested $10,000, earned
5% annual returns and reinvested all dividends and distributions. This is only
an example; actual expenses will be different.
- --------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Expenses, assuming you kept your shares
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ICON] FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Harry E. Resis, Jr. Michael A. McNamara
Co-lead Portfolio Manager o Began investment career in
o Began investment career in [YEAR]
[YEAR] o Joined the advisor in
o Joined the advisor in 1972
1988 o Joined the fund team in
o Joined the fund team in 1990
1992
Daniel J. Doyle
Co-lead Portfolio Manager
o Began investment career in
[YEAR]
o Joined the advisor in
[YEAR]
o Joined the fund team in
[YEAR]
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together
to develop the fund's investment strategies.
- --------------------------------------------------------------------------------
19
<PAGE>
TICKER SYMBOLS CLASS: A) KYOAX B) KYOBX C) KYOCX
Kemper
High Yield
Opportunity Fund
The fund seeks total return through high current income and capital
appreciation.
20
<PAGE>
- --------------------------------------------------------------------------------
The Fund's Strategy
The fund invests mainly in lower rated, higher yielding corporate bonds, often
called junk bonds. Generally, most are from U.S. issuers, but up to 25% of total
assets could be in bonds of foreign issuers. The fund may invest up to 20
percent of total assets in common stocks and other equities, including preferred
stocks, convertible securities and real estate investment trusts (REITs).
In deciding which securities to buy and sell, the portfolio managers rely on
extensive independent analysis, favoring the bonds of companies whose credit is
gaining strength or whom they believe are unlikely to default. The managers also
seek to take advantage of special opportunities by investing in stocks of
high-yield issuers, including initial public offerings of stock (IPOs).
Based on their analysis of economic and market trends, the managers may favor
bonds from different segments of the economy at different times, while still
maintaining variety in terms of the companies and industries represented. For
example, the managers typically favor subordinated debt (which has higher risks
and pays higher returns), but may emphasize senior debt if the managers expect
an economic slowdown.
Although the managers may adjust the duration (a measure of sensitivity to
interest rate movements) of the fund's portfolio, they generally intend to keep
it between x and y years. They're also permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities or securities).
- --------------------------------------------------------------------------------
[ICON] CREDIT QUALITY POLICIES
This fund normally invests primarily in junk bonds, which are those below the
fourth credit grade (i.e., grade BB/Ba and below). Compared to investment-grade
bonds, junk bonds generally pay higher yields and have
21
<PAGE>
higher volatility and higher risk of default on payments.
22
<PAGE>
- --------------------------------------------------------------------------------
The Risks Of Investing In The Fund
There are several risk factors that could reduce the yield you get from the
fund, cause you to lose money or make the fund perform less well than other
investments.
For this fund, the main factor is the economy. Because the companies that issue
high yield bonds may be in uncertain financial health, the prices of their bonds
(and stocks) can be more vulnerable to bad economic news, or even the
expectation of bad news than investment-grade bonds. This may affect a company,
an industry, or the high yield market as a whole. In some cases, bonds may
decline in credit quality or go into default. This risk is higher with foreign
bonds.
Another factor is market interest rates. A rise in interest rates generally
means a fall in bond prices - and, in turn, a fall in the value of your
investment. An increase in the portfolio's duration could make the fund more
sensitive to this risk.
Because the economy affects corporate bond performance, the fund will tend to
perform less well than other types of bond funds when the economy is weak. Also,
to the extent that the fund emphasizes bonds from any given industry, it could
be hurt if that industry does not do well. Also, negative corporate news may
have a significant impact on individual bond prices.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
issuers, industries or other matters
o some types of bonds could be paid off earlier than expected, which
would hurt the fund's performance
o currency fluctuations could cause foreign investments to lose value
o derivatives could produce disproportionate losses
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
Investors who seek high current income and can accept risk of loss of principal
may be interested in this fund.
- --------------------------------------------------------------------------------
23
<PAGE>
o at times, it could be hard to value some investments or to get an
attractive price for them
24
<PAGE>
- --------------------------------------------------------------------------------
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. (The chart doesn't
include sales charges, which would reduce returns.) The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A shares
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE:
BAR CHART DATA:
1989 00.00
1990 00.00
1991 00.00
1992 00.00
1993 00.00
1994 00.00
1995 00.00
1996 00.00
1997 00.00
1998 00.00
Best quarter: 0.00%, Q0 1990 YTD return as of 9/30/1999: 0.00%
Worst quarter: -0.00%, Q0 1900
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 6/30/92 Since 12/31/70
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- --------------------------------------------------------------------------------
Class A 00.00% 00.00% -- 00.00% 00.00%
- --------------------------------------------------------------------------------
Class B 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
Class C 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
[Appropriate Index to be updated]
- --------------------------------------------------------------------------------
00.00% 00.00% 00.00% 00.00% 00.00%
- --------------------------------------------------------------------------------
25
<PAGE>
- --------------------------------------------------------------------------------
How Much Investors Pay
The sales charge on purchases is deducted from your investment, and is shown as
a percentage of the offering price. The contingent deferred sales charge is
deducted from the proceeds when you sell, and is figured as a percentage of your
initial cost or the value at the time you sell, whichever is less. The fund also
has annual operating expenses, and as a shareholder, you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- --------------------------------------------------------------------------------
Maximum Sales Charge On Purchases 4.50% None None
- --------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge None 4.00% 1.00%
- --------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- --------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- --------------------------------------------------------------------------------
Other Expenses* 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- --------------------------------------------------------------------------------
* Includes costs of shareholder servicing, custody, accounting services
and similar expenses, which may vary with fund size and other factors.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY 10154-0010. Scudder Kemper has more than 70 years
of experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
26
<PAGE>
Based on the figures at left (including one year of capped expenses in each
period), this example is designed to help you compare the expenses of each share
class to those of other funds. The example assumes you invested $10,000, earned
5% annual returns and reinvested all dividends and distributions. This is only
an example; actual expenses will be different.
- --------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Expenses, assuming you kept your shares
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ICON] FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Harry E. Resis, Jr. Daniel J. Doyle
Co-lead Portfolio Manager o Began investment career in
o Began investment career in [YEAR]
[YEAR] o Joined the advisor in
o Joined the advisor in [YEAR]
1988 o Joined the fund team in
o Joined the fund team in 1997
1992
Michael A. McNamara Co-lead
Portfolio Manager
o Began investment career in
[YEAR]
o Joined the advisor in
1972
o Joined the fund team in 1990
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together
to develop the fund's investment strategies.
- --------------------------------------------------------------------------------
27
<PAGE>
TICKER SYMBOLS CLASS: A) KICAX B) KICBX C) KICCX
Kemper
Income and Capital
Preservation Fund
The fund seeks as high a level of current income as is consistent with
reasonable risk, preservation of capital and ready marketability of its
portfolio by investing primarily in a diversified portfolio of investment-grade
debt securities.
28
<PAGE>
- --------------------------------------------------------------------------------
The Fund's Strategy
The fund can buy many types of income-producing securities, among them corporate
bonds, U.S. government and agency bonds, mortgage- and asset-backed securities
and others. Generally, most are from U.S. issuers, but up to 25 percent of total
assets could be in bonds from foreign issuers.
In deciding which securities to buy and sell, the portfolio managers use
independent analysis to look for bonds of companies whose fundamental business
prospects and cash flows are expected to improve. The managers also consider
valuation, preferring those bonds that appear attractively priced in comparison
to similar issues.
Based on their analysis of economic and market trends, the managers may favor
bonds from different segments of the economy at different times, while still
maintaining variety in terms of the companies and industries represented.
Although the managers may adjust the duration (a measure of sensitivity to
interest rate movements) of the fund's portfolio, they generally intend to keep
it between 4 and 6 years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments, and might not use them at all.
- --------------------------------------------------------------------------------
[ICON] CREDIT QUALITY POLICIES
This fund normally invests at least 80 percent of total assets in bonds of the
top four grades of credit quality (and typically more than that).
The fund could invest up to 20 percent of total assets in junk bonds. Compared
to investment-grade bonds, junk bonds generally pay higher yields and have
higher volatility and higher risk of default on payments of interest or
principal.
29
<PAGE>
- --------------------------------------------------------------------------------
The Risks Of Investing In The Fund
There are several factors that could reduce the yield you get from the fund,
cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices - and, in turn, a
fall in the value of your investment. Changes in interest rates will also affect
the fund's yield: when rates fall, fund yield tends to fall as well.
Because the economy affects corporate bond performance, the fund will tend to
perform less well than other types of bond funds when the economy is weak. Also,
to the extent that the fund emphasizes bonds from any given industry, it could
be hurt if that industry does not do well.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
issuers, industries or other matters
o a bond could decline in credit quality or go into default; this risk is
greater with lower rated domestic and foreign bonds
o some types of bonds could be paid off earlier than expected, which
would hurt the fund's performance
o some derivatives could produce disproportionate losses
o currency fluctuations could cause foreign investments to lose value
o at times, it could be hard to value some investments or to get an
attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
This fund may appeal to investors who want exposure to the intermediate-term
corporate bond market through a diversified portfolio that emphasizes capital
preservation.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. (The chart doesn't
include sales charges, which would reduce returns.) The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A shares
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE:
BAR CHART DATA:
1989 00.00
1990 00.00
1991 00.00
1992 00.00
1993 00.00
1994 00.00
1995 00.00
1996 00.00
1997 00.00
1998 00.00
Best quarter: 0.00%, Q0 1990 YTD return as of 9/30/1999: 0.00%
Worst quarter: -0.00%, Q0 1900
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 6/30/92 Since 12/31/70
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- --------------------------------------------------------------------------------
Class A 00.00% 00.00% -- 00.00% 00.00%
- --------------------------------------------------------------------------------
Class B 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
Class C 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
[Appropriate Index to be updated]
- --------------------------------------------------------------------------------
00.00% 00.00% 00.00% 00.00% 00.00%
- --------------------------------------------------------------------------------
31
<PAGE>
- --------------------------------------------------------------------------------
How Much Investors Pay
The sales charge on purchases is deducted from your investment, and is shown as
a percentage of the offering price. The contingent deferred sales charge is
deducted from the proceeds when you sell, and is figured as a percentage of your
initial cost or the value at the time you sell, whichever is less. The fund also
has annual operating expenses, and as a shareholder, you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- --------------------------------------------------------------------------------
Maximum Sales Charge On Purchases 4.50% None None
- --------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge None 4.00% 1.00%
- --------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- --------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- --------------------------------------------------------------------------------
Other Expenses* 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- --------------------------------------------------------------------------------
* Includes costs of shareholder servicing, custody, accounting services
and similar expenses, which may vary with fund size and other factors.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY 10154-0010. Scudder Kemper has more than 70 years
of experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
32
<PAGE>
Based on the figures at left (including one year of capped expenses in each
period), this example is designed to help you compare the expenses of each share
class to those of other funds. The example assumes you invested $10,000, earned
5% annual returns and reinvested all dividends and distributions. This is only
an example; actual expenses will be different.
- --------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Expenses, assuming you kept your shares
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ICON] FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Robert S. Cessine
Lead Portfolio Manager
o Began investment career
in 1982
o Joined the advisor in
1993
o Joined the fund team in
1994
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together
to develop the fund's investment strategies.
- --------------------------------------------------------------------------------
33
<PAGE>
TICKER SYMBOLS CLASS: A) KSGAX B) KSGBX C) KSGCX
Kemper
Short-Term
U.S. Government Fund
The fund seeks high current income and preservation of capital.
34
<PAGE>
- --------------------------------------------------------------------------------
The Fund's Strategy
The fund invests mainly in U.S. government securities. These may include U.S.
Treasuries, mortgage- or asset-backed securities such as Ginnie Maes and other
securities issued by the U.S. government, its agencies or instrumentalities. The
fund may also invest up to 00% of [net][total] assets in high quality corporate
bonds.
In deciding which types of government bonds to buy and sell, the portfolio
managers first consider the relative attractiveness of Treasuries compared to
other U.S. government and agency securities and determine allocations for each.
Their decisions are generally based on a number of factors, including interest
rate outlooks and changes in supply and demand within the bond market.
In choosing corporate bonds, the managers use independent analysis to look for
established companies with histories of dependable dividend payments and stable
or growing prices.
Although the managers may adjust the fund's average weighted maturity (the
effective maturity of the fund's portfolio), they generally intend to keep it
below three years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments, and might not use them at all.
- --------------------------------------------------------------------------------
[ICON] CREDIT QUALITY POLICIES
This fund normally invests at least 65 percent of total assets in securities
issued by the U.S. Government, its agencies or instrumentalities.
The fund could invest up to 35 percent of assets in non-U.S. government
investment-grade bonds, except that 10 percent of assets may be invested in junk
bonds.
35
<PAGE>
- --------------------------------------------------------------------------------
The Risks Of Investing In The Fund
There are several factors that could reduce the yield you get from the fund,
cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices - and, in turn, a
fall in the value of your investment. The fund's relatively short duration
should reduce the effect of this risk, but won't eliminate it. Changes in
interest rates will also affect the fund's yield: when rates fall, fund yield
tends to fall as well.
U.S. Government Securities (other than Treasury Securities) are generally not
backed by the full faith and credit of the U.S. government. While these types of
securities may involve risk to principal and interest, the securities the fund
typically invests in do not.
Mortgage- and asset-backed securities carry additional risks and may be more
volatile than many other types of debt securities. Any unexpected behavior in
interest rates could hurt the performance of these securities. For example, a
large fall in interest rates could cause these securities to be paid off earlier
than expected, forcing the fund to reinvest the money at a lower rate. In
addition, if interest rates rise or stay high, these securities could be paid
off later than expected, forcing the fund to endure low yields. These situations
also involve the risk of loss of principal. The result for the fund could be an
increase in the volatility of its share price and yield.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
issuers, industries or other matters
o a bond could decline in credit quality or go into default; this risk is
greater with junk and foreign bonds
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
This fund may make sense for investors seeking higher income than a money fund
and can accept some fluctuations in the value of their principal.
- --------------------------------------------------------------------------------
36
<PAGE>
o some derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
37
<PAGE>
- --------------------------------------------------------------------------------
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. (The chart doesn't
include sales charges, which would reduce returns.) The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A shares
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE:
BAR CHART DATA:
1989 00.00
1990 00.00
1991 00.00
1992 00.00
1993 00.00
1994 00.00
1995 00.00
1996 00.00
1997 00.00
1998 00.00
Best quarter: 0.00%, Q0 1990 YTD return as of 9/30/1999: 0.00%
Worst quarter: -0.00%, Q0 1900
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 6/30/92 Since 12/31/70
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- --------------------------------------------------------------------------------
Class A 00.00% 00.00% -- 00.00% 00.00%
- --------------------------------------------------------------------------------
Class B 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
Class C 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
[Appropriate Index to be updated]
- --------------------------------------------------------------------------------
00.00% 00.00% 00.00% 00.00% 00.00%
- --------------------------------------------------------------------------------
Total returns for 1989 through 1998 would have been lower if operating expenses
hadn't been maintained.
38
<PAGE>
- --------------------------------------------------------------------------------
How Much Investors Pay
The sales charge on purchases is deducted from your investment, and is shown as
a percentage of the offering price. The contingent deferred sales charge is
deducted from the proceeds when you sell, and is figured as a percentage of your
initial cost or the value at the time you sell, whichever is less. The fund also
has annual operating expenses, and as a shareholder, you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- --------------------------------------------------------------------------------
Maximum Sales Charge On Purchases 2.75% None None
- --------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge None 4.00% 1.00%
- --------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- --------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- --------------------------------------------------------------------------------
Other Expenses* 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- --------------------------------------------------------------------------------
* Includes costs of shareholder servicing, custody, accounting services
and similar expenses, which may vary with fund size and other factors.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY 10154-0010. Scudder Kemper has more than 70 years
of experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
39
<PAGE>
Based on the figures at left (including one year of capped expenses in each
period), this example is designed to help you compare the expenses of each share
class to those of other funds. The example assumes you invested $10,000, earned
5% annual returns and reinvested all dividends and distributions. This is only
an example; actual expenses will be different.
- --------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Expenses, assuming you kept your shares
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ICON] FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Richard L. Vandenberg John E. Dugenske
Lead Portfolio Manager o Began investment career
o Began investment career in 1990
in 1973 o Joined the advisor in
o Joined the advisor in 1998
1996 o Joined the fund team
o Joined the fund team in 1998
in 1996
Scott E. Dolan
o Began investment career
in 1993
o Joined the advisor in
1989
o Joined the fund team in
1998
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together
to develop the fund's investment strategies.
- --------------------------------------------------------------------------------
40
<PAGE>
TICKER SYMBOLS CLASS: A) KSGAX B) KSGBX C) KSGCX
Kemper
U.S. Government
Securities Fund
The fund seeks high current income, liquidity and security of principal.
41
<PAGE>
- --------------------------------------------------------------------------------
The Fund's Strategy
The fund invests in U.S. government securities of any maturity, focusing on
Ginnie Maes. Other U.S. government securities include U.S. Treasuries, mortgage-
or asset-backed securities and other securities issued by the U.S. government,
its agencies or instrumentalities.
In deciding which types of securities to buy and sell, the portfolio managers
first consider the relative attractiveness of Treasuries compared to other U.S.
government and agency securities and determine allocations for each. Their
decisions are generally based on a number of factors, including interest rate
outlooks and changes in supply and demand within the bond market.
In choosing individual bonds, the managers review each bond's fundamentals,
compare the yields of shorter maturity bonds to those of longer maturity bonds,
and use technical analysis to project prepayment rates and other factors that
could affect a bond's attractiveness.
Although the managers may adjust the duration (a measure of sensitivity to
interest rate movements) of the fund's portfolio, they generally intend to keep
it between 0.0 and 0.0 years. Also, while they're permitted to use various types
of derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments, and might not use them at all.
- --------------------------------------------------------------------------------
CREDIT QUALITY POLICIES
This fund normally invests all of its assets in securities issued by the U.S.
Government, its agencies or instrumentalities.
42
<PAGE>
- --------------------------------------------------------------------------------
The Risks Of Investing In The Fund
There are several factors that could reduce the yield you get from the fund,
cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices - and, in turn, a
fall in the value of your investment. An increase in the portfolio's duration
could make the fund more sensitive to this risk.
The full faith and credit guarantee of the U.S. government doesn't protect the
fund against market-driven declines in the prices or yields of these securities,
nor does it apply to shares of the fund itself. But it does guard against the
risk of payment default with respect to securities that are guaranteed.
Mortgage- and asset-backed securities carry additional risks and may be more
volatile than many other types of debt securities. Any unexpected behavior in
interest rates could hurt the performance of these securities. For example, a
large fall in interest rates could cause these securities to be paid off earlier
than expected, forcing the fund to reinvest the money at a lower rate. In
addition, if interest rates rise or stay high, these securities could be paid
off later than expected, forcing the fund to endure low yields. These situations
also involve the risk of loss of principal. The result for the fund could be an
increase in the volatility of its share price and yield.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
issuers, industries or other matters
o some derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
This fund may appeal to investors who want a fund that searches for attractive
yields generated by high credit quality U.S. government securities.
- --------------------------------------------------------------------------------
43
<PAGE>
- --------------------------------------------------------------------------------
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. (The chart doesn't
include sales charges, which would reduce returns.) The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A shares
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE:
BAR CHART DATA:
1989 00.00
1990 00.00
1991 00.00
1992 00.00
1993 00.00
1994 00.00
1995 00.00
1996 00.00
1997 00.00
1998 00.00
Best quarter: 0.00%, Q0 1990 YTD return as of 9/30/1999: 0.00%
Worst quarter: -0.00%, Q0 1900
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 6/30/92 Since 12/31/70
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- --------------------------------------------------------------------------------
Class A 00.00% 00.00% -- 00.00% 00.00%
- --------------------------------------------------------------------------------
Class B 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
Class C 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
[Appropriate Index to be updated]
- --------------------------------------------------------------------------------
00.00% 00.00% 00.00% 00.00% 00.00%
- --------------------------------------------------------------------------------
44
<PAGE>
- --------------------------------------------------------------------------------
How Much Investors Pay
The sales charge on purchases is deducted from your investment, and is shown as
a percentage of the offering price. The contingent deferred sales charge is
deducted from the proceeds when you sell, and is figured as a percentage of your
initial cost or the value at the time you sell, whichever is less. The fund also
has annual operating expenses, and as a shareholder, you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- --------------------------------------------------------------------------------
Maximum Sales Charge On Purchases 4.50% None None
- --------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge None 4.00% 1.00%
- --------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- --------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- --------------------------------------------------------------------------------
Other Expenses* 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- --------------------------------------------------------------------------------
* Includes costs of shareholder servicing, custody, accounting services
and similar expenses, which may vary with fund size and other factors.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY 10154-0010. Scudder Kemper has more than 70 years
of experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
45
<PAGE>
Based on the figures at left (including one year of capped expenses in each
period), this example is designed to help you compare the expenses of each share
class to those of other funds. The example assumes you invested $10,000, earned
5% annual returns and reinvested all dividends and distributions. This is only
an example; actual expenses will be different.
- --------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Expenses, assuming you kept your shares
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ICON] FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Richard L. Vandenberg ` John E. Dugenske
Lead Portfolio Manager o Began investment career
o Began investment career in 1990
in 1973 o Joined the advisor in
o Joined the advisor in 1998
1996 o Joined the fund team in
o Joined the fund team 1998
in 1996
Scott E. Dolan
o Began investment career
in 1993
o Joined the advisor in
1989
o Joined the fund team in
1998
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together
to develop the fund's investment strategies.
- --------------------------------------------------------------------------------
46
<PAGE>
TICKER SYMBOLS CLASS: A) KSTAX B) KSTBX C) KSTCX
Kemper
Strategic Income Fund
The fund seeks a high current return.
47
<PAGE>
- --------------------------------------------------------------------------------
The Fund's Strategy
The fund invests mainly in bonds issued by U.S. and foreign corporations and
governments. The fund may also invest in dividend-paying common stocks.
The fund may invest up to 50 percent of total assets in foreign bonds or stocks,
including emerging markets.
In deciding which types of securities to buy and sell, the portfolio managers
evaluate each major type of security the fund invests in - U.S. junk bonds,
investment-grade corporate bonds, emerging markets securities, foreign
government bonds and U.S. government and agency securities. The managers
typically consider a number of factors, including the relative attractiveness of
different types of securities, the potential impact of interest rate movements,
the outlook for various types of foreign bonds (including currency
considerations) and the relative yields and risks of bonds of various
maturities.
The managers may shift the proportions of the fund's holdings, favoring
different types of securities at different times, while still maintaining
variety in terms of the companies and industries represented.
Although the managers may adjust the duration (a measure of sensitivity to
interest rate movements) of the fund's portfolio, they generally intend to keep
it between 0.0 and 0.0 years. Also, while they're permitted to use various types
of derivatives (contracts whose value is based on, for example, indices,
commodities, or securities), the managers don't intend to use them as principal
investments, and might not use them at all.
- --------------------------------------------------------------------------------
[ICON] CREDIT QUALITY POLICIES
The credit quality of the fund's investments may vary; the fund may invest up to
100 percent of total assets in either investment-grade bonds or in junk bonds,
which are those below the fourth credit grade (i.e., grade BB/Ba
48
<PAGE>
and below). Compared to investment-grade bonds, junk bonds generally pay higher
yields and have higher volatility and higher risk of default on payments of
interest or principal.
49
<PAGE>
- --------------------------------------------------------------------------------
The Risks Of Investing In The Fund
There are several factors that could reduce the yield you get from the fund,
cause you to lose money, or make the fund perform less well than other
investments.
For this fund, the main risk factor will vary depending on the fund's weighting
of various types of securities. To the extent that it invests in junk bonds, one
main risk factor is the economy. Because the companies that issue high yield
bonds may be in uncertain financial health, the prices of their bonds can be
more vulnerable to bad economic news than investment-grade bonds. In some cases,
bonds may decline in credit quality or go into default. Also, negative corporate
news may have a significant impact on individual bond prices.
To the extent that the fund invests in higher quality bonds, a major factor is
market interest rates. A rise in interest rates generally means a fall in bond
prices - and, in turn, a fall in the value of your investment. An increase in
the portfolio's duration could make the fund more sensitive to this risk.
Foreign securities tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. This risk is greater in
emerging markets.
Currency exchange rates are also a factor. When the dollar value of a foreign
currency falls, so does the value of any investments the fund owns that are
denominated in that currency. This is separate from market risk, and may add to
market losses or reduce market gains.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
issuers, industries or other matters
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
Investors looking for a bond fund that emphasizes different types of bonds
depending on market and economic outlooks may want to invest in this fund.
50
<PAGE>
o some types of bonds could be paid off earlier than expected, which
would hurt the fund's performance
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
51
<PAGE>
- --------------------------------------------------------------------------------
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. (The chart doesn't
include sales charges, which would reduce returns.) The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A shares
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE:
BAR CHART DATA:
1989 00.00
1990 00.00
1991 00.00
1992 00.00
1993 00.00
1994 00.00
1995 00.00
1996 00.00
1997 00.00
1998 00.00
Best quarter: 0.00%, Q0 1990 YTD return as of 9/30/1999: 0.00%
Worst quarter: -0.00%, Q0 1900
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 6/30/92 Since 12/31/70
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- --------------------------------------------------------------------------------
Class A 00.00% 00.00% -- 00.00% 00.00%
- --------------------------------------------------------------------------------
Class B 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
Class C 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
[Appropriate Index to be updated]
- --------------------------------------------------------------------------------
00.00% 00.00% 00.00% 00.00% 00.00%
- --------------------------------------------------------------------------------
52
<PAGE>
- --------------------------------------------------------------------------------
How Much Investors Pay
The sales charge on purchases is deducted from your investment, and is shown as
a percentage of the offering price. The contingent deferred sales charge is
deducted from the proceeds when you sell, and is figured as a percentage of your
initial cost or the value at the time you sell, whichever is less. The fund also
has annual operating expenses, and as a shareholder, you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- --------------------------------------------------------------------------------
Maximum Sales Charge On Purchases 4.50% None None
- --------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge None 4.00% 1.00%
- --------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- --------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- --------------------------------------------------------------------------------
Other Expenses* 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- --------------------------------------------------------------------------------
* Includes costs of shareholder servicing, custody, accounting services
and similar expenses, which may vary with fund size and other factors.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY 10154-0010. Scudder Kemper has more than 70 years
of experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
53
<PAGE>
Based on the figures at left (including one year of capped expenses in each
period), this example is designed to help you compare the expenses of each share
class to those of other funds. The example assumes you invested $10,000, earned
5% annual returns and reinvested all dividends and distributions. This is only
an example; actual expenses will be different.
- --------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Expenses, assuming you kept your shares
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ICON] FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
J. Patrick Beimford Harry E. Resis, Jr.
Lead Portfolio Manager o Began investment career
o Began investment career in ??
in 1973 o Joined the advisor in
o Joined the advisor in 1988
1996 o Joined the fund team in
o Joined the fund team in 1992
1996
Robert S. Cessine
o Began investment career
in 1982
o Joined the advisor in
1993
o Joined the fund team in
1994
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together
to develop the fund's investment strategies.
- --------------------------------------------------------------------------------
54
<PAGE>
TICKER SYMBOLS CLASS: A) KUMAX B) KUMBX C) KUMCX
Kemper
U.S. Mortgage Fund
The fund seeks to provide maximum current return from U.S. Government
Securities.
55
<PAGE>
- --------------------------------------------------------------------------------
The Fund's Strategy
The fund invests in U.S. government securities, with an emphasis on
mortgage-backed securities issued by U.S. government agencies. These include
securities issued by Ginnie Mae, Fannie Mae and Freddie Mac. The fund can also
invest in U.S. Treasury securities.
In deciding which types of securities to buy and sell, the portfolio managers
first consider the relative attractiveness of mortgage-backed securities
compared to U.S. Treasuries and decide on allocations for each. Their decisions
are generally based on a number of factors, including changes in supply and
demand within the bond market.
In choosing individual bonds, the managers review each bond's fundamentals,
compare the yields of shorter maturity bonds to those of longer maturity bonds,
and use technical analysis to project prepayment rates and other factors that
could affect a bond's attractiveness.
Although the managers may adjust the duration (a measure of sensitivity to
interest rate movements) of the fund's portfolio, they generally intend to keep
it between X and Y years. Also, while they're permitted to use various types of
derivatives (contracts whose value is based on, for example, indices,
commodities or securities), the managers don't intend to use them as principal
investments, and might not use them at all.
- --------------------------------------------------------------------------------
[ICON] CREDIT QUALITY POLICIES
This fund normally invests at least 65 percent of assets in securities issued by
the U.S. Government, its agencies or instrumentalities.
56
<PAGE>
- --------------------------------------------------------------------------------
The Risks Of Investing In The Fund
There are several factors that could reduce the yield you get from the fund,
cause you to lose money or make the fund perform less well than other
investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices - and, in turn, a
fall in the value of your investment. An increase in the portfolio's duration
could make the fund more sensitive to this risk.
The full faith and credit guarantee of the U.S. government doesn't protect the
fund against market-driven declines in the prices or yields of these securities,
nor does it apply to shares of the fund itself. But it does guard against the
risk of payment default with respect to securities that are guaranteed.
Mortgage-backed securities carry additional risks and may be more volatile than
many other types of debt securities. Any unexpected behavior in interest rates
could hurt the performance of these securities. For example, a large fall in
interest rates could cause these securities to be paid off earlier than
expected, forcing the fund to reinvest the money at a lower rate. Another
example: if interest rates rise or stay high, these securities could be paid off
later than expected, forcing the fund to endure low yields. Both of these
examples also involve the risk of capital losses. The result for the fund could
be an increase in the volatility of its share price and yield.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
issuers or other matters
o some derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
This fund may appeal to investors who seek high current income but want to avoid
exposure to significant credit risk.
- --------------------------------------------------------------------------------
57
<PAGE>
- --------------------------------------------------------------------------------
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. (The chart doesn't
include sales charges, which would reduce returns.) The table shows how the
fund's returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the fund,
has no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
- --------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A shares
- --------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE:
BAR CHART DATA:
1989 00.00
1990 00.00
1991 00.00
1992 00.00
1993 00.00
1994 00.00
1995 00.00
1996 00.00
1997 00.00
1998 00.00
Best quarter: 0.00%, Q0 1990 YTD return as of 9/30/1999: 0.00%
Worst quarter: -0.00%, Q0 1900
- --------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1998)
- --------------------------------------------------------------------------------
Since Since
Since Since 6/30/92 Since 12/31/70
12/31/97 12/31/93 Life of 12/31/88 Life of
1 Year 5 Years Class B/C 10 Years Class A
- --------------------------------------------------------------------------------
Class A 00.00% 00.00% -- 00.00% 00.00%
- --------------------------------------------------------------------------------
Class B 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
Class C 00.00 00.00 00.00 -- --
- --------------------------------------------------------------------------------
[Appropriate Index to be updated]
- --------------------------------------------------------------------------------
00.00% 00.00% 00.00% 00.00% 00.00%
- --------------------------------------------------------------------------------
58
<PAGE>
- --------------------------------------------------------------------------------
How Much Investors Pay
The sales charge on purchases is deducted from your investment, and is shown as
a percentage of the offering price. The contingent deferred sales charge is
deducted from the proceeds when you sell, and is figured as a percentage of your
initial cost or the value at the time you sell, whichever is less. The fund also
has annual operating expenses, and as a shareholder, you pay them directly.
- --------------------------------------------------------------------------------
Fee Table Class A Class B Class C
- --------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
- --------------------------------------------------------------------------------
Maximum Sales Charge On Purchases 4.50% None None
- --------------------------------------------------------------------------------
Maximum Contingent Deferred Sales Charge None 4.00% 1.00%
- --------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
- --------------------------------------------------------------------------------
Management Fee 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.00 0.00
- --------------------------------------------------------------------------------
Other Expenses* 0.00 0.00 0.00
- --------------------------------------------------------------------------------
Total Annual Operating Expenses 0.00 0.00 0.00
- --------------------------------------------------------------------------------
* Includes costs of shareholder servicing, custody, accounting services
and similar expenses, which may vary with fund size and other factors.
- --------------------------------------------------------------------------------
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., located at
345 Park Avenue, New York, NY 10154-0010. Scudder Kemper has more than 70 years
of experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.00% of its average daily net assets.
59
<PAGE>
Based on the figures at left (including one year of capped expenses in each
period), this example is designed to help you compare the expenses of each share
class to those of other funds. The example assumes you invested $10,000, earned
5% annual returns and reinvested all dividends and distributions. This is only
an example; actual expenses will be different.
- --------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Expenses, assuming you kept your shares
- --------------------------------------------------------------------------------
Class A shares $0,000 $0,000 $0,000 $0,000
- --------------------------------------------------------------------------------
Class B shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
Class C shares 0,000 0,000 0,000 0,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ICON] FUND MANAGERS
Below are the people who handle the fund's day-to-day management:
Richard L. Vandenberg John E. Dugenske
Lead Portfolio Manager Portfolio Manager
o Began investment career in 1973 o Began investment career in 1990
o Joined the advisor in 1996 o Joined the advisor in 1998
o Joined the fund team in 1996 o Joined the fund team in 1998
Scott E. Dolan
Portfolio Manager
o Began investment career in 1993
o Joined the advisor in 1989
o Joined the fund team in 1998
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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The fund is managed by a team of investment professionals who work together
to develop the fund's investment strategies.
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Other Policies And Risks
While the previous pages describe the main points of each fund's strategy and
risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, each fund's Board could
change that fund's investment goal without seeking shareholder
approval.
o As a temporary defensive measure, any of these funds could shift up to
100% of assets into investments such as money market securities. This
could prevent losses, but would mean that the fund would not be
pursuing its goal.
o Scudder Kemper establishes a security's credit quality when it buys the
security, using independent ratings or, for unrated securities, its own
credit ratings. When ratings don't agree, a fund may use the higher
rating. If a security's credit quality falls, the advisor will
determine whether selling it would be in the shareholders' best
interests.
o Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, commodities,
currencies or securities), the managers don't intend to use them as
principal investments.
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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This prospectus doesn't tell you about every policy or risk of investing in a
fund. For more information, you may want to request a copy of the SAI (the back
cover has additional information on how to do this).
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Year 2000 and euro readiness
Like all mutual funds, these funds could be affected by the inability of some
computer systems to recognize the year 2000. Also, those funds permitted to
invest in foreign securities, could be affected by accounting differences,
changes in tax treatment or other issues related to the conversion of certain
European currencies into the euro, which is already underway. Scudder Kemper has
readiness programs designed to address these problems, and has researched the
readiness of suppliers and business partners as well as issuers of securities
the funds own. Still, there's some risk that one or both of these problems could
materially affect a fund's operations (such as its ability to calculate net
asset value and to handle purchases and redemptions), its investments or
securities markets in general.
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Financial Highlights
These tables are designed to help you understand each fund's financial
performance in recent years. The figures in the first part of each table are for
a single share. The total return figures represent the percentage that an
investor in a particular fund would have earned (or lost), assuming all
dividends and distributions were reinvested. This information has been audited
by Ernst & Young LLP, whose report, along with each fund's financial statements,
is included in that fund's annual report (see "Shareholder reports" on the back
cover).
Kemper High Yield Fund
Kemper High Yield Fund II
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Term U.S. Government Fund
Kemper Strategic Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund
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Investing In The Funds
The following pages tell you about many of the services, choices and benefits of
being a Kemper Funds shareholder. You'll also find information on how to check
the status of your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representative or other investment provider, such as a workplace
retirement plan.
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Choosing A Share Class
In this prospectus, there are three share classes for each fund. Each class has
its own fees and expenses, offering you a choice of cost structures.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Classes and features Points to help you compare
- --------------------------------------------------------------------------------------
<S> <C>
Class A
o Sales charges of up to 5.75%, charged o Some investors may be able to reduce
when you buy shares or eliminate their sales charges; see
o In most cases, no charges when you next page
sell shares o Annual expenses are lower than those
o No marketing/distribution fee for Class B or Class C
- --------------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge rate falls to
o Deferred sales charge of up to 4.00%, zero after six years
charged when you sell shares you bought o Shares automatically convert to Class A
within the last six years after six years, which means lower
o 0.75% marketing and distribution fee annual expenses going forward
- --------------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge rate is
o Deferred sales charge of 1.00%, lower, but your shares never convert to
charged when you sell shares you Class A, so annual expenses remain
bought within the last year higher
o 0.75% marketing and distribution fee
- --------------------------------------------------------------------------------------
</TABLE>
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Class A shares
Class A shares have a sales charge that varies with the amount you invest:
Government, High Yield, High Yield II, Income and Capital, Mortgage, Opportunity
and Strategic Funds
Sales charge as a Sales charge as a
percent of percent of your
Your investment offering price investment
- --------------------------------------------------------------------------------
Up to $100,000 4.50% 4.71%
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$100,000-$249,999 3.50 3.63
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$250,000-$499,999 2.60 2.67
- --------------------------------------------------------------------------------
$500,000-$999,999 2.00 2.04
- --------------------------------------------------------------------------------
$1 million or more .00 .00
- --------------------------------------------------------------------------------
Short-Term U.S. Government Fund
Your investment
Sales charge as a Sales charge as a
percent of percent of your
Your investment offering price investment
- --------------------------------------------------------------------------------
Up to $100,000 2.75% 2.83%
- --------------------------------------------------------------------------------
$100,000-$249,999 2.50 2.56
- --------------------------------------------------------------------------------
$250,000-$499,999 2.00 2.04
- --------------------------------------------------------------------------------
$500,000-$999,999 1.50 1.52
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$1 million or more .00 .00
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You may be able to lower your Class A sales charges if:
o you plan to invest at least $50,000 over the next 24 months ("letter of
intent")
o the amount of Kemper shares you already own (including shares in
certain other Kemper funds) plus the amount you're investing now is at
least $50,000 ("cumulative discount")
o you are investing a total of $50,000 or more in several Kemper funds at
once ("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
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You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you pay a
fee to an investment advisor or other firm for portfolio management
services
There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Kemper can answer
your questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPH.
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Class A shares may make sense for long-term investors, especially those who are
eligible for reduced or eliminated sales charges.
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<PAGE>
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which they charge an annual marketing/
distribution fee of 0.75%. This means the annual expenses for Class B shares are
somewhat higher (and their performance correspondingly lower) compared to Class
A shares, which don't have a 12b-1 fee. After six years, Class B shares
automatically convert to Class A, which has the net effect of lowering the
annual expenses from the seventh year on.
Class B shares have a contingent deferred sales charge (CDSC). This charge
declines over the years you own shares, and disappears completely after six
years of ownership. But for any shares you sell within those six years, you may
be charged as follows:
Year after you bought shares CDSC on shares you sell
- --------------------------------------------------------------------------------
First year 4.00%
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Second or third year 3.00
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Fourth or fifth year 2.00
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Sixth year 1.00
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Seventh year and later None (automatic conversion
to Class A)
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This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper can answer your questions and
help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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Class B shares can be a logical choice for long-term investors who'd prefer to
see all of their investment go to work right away, and can accept somewhat
higher annual expenses in exchange.
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<PAGE>
Class C shares
Like Class B shares, Class C shares have no up-front sales charges and have a
12b-1 plan that allows them to charge an annual marketing/ distribution fee of
0. 75%. Because of this fee, the annual expenses for Class C shares are similar
to those of Class B shares, but higher than those for Class A shares (and the
performance of Class C shares is correspondingly lower than that of Class A).
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a contingent deferred sales charge (CDSC), but only on
shares you sell within one year of buying them:
CDSC on shares you
Year after you bought shares sell
- --------------------------------------------------------------------------------
First year 1.00%
- --------------------------------------------------------------------------------
Second year and later None
- --------------------------------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper can answer your questions and
help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses mean that over the years you could end up paying more than the
equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.
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How To Buy Shares
Once you've chosen a share class, use these instructions to make investments.
Make out any checks to "Kemper Funds."
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
First investment Additional investments
- ----------------------------------------------------------------------------------------
<S> <C>
$1,000 or more for regular accounts $100 or more for regular accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic
Investment Plan
- ----------------------------------------------------------------------------------------
Through a financial representative
o Contact your representative using o Contact your representative using
the method that's most convenient for the method that's most convenient
you for you
- ----------------------------------------------------------------------------------------
By mail or express mail (see below)
o Fill out and sign an application o Send a check and a Kemper
o Send it to us at the appropriate investment slip to us at the
address, along with an investment appropriate address below
check o If you don't have an investment slip,
simply include a letter with your name,
account number, the full name of the
fund and the share class and your
investment instructions
- ----------------------------------------------------------------------------------------
By wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
- ----------------------------------------------------------------------------------------
By phone
o -- o Call (800) 621-1048 for instructions
- ----------------------------------------------------------------------------------------
With an automatic investment plan
o -- o To set up regular investments, call
(800) 621-1048
- ----------------------------------------------------------------------------------------
On the internet
o Follow the instructions at o Follow the instructions at
www.kemper.com www.kemper.com
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</TABLE>
Regular mail: Kemper Funds, PO Box 219415, Kansas City, MO 64121-9415
Express, registered, or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: 800-818-7526 (for exchanging and selling only)
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How To Exchange Or Sell Shares
Use these instructions to exchange or sell shares in your account.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Exchanging into another fund Selling shares
- -------------------------------------------------------------------------------------
<S> <C>
$1,000 or more to open a new account Some transactions, including most for
over $50,000, can only be ordered in
$100 or more for exchanges between writing with a signature guarantee; if
existing accounts you're in doubt, see page 00
- -------------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by the o Contact your representative by the
method that's most convenient for you method that's most convenient for you
- -------------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for instructions
- -------------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes: Write a letter that includes:
o the fund, class and account number o the fund, class and account number
you're exchanging out of from which you want to sell shares
o the dollar amount or number of shares o the dollar amount or number of shares
you want to exchange you want to sell
o the name and class of the fund you o your name(s), signature(s) and address,
want to exchange into as they appear on your account
o your name(s), signature(s) and address, o a daytime telephone number
as they appear on your account
o a daytime telephone number
- -------------------------------------------------------------------------------------
With a systematic exchange plan With a systematic withdrawal plan
o To set up regular exchanges from a o To set up regular cash payments from
Kemper fund account, call a Kemper fund account, call (800) 621-1048
(800) 621-1048
- -------------------------------------------------------------------------------------
On the internet
o Follow the instructions at o Follow the instructions at
www.kemper.com www.kemper.com
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</TABLE>
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Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
Policies about transactions
The funds are open for business whenever the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 3 p.m. central time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Kemper funds generally and on accounts held directly at Kemper. You can also use
it to make exchanges and sell shares.
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EXPRESS-Transfer lets you set up a link between a Kemper account and a bank
account. Once this link is in place, you can move money between the two with a
phone call. You'll need to make sure your bank has Automated Clearing House
(ACH) services. Transactions take two to three days to be completed, and there
is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the account
application; to add it to an existing account, call (800) 621-1048.
Share certificates are available on written request. However, we don't recommend
them unless you want them for a specific purpose, because they can only be sold
by mailing them in, and if they're ever lost they're difficult and expensive to
replace.
When you call us to sell shares, we may record the call, ask you for certain
information or take other steps designed to prevent fraudulent orders. It's
important to understand that as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The funds can only send or
accept wires of $1,000 or more.
Exchanges among Kemper funds are an option for most shareholders. Exchanges are
a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject or limit purchase orders, for
these or other reasons.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
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The Kemper Web site can be a valuable resource for shareholders with Internet
access. Go to www. kemper.com to get up-to-date information, review balances or
even place orders for exchanges.
- --------------------------------------------------------------------------------
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When you want to sell more than $50,000 worth of shares, you'll usually need to
place your order in writing and include a signature guarantee. The only
exception is if you want money wired to a bank account that is already on file
with us; in that case, you don't need a signature guarantee. Also, you don't
need a signature guarantee for an exchange, although we may require one in
certain other circumstances.
A signature guarantee is simply a certification of your signature - a valuable
safeguard against fraud. You can get a signature guarantee from most brokers and
most banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
When you sell shares that have a contingent deferred sales charge (CDSC), we
calculate the CDSC as a percentage of what you paid for the shares or what you
are selling them for - whichever results in the lowest charge to you. In
processing orders to sell shares, we turn to the shares with the lowest CSDC
first. Exchanges from one Kemper fund into another don't affect CDSCs: for each
investment you make, the date you first bought Kemper shares is the date we use
to calculate a CDSC on that particular investment.
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns
of excess contributions from retirement plans
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.
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75
<PAGE>
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Kemper can answer your questions and help you determine if you are eligible.
If you sell shares in a Kemper fund and then decide to invest with Kemper again
within six months, you can take of advantage of the "reinstatement feature."
With this feature, you can put your money back into the same class of a Kemper
fund at its current NAV and for purposes of sales charges it will be treated as
if it had never left Kemper. You'll be reimbursed (in the form of fund shares)
for any CDSC you paid when you sold. Future CDSC calculations will be based on
your original investment date, rather than your reinstatement date. There is
also an option that lets investors who sold Class B shares buy Class A shares
with no sales charge, although they won't be reimbursed for any CSDC they paid.
You can only use the reinstatement feature once for any given group of shares.
To take advantage of this feature, contact Kemper or your financial
representative.
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
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How the funds calculate share price
For each fund in this prospectus, the price at which you buy shares is as
follows:
Class A shares - net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing A Share Class")
Class B and Class C shares - net asset value per share, or NAV
To calculate NAV, each share class of each fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
- ---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For each fund and share class in this prospectus, the price at which you sell
shares is also the NAV, although for Class B and Class C investors a contingent
deferred sales charge may be taken out of the proceeds (see "Choosing A Share
Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
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Other rights we reserve
For each fund in this prospectus, you should be aware that we may do any of the
following:
o withhold 31% of your distributions as federal income tax if we have
been notified by the IRS that you are subject to backup withholding, or
if you fail to provide us with a correct taxpayer ID number or
certification that you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been
opened, we may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below
$1, 000 for the entire quarter; this policy doesn't apply to most
retirement accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving
you marketable securities (which typically will involve brokerage costs
for you to liquidate) rather than cash; in most cases, a fund won't
make a redemption in kind unless your requests over a 90-day period
total more than $250,000 or 1% of the fund's assets, whichever is less
o calculate NAV more than once a day
o change, add or withdraw various services, fees and account policies
(for example, we may change or terminate the exchange privilege at any
time)
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Understanding Distributions And Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The funds have regular schedules for paying out any earnings to shareholders:
o income: declared and paid monthly
o long-term capital gains: December, or otherwise as needed
The funds may make additional distributions for tax purposes if necessary.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares (at NAV), all sent to you by
check, have one type reinvested and the other sent to you by check or have them
invested in a different fund. Tell us your preference on your application. If
you don't indicate a preference, your dividends and distributions will all be
reinvested without sales charges. For retirement plans, reinvestment is the only
option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
- --------------------------------------------------------------------------------
Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences.
- --------------------------------------------------------------------------------
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<PAGE>
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
- --------------------------------------------------------------------------------
o short-term capital gains from selling fund shares
- --------------------------------------------------------------------------------
o income dividends you receive from a fund
- --------------------------------------------------------------------------------
o short-term capital gains distributions received from a fund
- --------------------------------------------------------------------------------
Generally taxed at capital gains rates
- --------------------------------------------------------------------------------
o long-term capital gains from selling fund shares
- --------------------------------------------------------------------------------
o long-term capital gains distributions received from a fund
- --------------------------------------------------------------------------------
You may be able to claim a tax credit or deduction for your share of any foreign
taxes your fund pays.
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before the fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends- received deduction for a portion
of income dividends they receive.
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To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. To reduce costs, we mail one copy per
household. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Kemper or the SEC (see below). Materials you
get from Kemper are free; those from the SEC involve a copying fee. If you like,
you can look over these materials in person at the SEC's Public Reference Room
in Washington, DC.
SEC
450 Fifth Street, N.W.
Washington, DC 20549-6009
www.sec.gov
Tel (800) SEC-0330
Kemper Funds
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com
Tel (800) 621-1048
SEC File Numbers
Kemper High Yield Fund 000-000
Kemper High Yield Fund II 000-000
Kemper High Yield Opportunity Fund 000-000
Kemper Income And Capital Preservation Fund 000-000
Kemper Short-Term U.S. Government Fund 000-000
Kemper U.S. Government Securities Fund 000-000
Kemper Strategic Income Fund 000-000
Kemper U.S. Mortgage Fund 000-000
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
[LOGO] KEMPER FUNDS
Long-term investing in a short-term world
<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............................................2
INVESTMENT POLICIES AND TECHNIQUES.................................6
BROKERAGE COMMISSIONS.............................................19
INVESTMENT MANAGER AND UNDERWRITER................................21
PURCHASE, REPURCHASE, AND REDEMPTION OF SHARES....................29
DIVIDENDS AND TAXES...............................................42
NET ASSET VALUE...................................................45
PERFORMANCE.......................................................46
OFFICERS AND TRUSTEES.............................................51
CAPITAL STRUCTURE.................................................55
APPENDIX -- RATINGS OF INVESTMENTS................................58
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.
<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. Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may the Fund purchase put or
call options if more than 5% of the Fund's net assets would be invested in
premiums on put and call options, combinations thereof or similar options;
however, the Fund may buy or sell options on financial futures contracts.
7. Purchase more than 10% of any class of voting securities of any issuer.
Strategic Fund (formerly Kemper Diversified Income Fund)
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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. Write (sell) put or call options, combinations thereof or similar options;
nor may it purchase put or call options if more than 5% of the Fund's net
assets would be invested in premiums on the purchase of put and call
options, combinations thereof or similar options; except that the Fund may
write covered call options with respect to its portfolio securities or
securities indices, or write secured put options; and the Fund may enter
into closing transactions with respect to such options, and may buy or sell
options on financial futures contracts.
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:
1. Invest more than 15% of its net assets in illiquid securities.
2. Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in
premiums on put and call options, combinations thereof or similar options;
however, the Fund may buy or sell options on financial futures contracts.
3. 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.
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
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<PAGE>
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. Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in
premiums on put and call options, combinations thereof or similar options;
however, the Fund may buy or sell options on financial futures contracts.
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.
4
<PAGE>
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. Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in
premiums on put and call options, combinations thereof or similar options;
however, the Fund may buy or sell options on financial futures contracts.
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 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. Write (sell) put or call options, combinations thereof or similar options
except that the Fund may write covered call options on up to 100% of the
Fund's net assets and may write secured put options on up to 50% of the
Fund's net assets; nor may the Fund purchase put or call options if more
than 5% of the Fund's net assets would be invested in premiums on put and
call options, combinations thereof or similar options; however, the Fund
may buy or sell options on financial futures contracts.
11. 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.
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
5
<PAGE>
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.
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. Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in
premiums on put and call options, combinations thereof or similar options;
however, the Fund may buy or sell options on financial futures contracts.
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.)
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 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
6
<PAGE>
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 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
7
<PAGE>
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 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
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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.
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
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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.
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
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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.
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
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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.
General. Each Fund may engage in options and financial futures and other
derivatives transactions in accordance with its respective investment objectives
and policies. Each such Fund intends to engage in such transactions if it
appears to the investment manager to be advantageous to do so in order to pursue
its investment objective and also to hedge against the effects of market risks
but not for speculative purposes. The use of futures and options, and possible
benefits and attendant risks, are discussed below along with information
concerning other investment policies and techniques.
Derivatives. In addition to options and financial futures transactions,
consistent with its objective, each Fund may invest in a broad array of
financial instruments and securities in which the value of the instrument or
security is "derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate or a foreign currency
("derivatives"). Derivatives are most often used to manage investment risk, to
increase or decrease exposure to an asset class or benchmark (as a hedge or to
enhance return), or to create an investment position indirectly (often because
it is more efficient or less costly than direct investment). The types of
derivatives used by each Fund and the techniques employed by the investment
manager may change over time as new derivatives and strategies are developed or
regulatory changes occur.
Regulatory Restrictions. To the extent required to comply with applicable
regulations, when purchasing a futures contract, writing a put option or
entering into a delayed delivery purchase or a forward currency exchange
purchase, a Fund will maintain eligible securities in a segregated account. A
Fund will use cover in connection with selling a futures contract.
A Fund will not engage in transactions in financial futures contracts or options
thereon for speculation, but only in an attempt to hedge against changes in
interest rates or market conditions affecting the value of securities which the
Fund holds or intends to purchase.
Options on Securities. A Fund may write (sell) "covered" call options on
securities as long as it owns the underlying securities subject to the option or
an option to purchase the same underlying securities, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain for the term of the option a segregated account
consisting of cash or other liquid securities ("eligible securities") to the
extent required by applicable regulation in connection with the optioned
securities. A Fund may write "covered" put options provided that, as long as the
Fund is obligated as a writer of a put option, the Fund will own an option to
sell the underlying securities subject to the option, having an exercise price
equal to or greater than the exercise price of the "covered" option, or it will
deposit and maintain in
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a segregated account eligible securities having a value equal to or greater than
the exercise price of the option. A call option gives the purchaser the right to
buy, and the writer the obligation to sell, the underlying security at the
exercise price during or at the end of the option period. A put option gives the
purchaser the right to sell, and the writer the obligation to buy, the
underlying security at the exercise price during or at the end of the option
period. The premium received for writing an option will reflect, among other
things, the current market price of the underlying security, the relationship of
the exercise price to such market price, the price volatility of the underlying
security, the option period, supply and demand and interest rates. The Funds may
write or purchase spread options, which are options for which the exercise price
may be a fixed dollar spread or yield spread between the security underlying the
option and another security that is used as a bench mark. The exercise price of
an option may be below, equal to or above the current market value of the
underlying security at the time the option is written. The buyer of a put who
also owns the related security is protected by ownership of a put option against
any decline in that security's price below the exercise price less the amount
paid for the option. The ability to purchase put options allows a Fund to
protect capital gains in an appreciated security it owns, without being required
to actually sell that security. At times a Fund would like to establish a
position in a security upon which call options are available. By purchasing a
call option, a Fund is able to fix the cost of acquiring the security, this
being the cost of the call plus the exercise price of the option. This procedure
also provides some protection from an unexpected downturn in the market, because
a Fund is only at risk for the amount of the premium paid for the call option
which it can, if it chooses, permit to expire.
During the option period the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain in the amount of the premium received.
If the covered call option writer has to sell the underlying security because of
the exercise of a call option, it realizes a gain or loss from the sale of the
underlying security, with the proceeds being increased by the amount of the
premium.
If a secured put option expires unexercised, the writer realizes a gain from the
amount of the premium. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized loss to the extent that the current market value of the
underlying security is less than the exercise price of the put option. However,
this would be offset in whole or in part by gain from the premium received.
Over-the-Counter Options. A Fund may deal in options on securities and
securities indexes, which options may be listed for trading on a national
securities exchange or traded over-the-counter ("OTC options"). OTC options
differ from exchange traded options in several respects. They are transacted
directly with dealers and not with a clearing corporation, and there is a risk
of nonperformance by the dealer as a result of the insolvency of such dealer or
otherwise, in which event a Fund may experience material losses. However, in
writing options the premium is paid in advance by the dealer. OTC options are
available for a greater variety of securities, and a wider range of expiration
dates and exercise prices, than are exchange traded options. Since there is no
exchange, pricing is normally done by reference to information from market
makers, which information is carefully monitored by the investment manager and
verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, a Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it.
Similarly, when a Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a purchaser of such put or call option
might also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The Funds understand the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The investment manager
disagrees with this position and has found the dealers with which it engages in
OTC options transactions generally agreeable to and capable of entering into
closing transactions.
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A Fund will only engage in OTC options transactions with dealers that have been
specifically approved by the investment manager. The investment manager believes
that the approved dealers should be able to enter into closing transactions if
necessary and, therefore, present minimal credit risks to a Fund. The investment
manager will monitor the creditworthiness of the approved dealers on an ongoing
basis. A Fund currently will not engage in OTC options transactions if the
amount invested by the Fund in OTC options, plus a "liquidity charge" related to
OTC options written by the Fund, plus the amount invested by the Fund in
illiquid securities, would exceed 15% of the Fund's net assets (10% of total
assets for the Mortgage Fund). The "liquidity charge" referred to above is
computed as described below.
The Funds anticipate entering into agreements with dealers to which a Fund sells
OTC options. Under these agreements a Fund would have the absolute right to
repurchase the OTC options from the dealer at any time at a price no greater
than a price established under the agreements (the "Repurchase Price"). The
"liquidity charge" referred to herein for a specific OTC option transaction will
be the Repurchase Price related to the OTC option less the intrinsic value of
the OTC option. The intrinsic value of an OTC call option for such purposes will
be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
will be the amount by which the exercise price exceeds the current market value
of the underlying security. If there is no such agreement requiring a dealer to
allow the Fund to repurchase a specific OTC option written by the Fund, the
"liquidity charge" will be the current market value of the assets serving as
"cover" for such OTC option.
Options on Securities Indices. A Fund also may purchase and write call and put
options on securities indices in an attempt to hedge against market conditions
affecting the value of securities that the Fund owns or intends to purchase, and
not for speculation. Through the writing or purchase of index options, a Fund
can achieve many of the same objectives as through the use of options on
individual securities. Options on securities indices are similar to options on a
security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to such difference between the
closing price of the index and the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends upon price movements in the market generally (or in a particular
industry or segment of the market), rather than upon price movements in
individual securities. Price movements in securities that the Fund owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index since the prices of such securities may be affected by
somewhat different factors and, therefore, the Fund bears the risk that a loss
on an index option would not be completely offset by movements in the price of
such securities.
When a Fund writes an option on a securities index, it will segregate, and
mark-to-market, eligible securities to the extent required by applicable
regulation. In addition, where the Fund writes a call option on a securities
index at a time when the contract value exceeds the exercise price, the Fund
will segregate and mark-to-market, until the option expires or is closed out,
cash or cash equivalents equal in value to such excess.
A Fund may also purchase and sell options on other appropriate indices, as
available, such as foreign currency indices. Options on a securities index
involve risks similar to those risks relating to transactions in financial
futures contracts described below. Also, an option purchased by a Fund may
expire worthless, in which case the Fund would lose the premium paid therefor.
Financial Futures Contracts. The Funds may enter into financial futures
contracts for the future delivery of a financial instrument, such as a security,
or an amount of foreign currency or the cash value of a securities index. This
investment technique is designed primarily to hedge (i.e., protect) against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might affect adversely the value of securities or other assets which
the Fund holds or intends to purchase. A "sale" of a futures contract means the
undertaking of a contractual obligation to deliver the securities or the cash
value of an index or foreign currency called for by the contract at a specified
price during a specified delivery period. A "purchase" of a futures contract
means the undertaking of a contractual obligation to acquire the securities or
cash value of an index or foreign currency at a specified price during a
specified delivery period. At the time of delivery, in the case of fixed income
securities pursuant to the contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than that specified in the contract. In some cases, securities
called for by a futures contract may not have been issued at the time the
contract was written.
Although some futures contracts by their terms call for the actual delivery or
acquisition of securities or other assets, in most cases a party will close out
the contractual commitment before delivery of the underlying assets by
purchasing (or selling, as
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the case may be) on a commodities exchange an identical futures contract calling
for delivery in the same month. Such a transaction, if effected through a member
of an exchange, cancels the obligation to make or take delivery of the
underlying securities or other assets. All transactions in the futures market
are made, offset or fulfilled through a clearing house associated with the
exchange on which the contracts are traded. A Fund will incur brokerage fees
when it purchases or sells contracts, and will be required to maintain margin
deposits. At the time a Fund enters into a futures contract, it is required to
deposit with its custodian, on behalf of the broker, a specified amount of cash
or eligible securities, called "initial margin." The initial margin required for
a futures contract is set by the exchange on which the contract is traded.
Subsequent payments, called "variation margin," to and from the broker are made
on a daily basis as the market price of the futures contract fluctuates. The
costs incurred in connection with futures transactions could reduce a Fund's
return. Futures contracts entail risks. If the investment manager's judgment
about the general direction of markets or exchange rates is wrong, the overall
performance may be poorer than if no such contracts had been entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio assets being hedged. In addition, the market prices of
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because, from the point of view of speculators, the
margin requirements in the futures markets are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities or other assets and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment manager may still not result in a successful hedging
transaction. If any of these events should occur, the Fund could lose money on
the financial futures contracts and also on the value of its portfolio assets.
Options on Financial Futures Contracts. A Fund may purchase and write call and
put options on financial futures contracts. 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 at a specified exercise price at any time during
the period of the option. Upon exercise, the writer of the option delivers the
futures contract to the holder at the exercise price. A Fund would be required
to deposit with its custodian initial margin and maintenance margin with respect
to put and call options on futures contracts written by it. A Fund will
establish segregated accounts or will provide cover with respect to written
options on financial futures contracts in a manner similar to that described
under "Options on Securities." Options on futures contracts involve risks
similar to those risks relating to transactions in financial futures contracts
described herein. Also, an option purchased by a Fund may expire worthless, in
which case the Fund would lose the premium paid therefor.
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,
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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.
Foreign Currency Options. The Strategic, High Yield, High Yield II, Income and
Capital and Opportunity Funds may engage in foreign currency options
transactions. A foreign currency option provides the option buyer with the right
to buy or sell a stated amount of foreign currency at the exercise price at a
specified date or during the option period. A call option gives its owner the
right, but not the obligation, to buy the currency, while a put option gives its
owner the right, but not the obligation, to sell the currency. The option seller
(writer) is obligated to fulfill the terms of the option sold if it is
exercised. However, either seller or buyer may close its position during the
option period in the secondary market for such options any time prior to
expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the Fund against an adverse movement in the
value of a foreign currency, it does not limit the gain which might result from
a favorable movement in the value of such currency. For example, if a Fund were
holding securities denominated in an appreciating foreign currency and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, it would not have to exercise its put. Similarly, if the Fund had
entered into a contract to purchase a security denominated in a foreign currency
and had purchased a foreign currency call to hedge against a rise in value of
the currency but instead the currency had depreciated in value between the date
of purchase and the settlement date, the Fund would not have to exercise its
call but could acquire in the spot market the amount of foreign currency needed
for settlement.
Foreign Currency Futures Transactions. As part of their financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Strategic, High Yield, High Yield II, Income and
Capital and Opportunity Funds may use foreign currency futures contracts and
options on such futures contracts. Through the purchase or sale of such
contracts, a Fund may be able to achieve many of the same objectives as through
forward foreign currency exchange contracts more effectively and possibly at a
lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and are traded on boards of trade and commodities
exchanges. It is anticipated that such contracts may provide greater liquidity
and lower cost than forward foreign currency exchange contracts.
Forward Foreign Currency Exchange Contracts. The Strategic, High Yield, High
Yield II, Income and Capital and Opportunity Funds may engage in forward foreign
currency transactions. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days ("term") from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded directly between currency traders (usually large commercial banks) and
their customers. The investment manager believes that it is important to have
the flexibility to enter into such forward contracts when it determines that to
do so is in the best interests of a Fund. These Funds may engage in foreign
currency transactions in connection with their investments in foreign securities
but will not speculate in foreign currency exchange.
The value of the foreign securities investments of a Fund measured in U.S.
Dollars may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. A Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded directly between currency traders (usually
large commercial banks) and their customers.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may want to establish the U.S. Dollar cost
or proceeds, as the case may be. By entering into a forward contract in U.S.
Dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the Fund is able to protect
16
<PAGE>
itself against a possible loss between trade and settlement dates resulting from
an adverse change in the relationship between the U.S. Dollar and such foreign
currency. However, this tends to limit potential gains that might result from a
positive change in such currency relationships. A Fund may also hedge its
foreign currency exchange rate risk by engaging in foreign currency financial
futures and options transactions. When the investment manager believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. Dollar, it may enter into a forward contract to sell an amount
of foreign currency approximating the value of some or all of the Fund's
securities denominated in such foreign currency. The forecasting of short-term
currency market movement is extremely difficult and whether such a short-term
hedging strategy will be successful is highly uncertain. It is impossible to
forecast with absolute precision the market value of portfolio securities at the
expiration of a contract. Accordingly, it may be necessary for a Fund to
purchase additional currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Fund is obligated to deliver when a decision is made to sell the
security and make delivery of the foreign currency in settlement of a forward
contract. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction with respect to a forward contract, the Fund will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between a Fund's entering into a
forward contract for the sale of foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund would
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund would suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain that might result should the value of such currency increase. A
Fund may have to convert its holdings of foreign currencies into U.S. Dollars
from time to time in order to meet such needs as Fund expenses and redemption
requests. Although foreign exchange dealers do not charge a fee for conversion,
they do realize a profit based on the difference (the "spread") between the
prices at which they are buying and selling various currencies.
A Fund will not enter into forward contracts or maintain a net exposure in such
contracts where the Fund would be obligated to deliver an amount of foreign
currency in excess of the value of the Fund's securities or other assets
denominated in that currency. The Strategic, High Yield, Income and Capital and
Opportunity Funds do not intend to enter into forward contracts for the purchase
of a foreign currency if they would have more than 15% of the value of their
total assets committed to such contracts. The Funds segregate cash or liquid
securities to the extent required by applicable regulation in connection with
forward foreign currency exchange contracts entered into for the purchase of a
foreign currency. A Fund generally does not enter into a forward contract with a
term longer than one year.
Short Sales Against-the-Box. The Short-Term Government, Strategic and Mortgage
Funds may each make short sales against-the-box. A short sale "against-the-box"
is a short sale in which the Fund owns at least an equal amount of the
securities sold short or securities convertible into or exchangeable for,
without payment of any further consideration, securities of the same issue as,
and at least equal in amount to, the securities sold short. A Fund may engage in
such short sales only to the extent that not more than 10% of the Fund's total
assets (determined at the time of the short sale) is held as collateral for such
sales. No Fund currently intends, however, to engage in such short sales to the
extent that more than 5% of its net assets will be held as collateral therefor
during the current year.
Interest Rate Swaps and Swap-Related Products. The Short-Term Government and
Opportunity Funds may engage in interest rate swaps and other swap-related
products. Swap agreements can take many different forms and are known by a
variety of names. The Short-Term Government and Opportunity Funds are not
limited to any particular form of swap agreement if the investment manager
determines it is consistent with a fund's investment objective and policies.
Interest rate swaps are the exchange by the Fund with another party of their
respective commitments to pay or receive interest with respect to a notional
(agreed upon) principal amount, for example, an exchange of floating rate
payments for fixed rate payments. Interest rate swaps are generally entered into
to permit the party seeking a floating or fixed rate obligation, as the case may
be, the opportunity to acquire such obligation at a lower rate than is directly
available in the credit market. The success of such a transaction depends in
large part on the availability of fixed rate obligations at a low enough coupon
rate to cover the cost involved. The purchase of an interest rate cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling
17
<PAGE>
the interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor.
Each of the Short-Term Government and Opportunity Funds usually will enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with a Fund receiving or paying, as the case may be, only the net amounts
of the two payments. The net amount of the excess, if any, of the Fund's
obligations over its entitlement with respect to each interest rate swap will be
accrued on a daily basis and an amount of cash or eligible securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. To the extent that a
Fund enters into interest rate swaps on other than a net basis, the amount
maintained in a segregated account will be the full amount of the Fund's
obligations, if any, with respect to such interest rate swaps, accrued on a
daily basis.
Each of the Short-Term Government and Opportunity Funds will not enter into any
swap transaction unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated in the highest rating category for the
Short-Term Government Fund, and, within the top three rating categories for the
Opportunity Fund, by at least one nationally recognized rating organization at
the time of entering into such transaction. If there is a default by the other
party to such a transaction, the Fund will 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 using standardized swap
documents. As a result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized documents have not yet
been developed and, accordingly, they are less liquid than swaps. It is
anticipated that neither the Short-Term Government nor Opportunity Fund will
invest more than 5% of its total assets in interest rate caps and floors and
that the aggregate notional (agreed upon) principal amount of interest rate
swaps entered into by a Fund and the aggregate contract value of outstanding
futures contracts of a Fund and futures contracts subject to outstanding options
written by a Fund will not exceed 50% of the Fund's total assets.
Repurchase Agreements. Each Fund may invest in repurchase agreements, under
which it acquires ownership of a security and the broker-dealer or bank agrees
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the Fund's holding period. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
might have expenses in enforcing its rights, and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The securities underlying a repurchase agreement will be
marked-to-market every business day so that the value of such securities is at
least equal to the investment value of the repurchase agreement, including any
accrued interest thereon. In addition, the Fund must take physical possession of
the security or receive written confirmation of the purchase and a custodial or
safekeeping receipt from a third party or be recorded as the owner of the
security through the Federal 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
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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.
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.
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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.
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
--------------------
Fund Fiscal 1999 Fiscal 1998 Fiscal 1997
- ---- ----------- ----------- -----------
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
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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 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
21
<PAGE>
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>
Short-Term Government $415,000 493,000
Strategic $4,986,000 4,664,000
Government $14,451,000 15,888,000
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.
22
<PAGE>
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 1999
Government
1998 $8,000 91,000 0
1997 $8,000 58,000 0
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
High Yield II 1999
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>
23
<PAGE>
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".
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.
24
<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
25
<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
26
<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>
27
<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.
28
<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.
29
<PAGE>
Short-Term Government Fund
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage As a Percentage of as a Percentage of
Amount of Purchase of 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 As a Percentage of as a Percentage of
Amount of Purchase of 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
30
<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
31
<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.
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<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.
33
<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
34
<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.
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<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
Year of Redemption on or after and Before Shares Purchased 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
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<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
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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
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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
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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.
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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
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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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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
43
<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.
44
<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.
45
<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).
46
<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
47
<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 Class A Class B Class C
RETURN TABLE Shares Shares Shares
- ------------ ------ ------ ------
Life of Fund(+) -- --
Life of Fund(++) -- 3.82% 4.28%
Five Years N/A N/A
One Year
48
<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 Class A Class B Class C
RETURN 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 Class A Class B Class C
RETURN 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 Class A Class B Class C
RETURN 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.
49
<PAGE>
HIGH YIELD FUND II -- SEPTEMBER 30, 1999
AVERAGE Fund Fund Fund
ANNUAL TOTAL Class A Class B Class C
RETURN TABLE Shares Shares Shares
- ------------ ------ ------ ------
Life of Fund(+) -- --
(+) Since November 30, 1998
INCOME AND CAPITAL FUND -- OCTOBER 31, 1999
AVERAGE Fund Fund Fund
ANNUAL TOTAL Class A Class B Class C
RETURN 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 Class A Class B Class C
RETURN 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 Class A Class B Class C
RETURN TABLE Shares Shares Shares
- ------------ ------ ------ ------
50
<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).
51
<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.*
52
<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>
53
<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:
Kemper Short-Term U.S. Government Fund (formerly Kemper Adjustable Rate U.S.
Government Fund)
Name and Address Class Percentage
- ---------------- ----- ----------
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
- ---------------- ----- ----------
54
<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
- ---------------- ----- ----------
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
55
<PAGE>
was known as the "Government Plus Portfolio" and prior to May 28, 1994, the
Mortgage Fund 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.
56
<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.
57
<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.
58
<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.
59
<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 is filed
herein.
(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 is filed herein.
(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 December
30, 1997.)
(h)(3) Administrative Service Agreement.
(Incorporated by reference to Post-Effective Amendment No. 25 to
<PAGE>
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.)
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 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
<PAGE>
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.
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
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##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
<PAGE>
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>
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
President None
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 18th day
of October, 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 18th day of October, 1999 on
behalf of the following persons in the capacities indicated.
SIGNATURE TITLE
- --------- -----
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*
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
<PAGE>
Effective Amendment to the Registration
Statement No. 27 filed on October 30, 1998
and this Post Effective Amendment to the
Registration Statement No. 28.
<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 Short-Term
U.S. Government 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 18, 1999
/s/ John W. Ballantine
John W. Ballantine
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. 28
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 28
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
Exhibit (d)(1)
Exhibit (g)(1)
Exhibit 23 (d)(1)
INVESTMENT MANAGEMENT AGREEMENT
Kemper U.S. Government Securities Fund
222 South Riverside Plaza
Chicago, Illinois 60606
September 7, 1998
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Kemper U.S. Government Securities Fund
Ladies and Gentlemen:
KEMPER U.S. GOVERNMENT SECURITIES FUND (the "Trust") has been established as a
Massachusetts business Trust to engage in the business of an investment company.
Pursuant to the Trust's Declaration of Trust, as amended from time-to-time (the
"Declaration"), the Board of Trustees is authorized to issue the Trust's shares
of beneficial interest (the "Shares"), in separate series, or funds. The Board
of Trustees has authorized Kemper U.S. Government Securities Fund (the "Fund").
Series may be abolished and dissolved, and additional series established, from
time to time by action of the Trustees.
The Trust, on behalf of the Fund, has selected you to act as the investment
manager of the Fund and to provide certain other services, as more fully set
forth below, and you have indicated that you are willing to act as such
investment manager and to perform such services under the terms and conditions
hereinafter set forth. Accordingly, the Trust on behalf of the Fund agrees with
you as follows:
1. Delivery of Documents. The Trust engages in the business of investing and
reinvesting the assets of the Fund in the manner and in accordance with the
investment objectives, policies and restrictions specified in the currently
effective Prospectus (the "Prospectus") and Statement of Additional Information
(the "SAI") relating to the Fund included in the Trust's Registration Statement
on Form N-1A, as amended from time to time, (the "Registration Statement") filed
by the Trust under the Investment Company Act of 1940, as amended, (the "1940
Act") and the Securities Act of 1933, as amended. Copies of the documents
referred to in the preceding sentence have been furnished to you by the Trust.
The Trust has also furnished you with copies properly certified or authenticated
of each of the following additional documents related to the Trust and the Fund:
(a) The Declaration, as amended to date.
(b) By-Laws of the Trust as in effect on the date hereof (the "By-
Laws").
(c) Resolutions of the Trustees of the Trust and the shareholders
of the Fund selecting you as investment manager and approving
the form of this Agreement.
(d) Establishment and Designation of Series of Shares of
Beneficial Interest relating to the Fund, as applicable.
The Trust will furnish you from time to time with copies, properly certified or
authenticated, of all amendments of or supplements, if any, to the foregoing,
including the Prospectus, the SAI and the Registration Statement.
2. Portfolio Management Services. As manager of the assets of the Fund, you
shall provide continuing
<PAGE>
investment management of the assets of the Fund in accordance with the
investment objectives, policies and restrictions set forth in the Prospectus and
SAI; the applicable provisions of the 1940 Act and the Internal Revenue Code of
1986, as amended, (the "Code") relating to regulated investment companies and
all rules and regulations thereunder; and all other applicable federal and state
laws and regulations of which you have knowledge; subject always to policies and
instructions adopted by the Trust's Board of Trustees. In connection therewith,
you shall use reasonable efforts to manage the Fund so that it will qualify as a
regulated investment company under Subchapter M of the Code and regulations
issued thereunder. The Fund shall have the benefit of the investment analysis
and research, the review of current economic conditions and trends and the
consideration of long-range investment policy generally available to your
investment advisory clients. In managing the Fund in accordance with the
requirements set forth in this section 2, you shall be entitled to receive and
act upon advice of counsel to the Trust. You shall also make available to the
Trust promptly upon request all of the Fund's investment records and ledgers as
are necessary to assist the Trust in complying with the requirements of the 1940
Act and other applicable laws. To the extent required by law, you shall furnish
to regulatory authorities having the requisite authority any information or
reports in connection with the services provided pursuant to this Agreement
which may be requested in order to ascertain whether the operations of the Trust
are being conducted in a manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Fund and place orders
with broker-dealers, foreign currency dealers, futures commission merchants or
others pursuant to your determinations and all in accordance with Fund policies
as expressed in the Registration Statement. You shall determine what portion of
the Fund's portfolio shall be invested in securities and other assets and what
portion, if any, should be held uninvested.
You shall furnish to the Trust's Board of Trustees periodic reports on the
investment performance of the Fund and on the performance of your obligations
pursuant to this Agreement, and you shall supply such additional reports and
information as the Trust's officers or Board of Trustees shall reasonably
request.
3. Administrative Services. In addition to the portfolio management services
specified above in section 2, you shall furnish at your expense for the use of
the Fund such office space and facilities in the United States as the Fund may
require for its reasonable needs, and you (or one or more of your affiliates
designated by you) shall render to the Trust administrative services on behalf
of the Fund necessary for operating as an open end investment company and not
provided by persons not parties to this Agreement including, but not limited to,
preparing reports to and meeting materials for the Trust's Board of Trustees and
reports and notices to Fund shareholders; supervising, negotiating contractual
arrangements with, to the extent appropriate, and monitoring the performance of,
accounting agents, custodians, depositories, transfer agents and pricing agents,
accountants, attorneys, printers, underwriters, brokers and dealers, insurers
and other persons in any capacity deemed to be necessary or desirable to Fund
operations; preparing and making filings with the Securities and Exchange
Commission (the "SEC") and other regulatory and self-regulatory organizations,
including, but not limited to, preliminary and definitive proxy materials,
post-effective amendments to the Registration Statement, semi-annual reports on
Form N-SAR and notices pursuant to Rule 24f-2 under the 1940 Act; overseeing the
tabulation of proxies by the Fund's transfer agent; assisting in the preparation
and filing of the Fund's federal, state and local tax returns; preparing and
filing the Fund's federal excise tax return pursuant to Section 4982 of the
Code; providing assistance with investor and public relations matters;
monitoring the valuation of portfolio securities and the calculation of net
asset value; monitoring the registration of Shares of the Fund under applicable
federal and state securities laws; maintaining or causing to be maintained for
the Fund all books, records and reports and any other information required under
the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Fund's custodian or other agents of the
Fund; assisting in establishing the accounting policies of the Fund; assisting
in the resolution of accounting issues that may arise with respect to the Fund's
operations and consulting with the Fund's independent accountants, legal counsel
and the Fund's other agents as necessary in connection therewith; establishing
and monitoring the Fund's operating expense budgets; reviewing the Fund's bills;
processing the payment of bills that have been approved by an authorized person;
assisting the Fund in determining the amount of
2
<PAGE>
dividends and distributions available to be paid by the Fund to its
shareholders, preparing and arranging for the printing of dividend notices to
shareholders, and providing the transfer and dividend paying agent, the
custodian, and the accounting agent with such information as is required for
such parties to effect the payment of dividends and distributions; and otherwise
assisting the Trust as it may reasonably request in the conduct of the Fund's
business, subject to the direction and control of the Trust's Board of Trustees.
Nothing in this Agreement shall be deemed to shift to you or to diminish the
obligations of any agent of the Fund or any other person not a party to this
Agreement which is obligated to provide services to the Fund.
4. Allocation of Charges and Expenses. Except as otherwise specifically provided
in this section 4, you shall pay the compensation and expenses of all Trustees,
officers and executive employees of the Trust (including the Fund's share of
payroll taxes) who are affiliated persons of you, and you shall make available,
without expense to the Fund, the services of such of your directors, officers
and employees as may duly be elected officers of the Trust, subject to their
individual consent to serve and to any limitations imposed by law. You shall
provide at your expense the portfolio management services described in section 2
hereof and the administrative services described in section 3 hereof.
You shall not be required to pay any expenses of the Fund other than those
specifically allocated to you in this section 4. In particular, but without
limiting the generality of the foregoing, you shall not be responsible, except
to the extent of the reasonable compensation of such of the Fund's Trustees and
officers as are directors, officers or employees of you whose services may be
involved, for the following expenses of the Fund: organization expenses of the
Fund (including out of-pocket expenses, but not including your overhead or
employee costs); fees payable to you and to any other Fund advisors or
consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian or
other agents of the Trust; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent for which the
Trust is responsible pursuant to the terms of the Fund Accounting Services
Agreement, custodians, subcustodians, transfer agents, dividend disbursing
agents and registrars; payment for portfolio pricing or valuation services to
pricing agents, accountants, bankers and other specialists, if any; expenses of
preparing share certificates and, except as provided below in this section 4,
other expenses in connection with the issuance, offering, distribution, sale,
redemption or repurchase of securities issued by the Fund; expenses relating to
investor and public relations; expenses and fees of registering or qualifying
Shares of the Fund for sale; interest charges, bond premiums and other insurance
expense; freight, insurance and other charges in connection with the shipment of
the Fund's portfolio securities; the compensation and all expenses (specifically
including travel expenses relating to Trust business) of Trustees, officers and
employees of the Trust who are not affiliated persons of you; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; expenses of printing and distributing reports, notices and
dividends to shareholders; expenses of printing and mailing Prospectuses and
SAIs of the Fund and supplements thereto; costs of stationery; any litigation
expenses; indemnification of Trustees and officers of the Trust; and costs of
shareholders' and other meetings.
You shall not be required to pay expenses of any activity which is primarily
intended to result in sales of Shares of the Fund if and to the extent that (i)
such expenses are required to be borne by a principal underwriter which acts as
the distributor of the Fund's Shares pursuant to an underwriting agreement which
provides that the underwriter shall assume some or all of such expenses, or (ii)
the Trust on behalf of the Fund shall have adopted a plan in conformity with
Rule 12b-1 under the 1940 Act providing that the Fund (or some other party)
shall assume some or all of such expenses. You shall be required to pay such of
the foregoing sales expenses as are not required to be paid by the principal
underwriter pursuant to the underwriting agreement or are not permitted to be
paid by the Fund (or some other party) pursuant to such a plan.
5. Management Fee. For all services to be rendered, payments to be made and
costs to be assumed by you as provided in sections 2, 3, and 4 hereof, the Trust
on behalf of the Fund shall pay you in United States Dollars on the last day of
each month the unpaid balance of a fee equal to the excess of (a) 1/12 of .45 of
1 percent of the average
3
<PAGE>
daily net assets as defined below of the Fund for such month; provided that, for
any calendar month during which the average of such values exceeds $250,000,000,
the fee payable for that month based on the portion of the average of such
values in excess of $250,000,000 shall be 1/12 of .43 of 1 percent of such
portion; provided that, for any calendar month during which the average of such
values exceeds $1,000,000,000, the fee payable for that month based on the
portion of the average of such values in excess of $1,000,000,000 shall be 1/12
of .41 of 1 percent of such portion; provided that, for any calendar month
during which the average of such values exceeds $2,500,000,000, the fee payable
for that month based on the portion of the average of such values in excess of
$2,500,000,000 shall be 1/12 of .40 of 1 percent of such portion; provided that,
for any calendar month during which the average of such values exceeds
$5,000,000,000, the fee payable for that month based on the portion of the
average of such values in excess of $5,000,000,000 shall be 1/12 of .38 of 1
percent of such portion; provided that, for any calendar month during which the
average of such values exceeds $7,500,000,000, the fee payable for that month
based on the portion of the average of such values in excess of $7,500,000,000
shall be 1/12 of .36 of 1 percent of such portion; provided that, for any
calendar month during which the average of such values exceeds $10,000,000,000,
the fee payable for that month based on the portion of the average of such
values in excess of $10,000,000,000 shall be 1/12 of .34 of 1 percent of such
portion; and provided that, for any calendar month during which the average of
such values exceeds $12,500,000,000, the fee payable for that month based on the
portion of the average of such values in excess of $12,500,000,000 shall be 1/12
of .32 of 1 percent of such portion; over any compensation waived by you from
time to time (as more fully described below). You shall be entitled to receive
during any month such interim payments of your fee hereunder as you shall
request, provided that no such payment shall exceed 75 percent of the amount of
your fee then accrued on the books of the Fund and unpaid.
The "average daily net assets" of the Fund shall mean the average of the values
placed on the Fund's net assets as of 4:00 p.m. (New York time) on each day on
which the net asset value of the Fund is determined consistent with the
provisions of Rule 22c-1 under the 1940 Act or, if the Fund lawfully determines
the value of its net assets as of some other time on each business day, as of
such time. The value of the net assets of the Fund shall always be determined
pursuant to the applicable provisions of the Declaration and the Registration
Statement. If the determination of net asset value does not take place for any
particular day, then for the purposes of this section 5, the value of the net
assets of the Fund as last determined shall be deemed to be the value of its net
assets as of 4:00 p.m. (New York time), or as of such other time as the value of
the net assets of the Fund's portfolio may be lawfully determined on that day.
If the Fund determines the value of the net assets of its portfolio more than
once on any day, then the last such determination thereof on that day shall be
deemed to be the sole determination thereof on that day for the purposes of this
section 5.
You agree that your gross compensation for any fiscal year shall not be greater
than an amount which, when added to other expenses of the Fund, shall cause the
aggregate expenses of the Fund to equal 1% of average daily net assets. Except
to the extent that such amount has been reflected in reduced payments to you,
you shall refund to the Fund the amount of any payment received in excess of the
limitation pursuant to this section 5 as promptly as practicable after the end
of such fiscal year, provided that you shall not be required to pay the Fund an
amount greater than the fee paid to you in respect of such year pursuant to this
Agreement. As used in this section 5, "expenses" shall mean those expenses
included in the applicable expense limitation having the broadest specifications
thereof, and "expense limitation" means a limit on the maximum annual expenses
which may be incurred by an investment company determined (i) by multiplying a
fixed percentage by the average, or by multiplying more than one such percentage
by different specified amounts of the average, of the values of an investment
company's net assets for a fiscal year or (ii) by multiplying a fixed percentage
by an investment company's net investment income for a fiscal year.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your fee, or any limitation of the Fund's expenses, as if such waiver
or limitation were fully set forth herein.
6. Avoidance of Inconsistent Position; Services Not Exclusive. In connection
with purchases or sales of
4
<PAGE>
portfolio securities and other investments for the account of the Fund, neither
you nor any of your directors, officers or employees shall act as a principal or
agent or receive any commission. You or your agent shall arrange for the placing
of all orders for the purchase and sale of portfolio securities and other
investments for the Fund's account with brokers or dealers selected by you in
accordance with Fund policies as expressed in the Registration Statement. If any
occasion should arise in which you give any advice to clients of yours
concerning the Shares of the Fund, you shall act solely as investment counsel
for such clients and not in any way on behalf of the Fund.
Your services to the Fund pursuant to this Agreement are not to be deemed to be
exclusive and it is understood that you may render investment advice, management
and services to others. In acting under this Agreement, you shall be an
independent contractor and not an agent of the Trust. Whenever the Fund and one
or more other accounts or investment companies advised by you have available
funds for investment, investments suitable and appropriate for each shall be
allocated in accordance with procedures believed by you to be equitable to each
entity. Similarly, opportunities to sell securities shall be allocated in a
manner believed by you to be equitable. The Fund recognizes that in some cases
this procedure may adversely affect the size of the position that may be
acquired or disposed of for the Fund.
7. Limitation of Liability of Manager. As an inducement to your undertaking to
render services pursuant to this Agreement, the Trust agrees that you shall not
be liable under this Agreement for any error of judgment or mistake of law or
for any loss suffered by the Fund in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect you against any liability to the Trust, the Fund
or its shareholders to which you would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of your duties, or
by reason of your reckless disregard of your obligations and duties hereunder.
8. Duration and Termination of This Agreement. This Agreement shall remain in
force until September 30, 1999, and continue in force from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually (a) by the vote of a majority of the Trustees who are not parties
to this Agreement or interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Trustees of the Trust, or by the vote of a majority of the outstanding
voting securities of the Fund. The aforesaid requirement that continuance of
this Agreement be "specifically approved at least annually" shall be construed
in a manner consistent with the 1940 Act and the rules and regulations
thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time, without
the payment of any penalty, by the vote of a majority of the outstanding voting
securities of the Fund or by the Trust's Board of Trustees on 60 days' written
notice to you, or by you on 60 days' written notice to the Trust. This Agreement
shall terminate automatically in the event of its assignment.
This Agreement may be terminated with respect to the Fund at any time without
the payment of any penalty by the Board of Trustees or by vote of a majority of
the outstanding voting securities of the Fund in the event that it shall have
been established by a court of competent jurisdiction that you or any of your
officers or directors has taken any action which results in a breach of your
covenants set forth herein.
9. Amendment of this Agreement. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against whom enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
10. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
of the Commonwealth of Massachusetts, provides that the name "Kemper U.S.
Government Securities Fund" refers to the Trustees under the Declaration
collectively as Trustees and not as
5
<PAGE>
individuals or personally, and that no shareholder of the Fund, or Trustee,
officer, employee or agent of the Trust, shall be subject to claims against or
obligations of the Trust or of the Fund to any extent whatsoever, but that the
Trust estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability as set
forth in the Declaration and you agree that the obligations assumed by the Trust
on behalf of the Fund pursuant to this Agreement shall be limited in all cases
to the Fund and its assets, and you shall not seek satisfaction of any such
obligation from the shareholders or any shareholder of the Fund or any other
series of the Trust, or from any Trustee, officer, employee or agent of the
Trust. You understand that the rights and obligations of each Fund, or series,
under the Declaration are separate and distinct from those of any and all other
series.
11. Miscellaneous. The captions in this Agreement are included for convenience
of reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
In interpreting the provisions of this Agreement, the definitions contained in
Section 2(a) of the 1940 Act (particularly the definitions of "affiliated
person," "assignment" and "majority of the outstanding voting securities"), as
from time to time amended, shall be applied, subject, however, to such
exemptions as may be granted by the SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Fund to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Trust on behalf of the Fund.
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract
effective as of the date of this Agreement.
Yours very truly,
KEMPER U.S. GOVERNMENT SECURITIES FUND on
behalf of Kemper U.S. Government Securities
Fund
By: /s/Mark S. Casady
----------------------------
President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/S. R. Beckwith
----------------------------
Treasurer
6
<PAGE>
Exhibit 23 (g)(1)
CUSTODIAN CONTRACT
between
KEMPER U.S. GOVERNMENT SECURITIES FUND
and
STATE STREET BANK AND TRUST COMPANY
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TABLE OF CONTENTS
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1. Employment of Custodian and Property to be Held
By It...........................................................................................1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States...................................2
2.1 Holding Securities.....................................................................2
2.2 Delivery of Securities.................................................................2
2.3 Registration of Securities.............................................................4
2.4 Bank Accounts..........................................................................4
2.5 Availability of Federal Funds..........................................................5
2.6 Collection of Income...................................................................5
2.7 Payment of Fund Monies.................................................................5
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.............6
2.9 Appointment of Agents..................................................................7
2.10 Deposit of Securities in U.S. Securities System......................................7
2.11 Fund Assets Held in the Custodian's Direct Paper System................................8
2.12 Segregated Account.....................................................................9
2.13 Ownership Certificates for Tax Purposes ...............................................9
2.14 Proxies................................................................................9
2.15 Communications Relating to Fund Securities............................................10
3. Duties of the Custodian with Respect to Property
of the Fund Held Outside the United States.....................................................10
3.1 Appointment of Foreign Sub-Custodians.................................................10
3.2 Assets to be Held.....................................................................10
3.3 Foreign Securities Depositories.......................................................10
3.4 Agreements with Foreign Banking Institutions..........................................11
3.5 Access of Independent Accountants of the Fund.......................................11
3.6 Reports by Custodian..................................................................11
3.7 Transactions in Foreign Custody Account...............................................11
3.8 Liability of Foreign Sub-Custodians...................................................12
3.9 Liability of Custodian................................................................12
3.10 Reimbursement for Advances............................................................12
3.11 Monitoring Responsibilities...........................................................13
3.12 Branches of U.S. Banks................................................................13
3.13 Tax Law...............................................................................13
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TABLE OF CONTENTS
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4. Payments for Sales or Repurchases or Redemptions
of Shares .....................................................................................13
5. Proper Instructions............................................................................14
6. Actions Permitted without Express Authority....................................................14
7. Evidence of Authority..........................................................................15
8. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and Net Income.....................................15
9. Records........................................................................................15
10. Opinion of Fund's Independent Accountants......................................................16
11. Reports to Fund by Independent Public Accountants..............................................16
12. Compensation of Custodian......................................................................16
13. Responsibility of Custodian....................................................................16
14. Effective Period, Termination and Amendment....................................................17
15. Successor Custodian............................................................................18
16. Interpretive and Additional Provisions........................................................ 19
17. Massachusetts Law to Apply.....................................................................19
18. Prior Contracts................................................................................19
19. Shareholder Communications Election............................................................19
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CUSTODIAN CONTRACT
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This Contract between Kemper U.S. Government Securities Fund, a
business trust organized and existing under the laws of The Commonwealth of
Massachusetts and having its principal place of business at 222 South Riverside
Plaza, Chicago, Illinois 60606 (the "Fund"), and State Street Bank and Trust
Company, a Massachusetts trust company having its principal place of business at
225 Franklin Street, Boston, Massachusetts 02110 (the "Custodian"),
WITNESSETH:
THAT, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto do hereby agree as follows:
1. Employment of Custodian and Property to be Held by It
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The Fund hereby employs the Custodian as the custodian of its assets,
including securities which it desires to be held in places within the United
States of America ("domestic securities") and securities it desires to be held
outside the United States of America ("foreign securities") pursuant to the
provisions of the Fund's declaration of trust (the "Declaration of Trust"). The
Fund agrees to deliver to the Custodian all securities and cash owned by it and
all payments of income, payments of principal or capital distributions received
by it with respect to all securities owned by the Fund from time to time, and
the cash consideration received by it for such new or treasury shares of
beneficial interest of the Fund ("Shares") as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of the Fund held
or received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (as such term is defined in
Article 5 of this Contract), the Custodian shall from time to time employ one or
more sub-custodians located in the United States of America, including any state
or political subdivision thereof and any territory over which its political
sovereignty extends (the "United States" or "U.S."), but only in accordance with
an applicable vote by the board of trustees of the Fund (the "Board of
Trustees") and provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian. The Custodian may employ as sub-custodians for the Fund's foreign
securities the foreign banking institutions and foreign securities depositories
designated in Schedule A hereto but only in accordance with the provisions of
Article 3.
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2. Duties of the Custodian with Respect to Property of the Fund Held By
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the Custodian in the United States
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2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of the Fund all non-cash property to be held by it in
the United States including all domestic securities owned by the Fund
other than (a) securities which are maintained in a "U.S. Securities
System" (as such term is defined in Section 2.10 of this Contract) and
(b) commercial paper of an issuer for which State Street Bank and Trust
Company acts as issuing and paying agent ("Direct Paper") which is
deposited and/or maintained in the Custodian's Direct Paper System
pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund and held by the Custodian or in a
U.S. Securities System account of the Custodian, which account shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for its customers ("U.S. Securities
System Account") or in the Custodian's Direct Paper book-entry system
account, which account shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise for its
customers ("Direct Paper System Account") only upon receipt of Proper
Instructions from the Fund, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.10
hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same
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aggregate face amount or number of units; provided that, in
any such case, the new securities are to be delivered to the
Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that, in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's U.S.
Securities System Account, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under
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the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or organizations,
regarding account deposits in connection with transactions by
the Fund;
14) Upon receipt of instructions from the transfer agent for the
Fund (the "Transfer Agent"), for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Fund's currently effective prospectus and statement of
additional information (the "Prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund, a
certified copy of a resolution of the Board of Trustees or of
the executive committee thereof signed by an officer of the
Fund and certified by the Fund's Secretary or Assistant
Secretary specifying the securities of the Fund to be
delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of
such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a nominee
to be used in common with other registered investment companies having
the same investment adviser as the Fund, or in the name or nominee name
of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the Fund under the
terms of this Contract shall be in "street name" or other good delivery
form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize reasonable
efforts only to (i) timely collect income due the Fund on such
securities and (ii) notify the Fund of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or
exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund,
subject only to draft or order by the Custodian acting pursuant to the
terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for
the account of the Fund, other than cash maintained by the Fund in a
bank account established and used in accordance with Rule 17f-3 under
the Investment Company Act of 1940, as amended. Funds held by the
Custodian for the Fund may be deposited by it to its credit as
Custodian in the banking department of the Custodian or in such other
banks or trust companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank
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or trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940, as amended (the "Investment Company
Act") and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall on behalf of the
Fund be approved by vote of a majority of the Board of Trustees. Such
funds shall be deposited by the Custodian in its capacity as Custodian
and shall be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon agreement between the Fund and the
Custodian, the Custodian shall, upon the receipt of Proper Instructions
from the Fund, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in
the amount of checks received in payment for Shares of the Fund which
are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to United States-registered securities held hereunder to
which the Fund shall be entitled either by law or pursuant to custom in
the securities business, and shall collect on a timely basis all income
and other payments with respect to domestic bearer securities if, on
the date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such income, as
collected, to the Fund's account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for payment all
coupons and other income items requiring presentation as and when they
become due and shall collect interest when due on securities held
hereunder. Collection of income due the Fund on domestic securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund; the Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data in its possession as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian
of the income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund, which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out monies of the Fund in the
following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Fund but only (a) against the delivery of such securities
or evidence of title to such options, futures contracts or
options on futures contracts to the Custodian (or any bank,
banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment
Company Act to act as a custodian and has been designated by
the Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
U.S. Securities System, in accordance with the conditions set
forth in Section 2.10 hereof; (c) in the case of a
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purchase involving the Direct Paper System, in accordance with
the conditions set forth in Section 2.11; (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the Custodian
along with written evidence of the agreement by the Custodian
to repurchase such securities from the Fund or (e) for
transfer to a time deposit account of the Fund in any bank,
whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions from the Fund
as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management fees,
accounting fees, transfer agent fees, legal fees and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Fund
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund, a certified
copy of a resolution of the Board of Trustees or of the
executive committee thereof signed by an officer of the Fund
and certified by the Fund's Secretary or an Assistant
Secretary, specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the
person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of the Fund is made by the Custodian in advance of receipt of
the securities purchased in the absence of specific written
instructions from the
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Fund to so pay in advance, the Custodian shall be absolutely liable to
the Fund for such securities to the same extent as if the securities
had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act to
act as a custodian, as its agent to carry out such of the provisions of
this Article 2 as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in U.S. Securities Systems. The Custodian may
deposit and/or maintain domestic securities owned by the Fund in a
clearing agency registered with the Securities and Exchange Commission
(the "SEC") under Section 17A of the Exchange Act, which acts as a
securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies (a "U.S.
Securities System") in accordance with applicable Federal Reserve Board
and SEC rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep domestic securities of the Fund in a
U.S. Securities System provided that such securities are
represented in a U.S. Securities System Account;
2) The records of the Custodian with respect to securities of the
Fund which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the U.S. Securities System Account and (ii) the
making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Fund; the
Custodian shall transfer securities sold for the account of
the Fund upon (i) receipt of advice from the U.S. Securities
System that payment for such securities has been transferred
to the U.S. Securities System Account and (ii) the making of
an entry on the records of the Custodian to reflect such
transfer and payment for the account of the Fund. Copies of
all advices from the U.S. Securities System of transfers of
securities for the account of the Fund shall identify the
Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund in the form of a written
advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the
U.S. Securities System for the account of the Fund;
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4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for
safeguarding securities deposited in the U.S. Securities
System;
5) The Custodian shall have received from the Fund the initial or
annual certificate, as the case may be, required by Article 14
hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the U.S. Securities System
by reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
U.S. Securities System; at the election of the Fund, it shall
be entitled to be subrogated to the rights of the Custodian
with respect to any claim against the U.S. Securities System
or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or
damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in the
Direct Paper System Account which shall not include any assets
of the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on
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the next business day following such transfer and shall
furnish to the Fund copies of daily transaction sheets
reflecting each day's transaction in the Direct Paper System
for the account of the Fund; and
6) Upon the reasonable request of the Fund, the Custodian shall
provide the Fund with any report on the Direct Paper System's
system of internal accounting controls which had been prepared
as of the time of such request.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund establish and maintain a segregated account
or accounts for and on behalf of the Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in a U.S. Securities System Account by the
Custodian pursuant to Section 2.10 hereof (i) in accordance with the
provisions of any agreement among the Fund, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the
NASD (or any futures commission merchant registered under the Commodity
Exchange Act), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities exchange
(or the Commodity Futures Trading Commission or any registered Contract
Market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by the
Fund, (iii) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the SEC relating to the maintenance
of segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, but only, in the case of this clause
(iv), upon receipt of, in addition to Proper Instructions from the
Fund, a certified copy of a resolution of the Board of Trustees or of
the executive committee thereof signed by an officer of the Fund and
certified by the Fund's Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of the Fund held by it and
in connection with transfers of such securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy soliciting
materials and all notices relating to such securities.
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2.15 Communications Relating to Fund Securities. Subject to the provisions
of Section 2.3, the Custodian shall transmit promptly to the Fund all
written information (including, without limitation, pendency of calls
and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund and the maturity of futures contracts purchased or
sold by the Fund) received by the Custodian from issuers of the
securities being held for the Fund. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents)
making the tender or exchange offer. If the Fund desires to take action
with respect to any tender offer, exchange offer or any other similar
transaction, the Fund shall notify the Custodian at least three (3)
business days prior to the date on which the Custodian is to take such
action.
3. Duties of the Custodian with Respect to Property of the Fund Held
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Outside of the United States
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3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto (the "foreign sub-custodians"). Upon
receipt of Proper Instructions, together with a certified resolution of
the Board of Trustees, the Custodian and the Fund may agree to amend
Schedule A hereto from time to time to designate additional foreign
banking institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
foreign sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, and (b) cash and cash
equivalents in such amounts as the Custodian or the Fund may determine
to be reasonably necessary to effect the Fund's foreign securities
transactions. The Custodian shall identify on its books as belonging to
the Fund, the foreign securities of the Fund held by each foreign
sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon
in writing by the Custodian and the Fund, assets of the Funds shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as
sub-custodians pursuant to the terms hereof. Where possible, such
arrangements shall include entry into agreements containing the
provisions set forth in Section 3.4 hereof.
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3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that (a) the assets of the
Fund will not be subject to any right, charge, security interest, lien
or claim of any kind in favor of the foreign banking institution or its
creditors or agent, except a claim of payment for their safe custody or
administration; (b) beneficial ownership of the assets of the Fund will
be freely transferable without the payment of money or value other than
for custody or administration; (c) adequate records will be maintained
identifying the assets as belonging to the Custodian on behalf of its
customers; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted
under applicable law the independent public accountants for the Fund,
will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign sub-custodian
will be subject only to the instructions of the Custodian or its
agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use reasonable efforts to arrange for the
independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by foreign sub-custodians,
including but not limited to an identification of entities having
possession of Fund securities and other assets and advices or
notifications of any transfers of securities to or from each custodial
account maintained by a foreign banking institution for the Custodian
on behalf of its customers indicating, as to securities acquired for
the Fund the identity of the entity having physical possession of such
securities.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.7, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the United States by
foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the
Fund and delivery of securities maintained for the account of the Fund
may be effected in accordance with the customary established securities
trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or
to a dealer therefor (or an agent for such purchaser or dealer) against
a receipt with the expectation of receiving later payment for such
securities from such purchaser or dealer.
11
<PAGE>
(c) Securities maintained in the custody of a foreign sub-custodian may
be maintained in the name of such entity's nominee to the same extent
as set forth in Section 2.3 of this Contract, and the Fund agrees to
hold any such nominee harmless from any liability as a holder of record
of such securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care
in the performance of its duties and to indemnify, and hold harmless,
the Custodian and the Fund from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of the
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made
whole for any such loss, damage, cost, expense, liability or claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a
U.S. bank as contemplated by Section 3.12 hereof, the Custodian shall
not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism or any loss where the sub-custodian has
otherwise exercised reasonable care. Notwithstanding the foregoing
provisions of this Section 3.9, in delegating custody duties to State
Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except
such loss as may result from (a) political risk (including, but not
limited to, exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or
(b) other losses (excluding a bankruptcy or insolvency of State Street
London Ltd. not caused by political risk) due to Acts of God, nuclear
incident or other losses under circumstances where the Custodian and
State Street London Ltd. have exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of the Fund
including the purchase or sale of foreign exchange or of contracts for
foreign exchange, or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any
property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of
the Fund's assets to the extent necessary to obtain reimbursement.
12
<PAGE>
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund (during the month of June) information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the Custodian
will promptly inform the Fund in the event that the Custodian learns of
a material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the SEC is notified by such foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the local currency
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally
accepted U.S. accounting principles).
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
Fund assets are maintained in a foreign branch of a banking institution
which is a "bank" as defined by Section 2(a)(5) of the Investment
Company Act meeting the qualification set forth in Section 26(a) of
said Act. The appointment of any such branch as a sub-custodian shall
be governed by Article 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in
an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the
direction of the Custodian, State Street London Ltd. or both.
3.13 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Fund or the Custodian
as custodian of the Fund by the tax law of the United States. It shall
be the responsibility of the Fund to notify the Custodian of the
obligations imposed on the Fund or the Custodian as custodian of the
Fund by the tax law of jurisdictions other than those mentioned in the
above sentence, including responsibility for withholding and other
taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist the
Fund with respect to any claim for exemption or refund under the tax
law of jurisdictions for which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares
----------------------------------------------------------
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent and deposit into the account of the Fund such payments as are
received for Shares of the Fund issued or sold from time to time by the Fund.
The Custodian will provide timely notification to the Fund and the Transfer
Agent of any receipt by it of payments for Shares of the Fund.
13
<PAGE>
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees pursuant thereto, the Custodian shall, upon receipt of instructions
from the Transfer Agent, make funds available for payment to holders of Shares
who have delivered to the Transfer Agent a request for redemption or repurchase
of their Shares. In connection with the redemption or repurchase of Shares, the
Custodian is authorized upon receipt of instructions from the Transfer Agent to
wire funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares, the
Custodian shall honor checks drawn on the Custodian by a holder of Shares, which
checks have been furnished by the Fund to the holder of Shares, when presented
to the Custodian in accordance with such procedures and controls as are mutually
agreed upon from time to time between the Fund and the Custodian.
5. Proper Instructions
-------------------
Proper Instructions as used throughout this Contract means a writing
signed or initialed by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. If given pursuant to procedures to be agreed upon by the
Custodian and the Fund, Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices. For purposes of this
Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three - party agreement which requires a segregated
asset account in accordance with Section 2.12.
6. Actions Permitted without Express Authority
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
14
<PAGE>
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Board of
Trustees.
7. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Trustees as conclusive evidence (a) of the authority of any person to act in
accordance with such vote or (b) of any determination or of any action by the
Board of Trustees pursuant to the Declaration of Trust as described in such
vote, and such vote may be considered as in full force and effect until receipt
by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
------------------------------------------------------------
Calculation of Net Asset Value and Net Income
---------------------------------------------
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees to keep the books of
account of the Fund and/or compute the net asset value per share of the
outstanding Shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Fund as described in the Prospectus and shall advise the Fund and the
Transfer Agent daily of the total amount of such net income and, if instructed
in writing by an officer of the Fund to do so, shall advise the Transfer Agent
periodically of the division of such net income among its various components.
The calculations of the net asset value per share and the daily income of the
Fund shall be made at the time or times described from time to time in the
Prospectus.
9. Records
-------
The Custodian shall with respect to the Fund create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company
Act, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder. All such records shall be the property of the Fund and shall at all
times during the regular business hours of the Custodian be open for inspection
by duly authorized officers, employees or agents of the Fund and employees and
agents of the SEC. The Custodian shall, at the Fund's request, supply the Fund
with a tabulation of securities owned by the Fund and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.
15
<PAGE>
10. Opinion of Fund's Independent Accountants
-----------------------------------------
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A and N-SAR or other
annual reports to the SEC and with respect to any other SEC requirements.
11. Reports to Fund by Independent Public Accountants
-------------------------------------------------
The Custodian shall provide the Fund at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports shall be of
sufficient scope and in sufficient detail, as may reasonably be required by the
Fund to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
12. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian as agreed upon from time to time between the
Fund and the Custodian.
13. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
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<PAGE>
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Section 3.9)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by Section 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to the Custodian.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, the purchase or sale of foreign exchange or of
contracts for foreign exchange, and assumed settlement), or in the event that
the Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any property
at any time held for the account of the applicable Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund's assets
to the extent necessary to obtain reimbursement.
14. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of the date of its execution,
shall continue in full force and effect until terminated as hereinafter
provided, may be amended at any time by mutual agreement of the parties hereto
and may be terminated by either party by an instrument in writing delivered or
mailed, postage prepaid to the other party, such termination to take effect not
sooner than thirty (30) days after the date of such delivery or mailing;
provided, however that the Custodian shall not with respect to the Fund act
under Section 2.10 hereof in the absence of receipt of an initial certificate of
the Secretary or an Assistant Secretary that the Board of Trustees has approved
the initial use of a particular Securities System by the Fund, as required by
Rule 17f-4 under the Investment Company Act and that the Custodian shall not
with respect to the Fund act under Section 2.11 hereof in the absence of receipt
of an initial certificate of the Secretary or an Assistant Secretary that the
Board of Trustees has approved the initial use of the Direct Paper System by the
Fund; provided further, however, that the Fund shall not amend or terminate this
17
<PAGE>
Contract in contravention of any applicable federal or state regulations, or any
provision of the Declaration of Trust, and further provided, that the Fund may
at any time by action of the Board of Trustees (i) substitute another bank or
trust company for the Custodian by giving notice as described above to the
Custodian or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
15. Successor Custodian
-------------------
If a successor custodian shall be appointed by the Board of Trustees,
the Custodian shall, upon termination, deliver to such successor custodian at
the offices of the Custodian, duly endorsed and in the form for transfer, all
securities of the Fund then held by it hereunder and shall transfer to an
account of the successor custodian all of the securities of the Fund held in a
Securities System. If no such successor custodian shall be appointed, the
Custodian shall, in like manner, upon receipt of a certified copy of a vote of
the Board of Trustees, deliver at the offices of the Custodian and transfer such
securities, funds and other properties in accordance with such vote. In the
event that no written order designating a successor custodian or certified copy
of a vote of the Board of Trustees shall have been delivered to the Custodian on
or before the date when such termination shall become effective, then the
Custodian shall have the right to deliver to a bank or trust company, which is a
"bank" as defined in the Investment Company Act, doing business in Boston,
Massachusetts, or New York, New York, of its own selection, having an aggregate
capital, surplus, and undivided profits, as shown by its last published report,
of not less than $25,000,000, all securities, funds and other properties held by
the Custodian and all instruments held by the Custodian relative thereto and all
other property held by it under this Contract on behalf of the Fund and to
transfer to an account of such successor custodian all of the securities of the
Fund held in any Securities System. Thereafter, such bank or trust company shall
be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
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<PAGE>
16. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Declaration of Trust. No interpretive or additional provisions made as
provided in the preceding sentence shall be deemed to be an amendment of this
Contract.
17. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
18. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the assets of the Fund.
19. Shareholder Communications Election
-----------------------------------
SEC Rule 14b-2 requires banks which hold securities for the account of
customers to respond to requests by issuers of securities for the names,
addresses and holdings of beneficial owners of securities of that issuer held by
the bank unless the beneficial owner has expressly objected to disclosure of
this information. In order to comply with the rule, the Custodian needs the Fund
to indicate whether it authorizes the Custodian to provide the Fund's name,
address, and share position to requesting companies whose securities the Fund
owns. If the Fund tells the Custodian "no", the Custodian will not provide this
information to requesting companies. If the Fund tells the Custodian "yes" or
does not check either "yes" or "no" below, the Custodian is required by the rule
to treat the Fund as consenting to disclosure of this information for all
securities owned by the Fund or any funds or accounts established by the Fund.
For the Fund's protection, the Rule prohibits the requesting company from using
the Fund's name and address for any purpose other than corporate
19
<PAGE>
communications. Please indicate below whether the Fund consents or objects by
checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's
name, address, and share positions.
NO [ ] The Custodian is not authorized to release the
Fund's name, address, and share positions.
20
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of April 5, 1999.
ATTEST KEMPER U.S. GOVERNMENT SECURITIES
FUND
/s/Maureen Kane By: /s/Mark S. Casady
- ------------------------ -----------------------
Name: Maureen Kane Name: Mark S. Casady
Ass't Sec. Title: President
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/Marc L. Parsons By: /s/Ronald E. Logue
- ------------------------ -----------------------
Marc L. Parsons Ronald E. Logue
Associate Counsel Vice Chairman
21
