<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1997.
1933 ACT REGISTRATION NO. 2-58921
1940 ACT REGISTRATION NO. 811-2743
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. _ [ ]
Post-Effective Amendment No. 31 [X]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 31 [X]
</TABLE>
(Check appropriate box or boxes)
------------------
KEMPER DIVERSIFIED INCOME FUND
(Exact name of Registrant as Specified in Charter)
<TABLE>
<S> <C>
222 South Riverside Plaza, Chicago, Illinois 60606
(Address of Principal Executive Office) (Zip Code)
</TABLE>
Registrant's Telephone Number, including Area Code: (312) 537-7000
<TABLE>
<S> <C>
Philip J. Collora, Vice President and Secretary With a copy to:
Kemper Diversified Income Fund Cathy G. O'Kelly
222 South Riverside Plaza David A. Sturms
Chicago, Illinois 60606 Vedder, Price, Kaufman & Kammholz
(Name and Address of Agent for Service) 222 North LaSalle Street
Chicago, Illinois 60601
</TABLE>
It is proposed that this filing will become effective (check appropriate
box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on December 30, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
================================================================================
<PAGE> 2
KEMPER DIVERSIFIED INCOME FUND
CROSS-REFERENCE SHEET
BETWEEN ITEMS ENUMERATED IN PART A
OF FORM N-1A AND PROSPECTUS
<TABLE>
<CAPTION>
ITEM NUMBER
OF FORM N-1A LOCATION IN PROSPECTUS
<S> <C> <C>
1. Cover Page............................. Cover Page
2. Synopsis............................... Summary; Summary of Expenses; Supplement to
Prospectus
3. Condensed Financial Information........ Financial Highlights; Performance
4. General Description of Registrant...... Summary; Investment Objectives, Policies and
Risk Factors; Appendices
5. Management of the Fund................. Summary; Investment Manager and Underwriter
5A. Management's Discussion of Fund
Performance............................ Performance
6. Capital Stock and Other Securities..... Summary; Dividends and Taxes; Purchase of
Shares; Capital Structure
7. Purchase of Securities Being Offered... Summary; Investment Manager and Underwriter;
Net Asset Value; Purchase of Shares; Special
Features; Supplement to Prospectus
8. Redemption or Repurchase............... Summary; Redemption or Repurchase of Shares
9. Pending Legal Proceedings.............. Inapplicable
</TABLE>
<PAGE> 3
KEMPER INCOME FUNDS
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 30, 1997
CLASS I SHARES
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
KEMPER DIVERSIFIED INCOME FUND
KEMPER U.S. GOVERNMENT SECURITIES FUND
KEMPER HIGH YIELD FUND
KEMPER HIGH YIELD OPPORTUNITY FUND
KEMPER INCOME AND CAPITAL PRESERVATION FUND
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
Kemper Adjustable Rate U.S. Government Fund (the "Adjustable Rate Fund"),
Kemper Diversified Income Fund (the "Diversified Fund"), Kemper U.S. Government
Securities Fund (the "Government Fund"), Kemper High Yield Fund (the "High Yield
Fund"), Kemper High Yield Opportunity Fund (the "Opportunity Fund"), Kemper
Income and Capital Preservation Fund (the "Income and Capital Fund"), Kemper
U.S. Mortgage Fund (the "Mortgage Fund") and Kemper Short-Intermediate
Government Fund (the "Short-Intermediate Government Fund") (collectively, the
"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 prospectus, and Class I shares, which are described
in the prospectus as supplemented hereby.
Class I shares are available for purchase exclusively by the following
investors: (a) tax-exempt retirement plans of Zurich Kemper Investments, Inc.
("ZKI") and its affiliates; and (b) the following investment advisory clients of
ZKI and its investment advisory affiliates (including Zurich Investment
Management, Inc.) that invest at least $1 million in a Fund: (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. Class I shares currently are
available for purchase only from Kemper Distributors, Inc., principal
underwriter for the Funds. 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, will typically be
higher for Class I shares than for Class A, Class B and Class C shares.
<PAGE> 4
The following information supplements the indicated sections of the prospectus.
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
(APPLICABLE TO ALL FUNDS) CLASS I
<S> <C>
Maximum Sales Charge on Purchases
(as a percentage of offering price)....................... None
Maximum Sales Charge on Reinvested Dividends................ None
Redemption Fees............................................. None
Exchange Fee................................................ None
Deferred Sales Charge (as a percentage of redemption
proceeds)................................................. None
</TABLE>
<TABLE>
<CAPTION>
Annual Fund Income Short-
Operating Adjustable High and Intermediate
Expenses Rate Diversified Government Yield Capital Mortgage Opportunity Government
(as a percentage of Fund Fund Fund Fund Fund Fund Fund Fund
average net assets) ---------- ----------- ---------- ----- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............ .55% .56% .41% .53% .53% .50% .65% .55%
12b-1 Fees................. None None None None None None None None
Other Expenses
(estimated).............. .15% 2.08% .19% .09% .17% .15% .80% .15%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses... .70% 2.64% .60% .62% .70% .65% 1.45% .70%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE FUND YEAR YEARS YEARS YEARS
- ------- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
You would pay the following expenses Adjustable Rate............... $ 7 $22 $ 39 $ 87
on a $1,000 investment, assuming Diversified................... $27 $82 $140 $297
(1) 5% annual return and Government.................... $ 6 $19 $ 33 $ 75
(2) redemption at the end of High Yield.................... $ 6 $20 $ 35 $ 77
each time period: Income and Capital............ $ 7 $22 $ 39 $ 87
Mortgage...................... $ 7 $21 $ 36 $ 81
Opportunity................... $15 $46 -- --
Short-Intermediate
Government.................... $ 7 $22 $ 39 $ 87
</TABLE>
The purpose of the preceding table is to assist investors in understanding
the various costs and expenses that an investor in Class I shares of a Fund will
bear directly or indirectly.
"Other Expenses" have been estimated for the current fiscal year:
Adjustable Rate Fund, Mortgage Fund, Opportunity Fund and Short-Intermediate
Government Fund. For the Opportunity Fund, which commenced operations on October
1, 1997, the estimated "Other Expenses" include estimated interest expense of
.60% of average net assets. Interest expense represents interest paid by the
Opportunity Fund on borrowings for the purpose of making additional portfolio
investments. Excluding interest expense, "Total Operating Expenses" for the
Opportunity Fund would be .85% and expenses shown in the Example would be $9 and
$27, respectively.
2
<PAGE> 5
The Example assumes a 5% annual rate of return pursuant to requirements of
the Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of any Fund. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
No financial information is presented for Class I shares of the Adjustable
Rate Fund, Mortgage Fund and the Short-Intermediate Government Fund since no
Class I shares had been issued as of such Fund's fiscal year end. The
Opportunity Fund (not shown below) commenced operations on October 1, 1997.
DIVERSIFIED FUND
<TABLE>
<CAPTION>
NOVEMBER 22,
YEAR ENDED 1995 TO
OCTOBER 31, OCTOBER 31,
1997 1996
----------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $6.00 5.98
- -------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .36 .45
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain on
investments and foreign currency .01 .12
- -------------------------------------------------------------------------------------------
Total from investment operations .37 .57
- -------------------------------------------------------------------------------------------
Less distribution from net investment income .49 .55
- -------------------------------------------------------------------------------------------
Net asset value, end of period $5.88 6.00
- -------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 6.33% 10.01
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 2.64% 1.27
- -------------------------------------------------------------------------------------------
Net investment income 6.07% 7.48
- -------------------------------------------------------------------------------------------
</TABLE>
GOVERNMENT FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED JULY 3 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.74 8.92 8.88
- ---------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .66 .64 .22
- ---------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .06 (.17) .04
- ---------------------------------------------------------------------------------------------------------
Total from investment operations .72 .47 .26
- ---------------------------------------------------------------------------------------------------------
Less distribution from net investment income .65 .65 .22
- ---------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.81 8.74 8.92
- ---------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 8.60% 5.56 3.02
- ---------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses .60% .59 .53
- ---------------------------------------------------------------------------------------------------------
Net investment income 7.52% 7.35 7.07
- ---------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 6
HIGH YIELD FUND
<TABLE>
<CAPTION>
DECEMBER 29,
YEAR ENDED YEAR ENDED 1994 TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.23 8.01 7.55
- ------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .78 .78 .66
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain .31 .23 .39
- ------------------------------------------------------------------------------------------------------------
Total from investment operations 1.09 1.01 1.05
- ------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .82 .79 .59
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.50 8.23 8.01
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 13.96% 13.32 14.37
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses .62% .61 .61
- ------------------------------------------------------------------------------------------------------------
Net investment income 9.44% 9.72 10.70
- ------------------------------------------------------------------------------------------------------------
</TABLE>
INCOME AND CAPITAL FUND
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED JULY 3 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.45 8.61 8.52
- ---------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .59 .60 .19
- ---------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 (.15) .12
- ---------------------------------------------------------------------------------------------------------
Total from investment operations .67 .45 .31
- ---------------------------------------------------------------------------------------------------------
Less distribution from net investment income .59 .61 .22
- ---------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.53 8.45 8.61
- ---------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 8.26% 5.45 3.65
- ---------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses .70% .72 .62
- ---------------------------------------------------------------------------------------------------------
Net investment income 7.02% 7.14 6.87
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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 ZKI and its affiliates and (ii) Class I shares of any other
"Kemper Mutual Fund" listed under "Special Features--Class A Shares--Combined
Purchases" 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 ZKI 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 under "Special Features--Exchange
Privilege--General."
December 30, 1997
KFIF-1I (12/97)
4
<PAGE> 7
<TABLE>
<S> <C>
TABLE OF CONTENTS
- -----------------------------------------------
Summary 1
- -----------------------------------------------
Summary of Expenses 3
- -----------------------------------------------
Financial Highlights 5
- -----------------------------------------------
Investment Objectives, Policies and Risk
Factors 14
- -----------------------------------------------
Investment Manager and Underwriter 33
- -----------------------------------------------
Dividends and Taxes 37
- -----------------------------------------------
Net Asset Value 38
- -----------------------------------------------
Purchase of Shares 39
- -----------------------------------------------
Redemption or Repurchase of Shares 45
- -----------------------------------------------
Special Features 49
- -----------------------------------------------
Performance 52
- -----------------------------------------------
Capital Structure 54
- -----------------------------------------------
Appendix--Portfolio Composition 56
- -----------------------------------------------
</TABLE>
This combined prospectus of the Kemper Income Funds contains information about
each of the Funds that you should know before investing and should be retained
for future reference. A Statement of Additional Information dated December 30,
1997, has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. It is available upon request without charge
from the Funds at the address or telephone number on this cover or the firm from
which this prospectus was obtained.
THE FUNDS' SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT IN A
FUND'S SHARES INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[KEMPER FUNDS LOGO]
KEMPER
INCOME
FUNDS
PROSPECTUS December 30, 1997
KEMPER INCOME FUNDS
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This prospectus describes a choice of eight income investment portfolios managed
by Zurich Kemper Investments, Inc.
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
KEMPER DIVERSIFIED INCOME FUND
KEMPER U.S. GOVERNMENT SECURITIES FUND
KEMPER HIGH YIELD FUND
KEMPER HIGH YIELD OPPORTUNITY FUND
KEMPER INCOME AND CAPITAL PRESERVATION FUND
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
Kemper U.S. Mortgage Fund and Kemper Short-Intermediate Government Fund are each
a series of Kemper Portfolios. Kemper High Yield Fund and Kemper High Yield
Opportunity Fund are each a series of Kemper High Yield Series.
KEMPER DIVERSIFIED INCOME FUND MAY AND KEMPER HIGH YIELD FUND AND KEMPER HIGH
YIELD OPPORTUNITY FUND DO INVEST PRIMARILY IN LOWER RATED BONDS, COMMONLY
REFERRED TO AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A GREATER
RISK OF LOSS OF PRINCIPAL AND INTEREST THAN INVESTMENTS IN HIGHER RATED
SECURITIES. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THESE FUNDS.
<PAGE> 8
KEMPER INCOME FUNDS
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606, TELEPHONE 1-800-621-1048
SUMMARY
INVESTMENT OBJECTIVES. The eight open-end, diversified, management investment
companies or portfolios thereof (the "Funds") covered in this combined
prospectus are as follows:
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND (the "Adjustable Rate Fund") seeks
high current income consistent with low volatility of principal.
KEMPER DIVERSIFIED INCOME FUND (the "Diversified Fund") seeks a high current
return.
KEMPER U.S. GOVERNMENT SECURITIES FUND (the "Government Fund") seeks high
current income, liquidity and security of principal.
KEMPER HIGH YIELD FUND (the "High Yield Fund") seeks the highest level of
current income obtainable from a professionally managed, diversified portfolio
of fixed income securities which the Fund's investment manager considers
consistent with reasonable risk.
KEMPER HIGH YIELD OPPORTUNITY FUND (the "Opportunity Fund") seeks total return
through high current income and capital appreciation.
KEMPER INCOME AND CAPITAL PRESERVATION FUND (the "Income and Capital Fund")
seeks as high a level of current income as is consistent with prudent investment
management, preservation of capital and ready marketability of its portfolio.
KEMPER U.S. MORTGAGE FUND (the "Mortgage Fund") seeks maximum current return
from U.S. Government securities.
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND (the "Short-Intermediate Government
Fund") seeks, with equal emphasis, high current income and preservation of
capital from a portfolio composed primarily of short and intermediate-term U.S.
Government securities.
Each Fund may engage in options and financial futures transactions. The
Diversified, High Yield, Income and Capital and Opportunity Funds each may
invest a portion of its assets in foreign securities and engage in related
foreign currency transactions. See "Investment Objectives, Policies and Risk
Factors."
RISK FACTORS. There is no assurance that the investment objective of any Fund
will be achieved and investment in each Fund includes risks that vary in kind
and degree depending upon the investment policies of that Fund. The returns and
net asset value of each Fund will fluctuate. Investors should note that
investments in high yield securities by certain Funds (principally the
Diversified, High Yield and Opportunity Funds) entail relatively greater risk of
loss of income and principal than investments in higher rated securities and
market prices of high yield securities may fluctuate more than market prices of
higher rated securities. Foreign investments by certain Funds involve risk and
opportunity considerations not typically associated with investing in U.S.
companies. The U.S. Dollar value of a foreign security tends to decrease when
the value of the U.S. Dollar rises against the foreign currency in which the
security is denominated and tends to increase when the value of the U.S. Dollar
falls against such currency. Thus, the U.S. Dollar value of foreign securities
in a Fund's portfolio, and the Fund's net asset value, may change in response to
changes in currency exchange rates even though the value of the foreign
securities in local currency terms may not have changed. A Fund's investments in
foreign securities may be in developed countries or in countries considered by
the Fund's investment manager to be developing or "emerging" markets, which
involve exposure to economic structures that are generally less diverse and
mature than in the United States, and to political systems that may be less
stable. There are special risks associated with options, financial futures,
foreign currency and other derivative transactions and there is no assurance
that use of those investment techniques will be successful. The Opportunity Fund
may borrow money for leverage purposes, which can exaggerate the effect on its
net asset value of any increase or decrease in the market value of the Fund's
portfolio. The government guarantee of the U.S. Government securities in which
certain Funds invest (principally
1
<PAGE> 9
the Adjustable Rate, Government, Mortgage and Short-Intermediate Government
Funds) does not guarantee the market value of the shares of such Funds.
Normally, the value of investments in U.S. Government securities, as with most
debt securities, varies inversely with changes in interest rates. See
"Investment Objectives, Policies and Risk Factors."
PURCHASES AND REDEMPTIONS. Each Fund provides investors with the option of
purchasing shares in the following ways:
<TABLE>
<S> <C>
Class A Shares............................ Offered at net asset value plus a maximum sales charge of
4.5% (3.5% for the Adjustable Rate and Short-Intermediate
Government Funds) of the offering price. Reduced sales
charges apply to purchases of $100,000 or more. Class A
shares purchased at net asset value under the Large Order
NAV Purchase Privilege may be subject to a 1% contingent
deferred sales charge if redeemed within one year of
purchase and a .50% contingent deferred sales charge if
redeemed during the second year of purchase.
Class B Shares............................ Offered at net asset value, subject to a Rule 12b-1
distribution fee and a contingent deferred sales charge that
declines from 4% to zero on certain redemptions made within
six years of purchase. Class B shares automatically convert
into Class A shares (which have lower ongoing expenses) six
years after purchase.
Class C Shares............................ Offered at net asset value without an initial sales charge,
but subject to a Rule 12b-1 distribution fee and a 1%
contingent deferred sales charge on redemptions made within
one year of purchase. Class C shares do not convert into
another class.
</TABLE>
Each class of shares represents interests in the same portfolio of investments
of a Fund. The minimum initial investment is $1,000 and each investment
thereafter must be at least $100. Shares are redeemable at net asset value,
which may be more or less than original cost, subject to any applicable
contingent deferred sales charge. See "Purchase of Shares" and "Redemption or
Repurchase of Shares."
INVESTMENT MANAGER AND UNDERWRITER. Zurich Kemper Investments, Inc. ("ZKI")
serves as investment manager for each Fund. ZKI is paid an investment management
fee by each Fund based upon the average daily net assets of that Fund at an
effective annual rate that differs for each Fund. Zurich Investment Management
Limited ("ZIML"), an affiliate of ZKI, is the sub-adviser for each of the
Diversified, High Yield, Income and Capital and Opportunity Funds and is paid by
ZKI a fee of .30% of the portion of the average daily net assets of that Fund
allocated by ZKI to ZIML for management. ZIML is not expected to continue as
sub-adviser after the closing of the acquisition of Scudder, Stevens & Clark,
Inc. ("Scudder") by Zurich Insurance Company ("Zurich"). For further details see
"Investment Manager and Underwriter." Kemper Distributors, Inc. ("KDI"), a
wholly owned subsidiary of ZKI, is principal underwriter and administrator for
each Fund. For Class B shares and Class C shares, KDI receives a Rule 12b-1
distribution fee of .75 of 1% of average daily net assets. KDI also receives the
amount of any contingent deferred sales charges paid on the redemption of
shares. Administrative services are provided to shareholders under
administrative services agreements with KDI. Each Fund pays an administrative
services fee at the annual rate of up to .25 of 1% of average daily net assets
of each class of the Fund, which KDI pays to various broker-dealer firms and
other service or administrative firms. See "Investment Manager and Underwriter."
DIVIDENDS. Each Fund normally distributes monthly dividends of net investment
income and distributes any net realized capital gains at least annually. Income
and capital gain dividends of a Fund are automatically reinvested in additional
shares of that Fund, without a sales charge, unless the shareholder makes a
different election. See "Dividends and Taxes."
GENERAL. In the opinion of the staff of the Securities and Exchange Commission,
the use of this combined prospectus may make each Fund liable for any
misstatement or omission in this prospectus regardless of the particular Fund to
which it pertains.
2
<PAGE> 10
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO ALL CLASS A CLASS B CLASS C
FUNDS)(1) ------- ------- -------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases
(as a percentage of offering price)..................
3.5*/4.5%(2) None None
Maximum Sales Charge on Reinvested Dividends........... None None None
Redemption Fees........................................ None None None
Exchange Fee........................................... None None None
Deferred Sales Charge (as a percentage of redemption
proceeds)............................................ None(3) 4% during the first 1% during
year, 3% during the the first
second and third years, year
2% during the fourth and
fifth years and 1% in
the sixth year
</TABLE>
* 3.5% APPLIES TO THE ADJUSTABLE RATE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS
ONLY.
- ---------------
(1) Investment dealers and other firms may independently charge additional fees
for shareholder transactions or for advisory services; please see their
materials for details. The table does not include the $9.00 quarterly small
account fee. See "Redemption or Repurchase of Shares."
(2) Reduced sales charges apply to purchases of $100,000 or more. See "Purchase
of Shares -- Initial Sales Charge Alternative -- Class A Shares."
(3) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% the first year and .50% the second year. See "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares."
CLASS A SHARES
<TABLE>
<CAPTION>
INCOME SHORT-
ANNUAL FUND ADJUSTABLE HIGH AND INTERMEDIATE
OPERATING EXPENSES RATE DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE OPPORTUNITY GOVERNMENT
(as a percentage of average net FUND FUND FUND FUND FUND FUND FUND FUND
assets) ---------- ----------- ---------- ----- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees................ .55% .56% .41% .53% .53% .50% .65% .55%
12b-1 Fees..................... None None None None None None None None
Other Expenses(6).............. .70% .47% .37% .35% .44% .46% 1.20% .64%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses....... 1.25% 1.03% .78% .88% .97% .96% 1.85% 1.19%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
INCOME SHORT-
ANNUAL FUND ADJUSTABLE HIGH AND INTERMEDIATE
OPERATING EXPENSES RATE DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE OPPORTUNITY GOVERNMENT
(as a percentage of average net Fund Fund Fund Fund Fund Fund Fund Fund
assets) ---------- ----------- ---------- ----- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees................ .55% .56% .41% .53% .53% .50% .65% .55%
12b-1 Fees(4).................. .75% .75% .75% .75% .75% .75% .75% .75%
Other Expenses(6).............. .63% .67% .57% .48% .62% .58% 1.33% .72%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses....... 1.93% 1.98% 1.73% 1.76% 1.90% 1.83% 2.73% 2.02%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(4) Long-term shareholders may pay more than the economic equivalent of the
maximum initial sales charges permitted by the National Association of
Securities Dealers, although KDI believes that it is unlikely because of the
automatic conversion feature described under "Purchase of Shares--Deferred
Sales Charge Alternative--Class B Shares."
3
<PAGE> 11
CLASS C SHARES
<TABLE>
<CAPTION>
ANNUAL FUND
INCOME SHORT-
ADJUSTABLE HIGH AND INTERMEDIATE
OPERATING EXPENSES RATE DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE OPPORTUNITY GOVERNMENT
(as a percentage of average net FUND FUND FUND FUND FUND FUND FUND FUND
assets) ---------- ----------- ---------- ----- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees................ .55% .56% .41% .53% .53% .50% .65% .55%
12b-1 Fees(5).................. .75% .75% .75% .75% .75% .75% .75% .75%
Other Expenses(6).............. .58% .54% .52% .43% .58% .46% 1.30% .56%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses....... 1.88% 1.85% 1.68% 1.71% 1.86% 1.71% 2.70% 1.86%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(5) As a result of the accrual of 12b-1 fees, long-term shareholders may pay
more than the economic equivalent of the maximum initial sales charges
permitted by the National Association of Securities Dealers.
(6) "Other Expenses" have been estimated for the Opportunity Fund for the
current fiscal year. These expenses include estimated interest expense of
.60% of average net assets. Interest expense represents interest paid by the
Opportunity Fund on borrowings for the purpose of making additional
portfolio investments. Excluding interest expense, "Total Operating
Expenses" would be for Class A, 1.25%, for Class B, 2.13%, and for Class C,
2.10%.
CLASS A SHARES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
EXAMPLE
You would pay the following Adjustable Rate $47 $ 73 $101 $181
expenses on a $1,000 Diversified $55 $ 76 $ 99 $165
investment, assuming (1) 5% Government $53 $ 69 $ 86 $137
annual return and (2) High Yield $54 $ 72 $ 92 $149
redemption at the end of each Income and Capital $54 $ 75 $ 96 $159
time period: Mortgage $54 $ 74 $ 96 $158
Opportunity(7) $63 $101 $ -- $ --
Short-Intermediate Government $47 $ 71 $ 98 $174
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
EXAMPLE(8)
You would pay the following Adjustable Rate $60 $ 91 $124 $192
expenses on a $1,000 Diversified $60 $ 92 $127 $183
investment, assuming (1) 5% Government $58 $ 84 $114 $156
annual return and (2) High Yield $58 $ 85 $115 $163
redemption at the end of each Income and Capital $59 $ 90 $123 $176
time period: Mortgage $59 $ 88 $119 $171
Opportunity(7) $68 $115 $ -- $ --
Short-Intermediate Government $61 $ 93 $129 $194
You would pay the following Adjustable Rate $20 $ 61 $104 $192
expenses on the same Diversified $20 $ 62 $107 $183
investment, assuming no Government $18 $ 54 $ 94 $156
redemption: High Yield $18 $ 55 $ 95 $163
Income and Capital $19 $ 60 $103 $176
Mortgage $19 $ 58 $ 99 $171
Opportunity(7) $28 $ 85 $ -- $ --
Short-Intermediate Government $21 $ 63 $109 $194
</TABLE>
- ---------------
(7) For the Opportunity Fund, excluding interest expense discussed in footnote
(6) above, expenses shown in the Example would be for Class A, $57 and $83,
for Class B with redemption, $62 and $97, for Class B without redemption,
$22 and $67, for Class C with redemption, $31 and $66, and for Class C
without redemption, $21 and $66, respectively.
(8) Assumes conversion to Class A shares six years after purchase. The
contingent deferred sales charge was applied as follows: 1 year (4%), 3
years (3%), 5 years (2%) and 10 years (0%). See "Redemption or Repurchase of
Shares -- Contingent Deferred Sales Charge -- Class B Shares" for more
information regarding the calculation of the contingent deferred sales
charge.
4
<PAGE> 12
CLASS C SHARES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
EXAMPLE(9)
You would pay the following Adjustable Rate $29 $59 $102 $220
expenses on a $1,000 Diversified $29 $58 $100 $217
investment,
assuming (1) 5% annual return Government $27 $53 $ 91 $199
and (2) redemption at the end High Yield $27 $54 $ 93 $202
of each time period: Income and Capital $29 $58 $101 $218
Mortgage $27 $54 $ 93 $202
Opportunity(7) $37 $84 $ -- $ --
Short-Intermediate Government $29 $58 $101 $218
You would pay the following Adjustable Rate $19 $59 $102 $220
expenses on the same Diversified $19 $58 $100 $217
investment,
assuming no redemption: Government $17 $53 $ 91 $199
High Yield $17 $54 $ 93 $202
Income and Capital $19 $58 $101 $218
Mortgage $17 $54 $ 93 $202
Opportunity(7) $27 $84 $ -- $ --
Short-Intermediate Government $19 $58 $101 $218
</TABLE>
- ---------------
(9) The contingent deferred sales charge was applied as follows: 1 year (1%), 3
years (0%), 5 years (0%) and 10 years (0%). See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Class C Shares."
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in a Fund will bear directly or
indirectly. See "Investment Manager and Underwriter" for more information. The
Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of any Fund. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The tables below show financial information for each Fund, except the
Opportunity Fund, expressed in terms of one share outstanding throughout the
period. The information in the table for each Fund is covered by the report of
the Fund's independent auditors. The report for each Fund is contained in its
Registration Statement and is available from that Fund. The financial statements
contained in each Fund's 1997 Annual Report to Shareholders (except the
Opportunity Fund) are incorporated herein by reference and may be obtained by
writing or calling that Fund.
5
<PAGE> 13
ADJUSTABLE RATE FUND
<TABLE>
<CAPTION>
SEPTEMBER 1,
JULY 1 TO YEAR ENDED 1987 TO
YEAR ENDED AUGUST 31, AUGUST 31, JUNE 30, JUNE 30,
1997 1996 1995 1994 1993 1992 1991 1991 1990 1989 1988
CLASS A SHARES ----------------------------------------- ---------- -------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $8.22 8.30 8.33 8.68 8.63 8.37 8.21 8.21 8.66 8.79 9.00
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45 .46 .48 .34 .47 .63 .13 .79 .81 .87 .52
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .09 (.09) (.04) (.29) .02 .22 .17 .02 (.41) (.08) (.14)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .54 .37 .44 .05 .49 .85 .30 .81 .40 .79 .38
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .45 .45 .47 .40 .44 .59 .14 .81 .78 .85 .49
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized
gain -- -- -- -- -- -- -- -- .07 .07 .10
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .45 .45 .47 .40 .44 .59 .14 .81 .85 .92 .59
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.31 8.22 8.30 8.33 8.68 8.63 8.37 8.21 8.21 8.66 8.79
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 6.75% 4.55 5.52 .59 5.87 10.56 3.62 10.33 4.85 9.64 4.29
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)(A):
Expenses 1.25% 1.15 1.10 .93 .21 .28 1.09 1.07 1.37 1.41 1.51
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.50% 5.49 5.76 3.96 5.44 7.02 9.45 9.62 9.60 10.10 8.63
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED YEAR ENDED
AUGUST 31, MAY 31 TO AUGUST 31, MAY 31 TO
1997 1996 1995 AUGUST 31, 1994 1997 1996 1995 AUGUST 31, 1994
CLASS B & C SHARES ------------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.23 8.31 8.32 8.37 8.24 8.32 8.33 8.37
- ------------------------------------------------------------------------------------ ------------------------------------
Income from investment operations:
Net investment income .39 .40 .43 .07 .39 .40 .43 .08
- ------------------------------------------------------------------------------------ ------------------------------------
Net realized and unrealized gain (loss) .09 (.09) (.04) (.04) .09 (.09) (.04) (.04)
- ------------------------------------------------------------------------------------ ------------------------------------
Total from investment operations .48 .31 .39 .03 .48 .31 .39 .04
- ------------------------------------------------------------------------------------ ------------------------------------
Less distribution from net investment income .39 .39 .40 .08 .39 .39 .40 .08
- ------------------------------------------------------------------------------------ ------------------------------------
Net asset value, end of period $8.32 8.23 8.31 8.32 8.33 8.24 8.32 8.33
- ------------------------------------------------------------------------------------ ------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.96% 3.79 4.84 .34 5.98 3.82 4.89 .47
- ------------------------------------------------------------------------------------ ------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.93% 1.89 1.85 1.96 1.88 1.89 1.79 1.88
- ------------------------------------------------------------------------------------ ------------------------------------
Net investment income 4.82% 4.75 5.01 3.36 4.87 4.75 5.07 3.52
- ------------------------------------------------------------------------------------ ------------------------------------
</TABLE>
<TABLE>
<CAPTION>
JULY 1 TO
YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED JUNE 30,
1997 1996 1995 1994 1993 1992 1991 1991 1990 1989
ALL CLASSES ---------------------------------------------------------- ---------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) $ 81,967 94,477 129,757 202,815 212,694 174,967 76,749 75,012 75,913 75,704
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 249% 272 308 533 138 309 228 259 278 265
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SEPTEMBER 1,
1987 TO
JUNE 30,
1988
ALL CLASSES ------------
<S> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) 59,054
- -------------------------------------
Portfolio turnover rate
(annualized) 201
- -------------------------------------
</TABLE>
(a) ZKI agreed to waive its management fee and to absorb certain other operating
expenses of the Adjustable Rate Fund through December 31, 1992. Thereafter,
these expenses were gradually reinstated through January 31, 1994. Without this
agreement, the ratio of expenses to average net assets and the ratio of net
investment income to average net assets for Class A Shares would have been .99%
and 3.90%, respectively, for fiscal 1994, .95% and 4.70%, respectively, for
fiscal 1993, and .90% and 6.40%, respectively, for fiscal 1992.
6
<PAGE> 14
DIVERSIFIED FUND
<TABLE>
<CAPTION>
DEC. 1, THIRTEEN
1990 YEAR MONTHS YEAR
TO ENDED ENDED ENDED
YEAR ENDED OCTOBER 31, OCT. 31, NOV. 30, NOV. 30, OCT. 31,
CLASS A SHARES 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period $5.99 5.98 5.77 6.23 5.65 5.47 4.14 5.48 6.06 6.10
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .46 .46 .55 .52 .59 .63 .60 .71 .39 .13
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investments and
foreign currency .01 .12 .16 (.45) .58 .14 1.36 (1.34) .10 .72
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .47 .58 .71 .07 1.17 .77 1.96 (.63) .49 .85
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment
income .50 .57 .50 .53 .59 .59 .63 .71 .40 .13
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net
realized gain -- -- -- -- -- -- -- -- -- .02
- ---------------------------------------------------------------------------------------------------------------------------------
Paid in surplus -- -- -- -- -- -- -- -- .67 .74
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .50 .57 .50 .53 .59 .59 .63 .71 1.07 .89
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $5.96 5.99 5.98 5.77 6.23 5.65 5.47 4.14 5.48 6.06
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT
ANNUALIZED): 8.13% 10.27 12.90 1.02 21.60 14.59 50.58 (12.79) 8.59 15.30
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS (ANNUALIZED):
Expenses 1.03% 1.03 1.09 1.12 1.10 1.19 1.21 1.15 .96 .97
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 7.68% 7.72 9.43 8.81 9.74 11.02 13.41 14.32 6.76 3.08
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED OCT. 31, MAY 31 TO YEAR ENDED OCT. 31, MAY 31 TO
CLASS B & C SHARES 1997 1996 1995 OCTOBER 31, 1994 1997 1996 1995 OCTOBER 31, 1994
----------------------- ---------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $5.99 5.98 5.77 5.94 6.01 6.00 5.79 5.95
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .40 .41 .49 .19 .42 .41 .50 .20
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency .01 .12 .16 (.17) .01 .12 .16 (.17)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .41 .53 .65 .02 .43 .53 .66 .03
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends from net investment
income .44 .52 .44 .19 .45 .52 .45 .19
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.96 5.99 5.98 5.77 5.99 6.01 6.00 5.79
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 7.13% 9.23 11.87 .35 7.37 9.33 11.95 .55
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.98% 1.96 2.04 1.97 1.85 1.86 1.86 1.96
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.73% 6.79 8.48 8.01 6.86 6.89 8.68 8.02
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DEC. 1, THIRTEEN
1990 YEAR MONTHS
TO ENDED ENDED
YEAR ENDED OCT. 31, OCT. 31, NOV. 30, NOV. 30,
ALL CLASSES 1997 1996 1995 1994 1993 1992 1991 1990 1989
--------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period
(in thousands) $861,543 778,752 754,222 738,014 328,512 244,620 227,625 179,154 284,497
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover
rate (annualized) 347% 310 286 179 80 57 20 45 102
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR
ENDED
OCT. 31,
ALL CLASSES 1988
---------
<S> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period
(in thousands) 371,758
- --------------------------------
Portfolio turnover
rate (annualized) 16
- --------------------------------
</TABLE>
7
<PAGE> 15
GOVERNMENT FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
CLASS A SHARES 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of year $8.74 8.92 8.35 9.29 9.30 9.32 8.71 9.09 9.02 9.13
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .63 .66 .67 .69 .78 .84 .85 .88 .93
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .06 (.17) .56 (.97) (.01) (.02) .61 (.38) .09 (.08)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .70 .46 1.22 (.30) .68 .76 1.45 .47 .97 .85
- ---------------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment
income .63 .64 .65 .64 .69 .78 .84 .85 .90 .96
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $8.81 8.74 8.92 8.35 9.29 9.30 9.32 8.71 9.09 9.02
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: 8.41% 5.36 15.24 (3.37) 7.60 8.44 17.41 5.53 11.51 9.73
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .78% .77 .72 .75 .65 .64 .63 .53 .49 .50
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 7.34% 7.17 7.68 7.58 7.36 8.31 9.24 9.62 9.93 10.20
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED OCT. 31, MAY 31 TO YEAR ENDED OCT. 31, MAY 31 TO
CLASS B & C SHARES 1997 1996 1995 OCTOBER 31, 1994 1997 1996 1995 OCTOBER 31, 1994
---------------------- ---------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.73 8.91 8.34 8.67 8.75 8.93 8.35 8.67
- ------------------------------------------------------------------------------------ -----------------------------------------
Income from investment operations:
Net investment income .56 .54 .58 .28 .56 .55 .60 .29
- ------------------------------------------------------------------------------------ -----------------------------------------
Net realized and unrealized gain
(loss) .06 (.17) .56 (.38) .06 (.17) .56 (.38)
- ------------------------------------------------------------------------------------ -----------------------------------------
Total from investment operations .62 .37 1.14 (.10) .62 .38 1.16 (.09)
- ------------------------------------------------------------------------------------ -----------------------------------------
Less distribution from net investment
income .55 .55 .57 .23 .55 .56 .58 .23
- ------------------------------------------------------------------------------------ -----------------------------------------
Net asset value, end of period $8.80 8.73 8.91 8.34 8.82 8.75 8.93 8.35
- ------------------------------------------------------------------------------------ -----------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 7.40% 4.36 14.18 (1.15) 7.42 4.40 14.33 (1.01)
- ------------------------------------------------------------------------------------ -----------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.73% 1.73 1.69 1.71 1.68 1.70 1.64 1.68
- ------------------------------------------------------------------------------------ -----------------------------------------
Net investment income 6.39% 6.21 6.71 7.09 6.44 6.24 6.76 7.12
- ------------------------------------------------------------------------------------ -----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
ALL CLASSES 1997 1996 1995 1994 1993 1992 1991
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of year
(in thousands) $3,642,027 4,163,157 4,738,415 4,941,451 6,686,735 6,683,092 5,544,095
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 261% 391 362 1,000 550 569 695
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED OCTOBER 31,
ALL CLASSES 1990 1989 1988
---------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of year
(in thousands) 4,565,689 4,540,382 4,403,110
- -------------------------------------------------------------
Portfolio turnover rate 497 289 203
- -------------------------------------------------------------
</TABLE>
8
<PAGE> 16
HIGH YIELD FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
CLASS A SHARES 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $8.23 8.01 7.74 8.12 7.86 7.30 6.22 8.34 8.95 9.23
- ----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .76 .76 .83 .73 .81 .85 .92 1.07 1.09 1.10
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .31 .23 .20 (.35) .23 .54 1.15 (2.13) (.58) .09
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.07 .99 1.03 .38 1.04 1.39 2.07 (1.06) .51 1.19
- ----------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .80 .77 .76 .76 .78 .83 .99 1.06 1.12 1.11
- ----------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- -- -- -- -- -- .36
- ----------------------------------------------------------------------------------------------------------------------------------
Total dividends .80 .77 .76 .76 .78 .83 .99 1.06 1.12 1.47
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.50 8.23 8.01 7.74 8.12 7.86 7.30 6.22 8.34 8.95
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 13.69% 13.00 14.10 4.64 13.92 19.96 36.82 (13.83) 5.91 14.22
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses .88% .88 .90 .86 .80 .82 .85 .73 .67 .72
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income 9.18% 9.45 10.74 9.22 10.22 11.00 14.02 14.46 12.40 12.59
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED MAY 31 TO YEAR ENDED MAY 31 TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
CLASS B & C SHARES 1997 1996 1995 1994 1997 1996 1995 1994
--------------------- ------------- --------------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.22 8.00 7.73 7.96 8.24 8.02 7.75 7.96
- -------------------------------------------------------------------------------- -------------------------------------------
Income from investment operations:
Net investment income .69 .69 .76 .23 .70 .69 .77 .25
- -------------------------------------------------------------------------------- -------------------------------------------
Net realized and unrealized gain (loss) .31 .23 .20 (.23) .31 .23 .20 (.23)
- -------------------------------------------------------------------------------- -------------------------------------------
Total from investment operations 1.00 .92 .96 -- 1.01 .92 .97 .02
- -------------------------------------------------------------------------------- -------------------------------------------
Less distribution from net investment income .73 .70 .69 .23 .73 .70 .70 .23
- -------------------------------------------------------------------------------- -------------------------------------------
Net asset value, end of period $8.49 8.22 8.00 7.73 8.52 8.24 8.02 7.75
- -------------------------------------------------------------------------------- -------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 12.72% 12.02 13.09 -- 12.88 12.06 13.13 .27
- -------------------------------------------------------------------------------- -------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.76% 1.77 1.77 1.80 1.71 1.71 1.71 1.74
- -------------------------------------------------------------------------------- -------------------------------------------
Net investment income 8.30% 8.56 9.87 8.70 8.35 8.62 9.93 8.75
- -------------------------------------------------------------------------------- -------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
ALL CLASSES 1997 1996 1995 1994 1993 1992 1991
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
year (in thousands) $4,939,302 4,096,939 3,527,954 3,152,029 1,957,524 1,953,509 1,673,161
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover
rate (annualized) 91% 102 99 93 101 69 31
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
ALL CLASSES 1990 1989 1988
-------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
year (in thousands) 1,183,943 1,552,762 978,310
- ------------------------------------------------------
Portfolio turnover
rate (annualized) 37 45 76
- ------------------------------------------------------
</TABLE>
9
<PAGE> 17
INCOME AND CAPITAL FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
CLASS A SHARES 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 8.46 8.62 7.91 8.97 8.34 8.22 7.70 8.22 8.53 8.44
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .57 .58 .61 .61 .63 .67 .74 .80 .84 .89
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 (.15) .72 (1.03) .62 .11 .53 (.52) (.26) .12
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .65 .43 1.33 (.42) 1.25 .78 1.27 .28 .58 1.01
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .57 .59 .62 .59 .62 .66 .75 .80 .89 .92
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- .05 -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .57 .59 .62 .64 .62 .66 .75 .80 .89 .92
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 8.54 8.46 8.62 7.91 8.97 8.34 8.22 7.70 8.22 8.53
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: 8.00% 5.17 17.47 (4.86) 15.48 9.83 17.26 3.60 7.13 12.67
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .97% .96 .90 .94 .82 .82 .82 .73 .67 .69
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.75% 6.90 7.31 7.34 7.26 8.01 9.21 10.05 10.02 10.53
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED YEAR ENDED
OCTOBER 31, MAY 31 TO OCTOBER 31, MAY 31 TO
CLASS B & C SHARES 1997 1996 1995 OCTOBER 31, 1994 1997 1996 1995 OCTOBER 31, 1994
---------------------- ---------------- ----------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.43 8.59 7.90 8.16 8.45 8.61 7.90 8.16
- ------------------------------------------------------------------------------ --------------------------------------
Income from investment operations:
Net investment income .49 .50 .51 .23 .49 .50 .53 .23
- ------------------------------------------------------------------------------ --------------------------------------
Net realized and unrealized gain
(loss) .08 (.15) .72 (.26) .08 (.15) .72 (.26)
- ------------------------------------------------------------------------------ --------------------------------------
Total from investment operations .57 .35 1.23 (.03) .57 .35 1.25 (.03)
- ------------------------------------------------------------------------------ --------------------------------------
Less distribution from net investment
income .49 .51 .54 .23 .49 .51 .54 .23
- ------------------------------------------------------------------------------ --------------------------------------
Net asset value, end of period $ 8.51 8.43 8.59 7.90 8.53 8.45 8.61 7.90
- ------------------------------------------------------------------------------ --------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 6.99% 4.20 16.12 (.45) 7.03 4.23 16.45 (.44)
- ------------------------------------------------------------------------------ --------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.90% 1.93 1.81 1.92 1.86 1.90 1.78 1.89
- ------------------------------------------------------------------------------ --------------------------------------
Net investment income 5.82% 5.93 6.40 6.72 5.86 5.96 6.43 6.75
- ------------------------------------------------------------------------------ --------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
ALL CLASSES 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of year (in
thousands) $613,470 572,998 649,427 510,432 569,145 482,009 432,490 394,131 404,995 322,229
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 164% 74 182 163 190 178 115 189 64 34
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 18
MORTGAGE FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31, JANUARY 10 TO
CLASS A SHARES 1997 1996 1995 1995 1994 1993 JULY 31, 1992
--------------- ------------ ------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $6.91 7.13 7.06 6.96 7.56 7.78 7.81
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .52 .49 .08 .53 .51 .62 .38
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .10 (.19) .08 .09 (.59) (.21) (.03)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .62 .30 .16 .62 (.08) .41 .35
- ---------------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment
income .52 .52 .09 .52 .52 .63 .38
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.01 6.91 7.13 7.06 6.96 7.56 7.78
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 9.26% 4.28 2.23 9.48 (1.21) 5.52 4.76
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses .96% .97 .94 .89 .99 .97 .94
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 7.23% 6.98 6.87 7.77 7.00 8.22 8.73
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31,
CLASS B SHARES 1997 1996 1995 1995 1994 1993 1992 1991 1990 1989 1988
--------------- ------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $6.91 7.12 7.05 6.96 7.56 7.77 7.25 7.25 7.61 7.58 8.01
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45 .44 .07 .47 .45 .57 .65 .64 .66 .72 .72
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .10 (.19) .08 .09 (.59) (.21) .49 .01 (.36) .07 (.33)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .55 .25 .15 .56 (.14) .36 1.14 .65 .30 .79 .39
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .46 .46 .08 .47 .46 .57 .62 .65 .66 .76 .74
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized
gain -- -- -- -- -- -- -- -- -- -- .08
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .46 .46 .08 .47 .46 .57 .62 .65 .66 .76 .82
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.00 6.91 7.12 7.05 6.96 7.56 7.77 7.25 7.25 7.61 7.58
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 8.17% 3.54 2.09 8.44 (2.00) 4.85 16.36 9.37 4.26 11.12 5.06
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.83% 1.80 1.79 1.75 1.79 1.75 1.86 2.03 1.99 1.98 1.98
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.36% 6.15 6.02 6.91 6.27 7.44 8.70 8.86 9.00 9.62 9.28
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 19
MORTGAGE FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, JULY 31, MAY 31 TO
CLASS C SHARES 1997 1996 1995 1995 JULY 31, 1994
----------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $6.90 7.12 7.05 6.95 6.99
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .43 .07 .48 .07
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .10 (.19) .08 .09 (.04)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .56 .24 .15 .57 .03
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividend from net investment income .46 .46 .08 .47 .07
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.00 6.90 7.12 7.05 6.95
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 8.45% 3.47 2.10 8.65 .47
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.71% 1.72 1.69 1.71 1.55
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.48% 6.23 6.12 6.95 6.46
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUG. 1, 1995
SEPT. 30, TO SEPT. 30, YEAR ENDED JULY 31,
ALL CLASSES 1997 1996 1995 1995 1994 1993 1992 1991
----------------------- ------------ ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) $2,497,825 2,960,135 3,493,052 3,528,329 4,158,066 5,639,097 5,602,682 4,879,832
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 235% 391 249 573 963 551 376 498
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED JULY 31,
ALL CLASSES 1990 1989 1988
----------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) 5,178,159 6,193,674 6,332,021
- --------------------------------------------------------------
Portfolio turnover rate
(annualized) 206 152 178
- --------------------------------------------------------------
</TABLE>
12
<PAGE> 20
SHORT-INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
AUGUST 1 JANUARY 10
YEAR ENDED TO TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31, JULY 31,
CLASS A SHARES 1997 1996 1995 1995 1994 1993 1992
--------------- ------------- ----------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.89 8.08 8.09 8.11 8.63 8.65 8.59
- ----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .51 .54 .09 .54 .48 .53 .29
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.07) (.20) (.01) (.03) (.44) (.03) .11
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .44 .34 .08 .51 .04 .50 .40
- ----------------------------------------------------------------------------------------------------------------------------------
Less dividends from:
Distribution from net investment income .53 .53 .09 .53 .45 .52 .34
- ----------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- .11 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total dividends .53 .53 .09 .53 .56 .52 .34
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.80 7.89 8.08 8.09 8.11 8.63 8.65
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.80% 4.25 1.00 6.58 .41 6.01 4.87
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.19% 1.15 1.05 1.06 1.06 1.04 .95
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.61% 6.65 6.56 6.65 5.85 6.06 7.48
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AUGUST 1 FEBRUARY 1
YEAR ENDED TO TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31, JULY 31,
CLASS B SHARES 1997 1996 1995 1995 1994 1993 1992 1991 1990 1989
--------------- ------------- ------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.85 8.05 8.06 8.08 8.61 8.64 8.27 8.42 8.70 8.50
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .46 .08 .47 .40 .45 .58 .69 .72 .36
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) (.07) (.20) (.01) (.03) (.44) (.02) .36 (.14) (.27) .14
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .39 .26 .07 .44 (.04) .43 .94 .55 .45 .50
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .47 .46 .08 .46 .38 .46 .57 .70 .72 .30
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- .11 -- -- -- .01 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .47 .46 .08 .46 .49 .46 .57 .70 .73 .30
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.77 7.85 8.05 8.06 8.08 8.61 8.64 8.27 8.42 8.70
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.11% 3.28 .87 5.68 (.48) 5.13 11.76 6.85 5.52 5.99
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 2.02% 1.97 1.91 1.87 1.93 1.87 1.89 2.07 2.10 2.24
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.78% 5.83 5.70 5.84 4.95 5.23 6.84 8.19 8.60 8.50
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 21
SHORT-INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
MAY 31
AUGUST 1 TO YEAR ENDED TO
YEAR ENDED SEPTEMBER 30, JULY 31, JULY 31,
SEPTEMBER 30, 1995 1995 1994
1997 1996 ------------- ---------- --------
CLASS C SHARES ----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.86 8.06 8.06 8.08 8.09
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .47 .47 .09 .47 .07
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.07) (.20) (.01) (.03) (.01)
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .40 .27 .08 .44 .06
- ------------------------------------------------------------------------------------------------------------------------
Less dividends from net investment income .48 .47 .08 .46 .07
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.78 7.86 8.06 8.06 8.08
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.24% 3.36 1.00 5.73 .77
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.86% 1.85 1.74 1.78 1.83
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 5.94% 5.95 5.87 5.93 5.54
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31,
1997 1996 1995 1995 1994 1993 1992 1991 1990
ALL CLASSES --------------------- ------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of period (in
thousands) $171,400 204,021 239,619 246,248 266,640 283,249 191,716 104,279 51,741
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (annualized) 164% 180 173 597 916 339 120 180 89
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES FOR ALL FUNDS:
Total return does not reflect the effect of any sales charges. The Adjustable
Rate, Diversified, Government and Income and Capital Funds are separate
Massachusetts business trusts. The Mortgage and Short-Intermediate Government
Funds are separate portfolios of Kemper Portfolios, a Massachusetts business
trust, and the High Yield and Opportunity Funds are separate portfolios of
Kemper High Yield Series, a Massachusetts business trust. See "Capital
Structure."
The Opportunity Fund (not shown above) commenced operations on October 1, 1997.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following information sets forth each Fund's investment objective and
policies. Each Fund's returns and net asset value will fluctuate and there is no
assurance that any Fund will achieve its objective.
ADJUSTABLE RATE FUND. The Adjustable Rate Fund seeks high current income
consistent with low volatility of principal. Under normal market conditions, the
Fund will, as a fundamental policy, invest at least 65% of its total assets in
adjustable rate securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities"). See "Government
Fund" below concerning U.S. Government Securities and the risks related to those
securities, including the fact that the government guarantee of such securities
in the Fund's portfolio does not guarantee the net asset value of the Fund's
shares. The Fund is designed for the investor who seeks a higher yield than a
stable price money market fund or an insured bank certificate of deposit and
less fluctuation in net asset value than a longer-term bond fund; unlike money
market funds, however, the Fund does not seek to maintain a stable net asset
value and, unlike an insured bank certificate of deposit, the Fund's shares are
not insured. There is no assurance that the Fund will achieve its objective.
14
<PAGE> 22
Adjustable rate securities bear interest at rates that adjust at periodic
intervals in response to changes in market levels of interest rates generally.
As the interest rates are reset periodically, yields on such securities will
gradually align themselves to reflect changes in market interest rates. The
adjustable interest rate feature of the securities in which the Fund invests
generally will act as a buffer to reduce sharp changes in the Fund's net asset
value in response to normal interest rate fluctuations. As the interest rates on
the Fund's investments are reset periodically, yields of portfolio securities
will gradually align themselves to reflect changes in market rates and should
cause the net asset value of the Fund's shares to fluctuate less dramatically
than it would if the Fund invested in long-term, fixed rate securities.
Adjustable rate securities allow the Fund to participate in increases in
interest rates through periodic adjustments in the interest rate resulting in
both higher current yields and lower price fluctuations. During periods of
declining interest rates, of course, the coupon rates may readjust downward,
resulting in lower yields to the Fund. Further, because of this feature, the
value of adjustable rate mortgages is unlikely to rise during periods of
declining interest rates to the same extent as fixed rate instruments. As with
other mortgage-backed securities, interest rate declines may result in
accelerated prepayment of mortgages, and the proceeds from such prepayments must
be reinvested at lower prevailing interest rates. However, during periods of
rising interest rates, changes in the coupon rate lag behind changes in the
market rate, possibly resulting in a lower net asset value until the coupon
resets to market rates. Thus, investors could suffer some principal loss if they
sold their shares of the Fund before the interest rates on portfolio investments
are adjusted to reflect current market rates. During periods of extreme
fluctuations in interest rates, the Fund's net asset value will fluctuate as
well.
The Fund may invest without limit in Mortgage-Backed Securities, as described
under "Mortgage Fund" below. Mortgage-Backed Securities can have either a fixed
rate of interest or an adjustable rate. Adjustable rate mortgage securities in
which the Fund generally invests would have the same characteristics as
described above with respect to adjustable rate securities. In addition, since
most mortgage securities in the Fund's portfolio will generally have annual
reset caps of 100 to 200 basis points (1-2%), fluctuation in interest rates
above these levels could cause such mortgage securities to "cap out" and to
behave more like long-term, fixed rate debt securities.
To help protect the value of the Fund's portfolio primarily from interest rate
fluctuations, the Fund may engage in interest rate swaps and other swap-related
products such as interest rate "caps" and "floors." The Fund will enter into
these transactions normally to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities the Fund anticipates purchasing. There is no assurance that
these transactions will be successful. The Fund will not sell interest rate caps
or floors that it does not own. See "Additional Investment Information--Interest
Rate Swaps and Swap-Related Products" below.
The Fund may also invest up to 35% of its total assets in securities other than
adjustable rate U.S. Government Securities including, without limitation,
privately issued Mortgage-Backed Securities, commercial paper and other debt
obligations of corporations and other business organizations, certificates of
deposit, bankers' acceptances and time deposits and other debt securities such
as convertible securities and preferred stocks. These securities will, at the
time of purchase, be rated within the two highest grades (Aaa or Aa) assigned by
Moody's Investors Service, Inc. ("Moody's"), or (AAA or AA) by Standard & Poor's
Corporation ("S&P"), or will be non-rated but of comparable quality in the
opinion of the investment manager.
The Fund also may invest in obligations collateralized by a portfolio or pool of
mortgages, Mortgage-Backed Securities, U.S. Government Securities or other
assets and may engage in options and financial futures transactions, securities
lending, delayed delivery transactions and other portfolio strategies. See
"Additional Investment Information" below.
Additional information concerning the Adjustable Rate Fund appears in the
"Interest Rate Swaps, Caps and Floors" and "Additional Information--Adjustable
Rate Securities" sections under "Investment Policies and Techniques" in the
Statement of Additional Information.
DIVERSIFIED FUND. The Diversified Fund seeks high current return. The Fund
pursues its objective by investing primarily in fixed income securities and
dividend-paying common stocks and by writing options. Current return includes
interest income, common stock dividends and any net short-term gains.
15
<PAGE> 23
Investment in fixed income securities will include corporate debt obligations,
U.S. and Canadian Government securities, obligations of U.S. and Canadian
banking institutions, convertible securities, preferred stocks, and cash and
cash equivalents, including repurchase agreements. Investment in equity
securities will primarily be in dividend-paying common stocks. The percentage of
assets invested in fixed income and equity securities will vary from time to
time depending upon the judgment of the investment manager as to general market
and economic conditions, trends in yields and interest rates and changes in
fiscal or monetary policies. The Fund may invest up to 50% of its total assets
in foreign securities that are traded principally in securities markets outside
the United States. Foreign securities present certain risks in addition to those
presented by domestic securities, including risks associated with currency
fluctuations, possible imposition of foreign governmental regulations or taxes
adversely affecting portfolio securities and generally different degrees of
liquidity, market volatility and availability of information. See "Special Risk
Factors--Foreign Securities" below.
The Fund may invest without limit in high yield, fixed income securities,
commonly referred to as "junk bonds," that are in the lower rating categories
and those that are non-rated. The high yield, fixed income securities (debt and
preferred stock issues, including convertibles and assignments or participations
in loans) in which the Fund may invest normally offer a current yield or yield
to maturity that is significantly higher than the yield available from
securities rated in the four highest categories assigned by S&P or Moody's. The
characteristics of the securities in the Fund's portfolio, such as the maturity
and the type of issuer, will affect yields and yield differentials, which vary
over time. The actual yield realized by the investor is subject, among other
things, to the Fund's expenses and the investor's transaction costs.
The Fund may also purchase options on securities and index options, purchase and
sell financial futures contracts and options on financial futures contracts,
engage in foreign currency transactions, engage in delayed delivery transactions
and lend its portfolio securities. See "Special Risk Factors--Foreign
Securities" and "Additional Investment Information" below. Under normal market
conditions, the Fund will invest at least 65% of its total assets in income
producing investments. In periods of unusual market conditions, the Fund may,
for defensive purposes, temporarily retain all or any part of its assets in cash
or cash equivalents.
There are market and investment risks with any security and the value of an
investment in the Fund will fluctuate over time. In seeking to achieve its
investment objective, the Fund will invest in fixed income securities based on
the investment manager's analysis without relying on any published ratings. The
Fund will invest in a particular fixed income security if in the investment
manager's view, the increased yield offered, regardless of published ratings, is
sufficient to compensate for a reasonable element of assumed risk. Since
investments will be based upon the investment manager's analysis rather than
upon published ratings, achievement of the Fund's goals may depend more upon the
abilities of the investment manager than would otherwise be the case.
Investments in lower rated or non-rated securities, while generally providing
greater income and opportunity for gain than investments in higher rated
securities, entail greater risk of loss of income and principal. See "Special
Risk Factors--High Yield (High Risk) Bonds" below and "Appendix--Ratings of
Investments" in the Statement of Additional Information.
Since interest rates vary with changes in economic, market, political and other
conditions, there can be no assurance that historic interest rates are
indicative of rates that may prevail in the future. The values of fixed income
securities in the Fund's portfolio will fluctuate depending upon market factors
and inversely with current interest rate levels. The market value of equity
securities in the Fund's portfolio will also fluctuate with market and other
conditions.
GOVERNMENT FUND. The Government Fund seeks high current income, liquidity and
security of principal by investing in obligations issued or guaranteed by the
U.S. Government or its agencies, and by obtaining rights to acquire such
securities. The Fund's yield and net asset value will fluctuate and there can be
no assurance that the Fund will attain its objective.
The Fund intends to invest some or all of its assets in Government National
Mortgage Association ("GNMA") Certificates of the modified pass-through type.
These GNMA Certificates are debt securities issued by a mortgage
16
<PAGE> 24
banker or other mortgagee and represent an interest in one or a pool of
mortgages insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. GNMA guarantees the timely payment of monthly
installments of principal and interest on modified pass-through Certificates at
the time such payments are due, whether or not such amounts are collected by the
issuer of these Certificates on the underlying mortgages.
The National Housing Act provides that the full faith and credit of the United
States is pledged to the timely payment of principal and interest by GNMA of
amounts due on these GNMA Certificates, and an assistant attorney general of the
United States has rendered an opinion that this guarantee by GNMA is a general
obligation of the United States backed by its full faith and credit.
Mortgages included in single family residential mortgage pools backing an issue
of GNMA Certificates have a maximum maturity of 30 years. Scheduled payments of
principal and interest are made to the registered holders of GNMA Certificates
(such as the Fund) each month. Unscheduled prepayments of mortgages included in
these pools occur as a result of the prepayment or refinancing of such mortgages
by homeowners or as a result of the foreclosure of such mortgages. Such
prepayments are passed through to the registered holders of GNMA Certificates
with the regular monthly payments of principal and interest, which has the
effect of reducing future payments on such Certificates. That portion of monthly
payments received by the Fund which represents interest and discount will be
included in the Fund's net investment income. See "Dividends and Taxes."
Principal payments on a GNMA Certificate will be reinvested by the Fund.
The balance of the Fund's assets, other than those invested in GNMA Certificates
and options and financial futures contracts as discussed below, will be invested
in obligations issued or guaranteed by the United States or by its agencies.
There are two broad categories of U.S. Government-related debt instruments: (a)
direct obligations of the U.S. Treasury, and (b) securities issued or guaranteed
by U.S. Government agencies. Examples of direct obligations of the U.S. Treasury
are Treasury Bills, Notes, Bonds and other debt securities issued by the U.S.
Treasury. These instruments are backed by the "full faith and credit" of the
United States. They differ primarily in interest rates, the length of maturities
and the dates of issuance. Some obligations issued or guaranteed by agencies of
the U.S. Government are backed by the full faith and credit of the United States
(such as Maritime Administration Title XI Ship Financing Bonds and Agency for
International Development Housing Guarantee Program Bonds) and others are backed
only by the rights of the issuer to borrow from the U.S. Treasury (such as
Federal Home Loan Bank Bonds and Federal National Mortgage Association Bonds).
With respect to securities supported only by the credit of the issuing agency or
by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies and such
securities may involve risk of loss of principal and interest. U.S. Government
Securities may include "zero coupon" securities that have been stripped by the
U.S. Government of their unmatured interest coupons (see "Investment Policies
and Techniques--Zero Coupon Government Securities" in the Statement of
Additional Information for a discussion of their features and risks) and
collateralized obligations issued or guaranteed by a U.S. Government agency or
instrumentality (see "Collateralized Obligations" below).
U.S. Government Securities of the type in which the Fund may invest have
historically involved little risk of loss of principal if held to maturity. The
government guarantee of the U.S. Government Securities in the Fund's portfolio,
however, does not guarantee the net asset value of the shares of the Fund. There
are market risks inherent in all investments in securities and the value of an
investment in the Fund will fluctuate over time. Normally, the value of the
Fund's investments varies inversely with changes in interest rates. For example,
as interest rates rise the value of the Fund's investments will tend to decline,
and as interest rates fall the value of the Fund's investments will tend to
increase. In addition, the potential for appreciation in the event of a decline
in interest rates may be limited or negated by increased principal prepayments
in respect to certain Mortgage-Backed Securities, such as GNMA Certificates.
Prepayments of high interest rate Mortgage-Backed Securities during times of
declining interest rates will tend to lower the return of the Fund and may even
result in losses to the Fund if some securities were acquired at a premium.
Moreover, during periods of rising interest rates, prepayments of
Mortgage-Backed Securities may decline, resulting in the extension of the Fund's
average portfolio maturity. As a result, the Fund's portfolio may experience
greater volatility during periods of rising interest rates than under normal
market
17
<PAGE> 25
conditions. With respect to U.S. Government Securities supported only by the
credit of the issuing agency or by an additional line of credit with the U.S.
Treasury, there is no guarantee that the U.S. Government will provide support to
such agencies and such securities may involve risk of loss of principal and
interest. The Fund will not invest in Mortgage-Backed Securities issued by
private issuers.
The Fund may also write (sell) and purchase options on securities, index
options, financial futures contracts and options on financial futures contracts
in connection with attempts to hedge its portfolio investments and not for
speculation. See "Additional Investment Information" below.
HIGH YIELD FUND. The primary objective of the High Yield Fund is to achieve the
highest level of current income obtainable from a professionally managed,
diversified portfolio of fixed income securities which the investment adviser
considers consistent with reasonable risk. As a secondary objective, the Fund
will seek capital gain where consistent with its primary objective.
The high yield, fixed income securities (debt and preferred stock issues,
including convertibles and assignments or participations in loans) in which the
Fund intends to invest are commonly referred to as "junk bonds" and normally
offer a current yield or yield to maturity that is significantly higher than the
yield available from securities rated in the four highest categories assigned by
S&P or Moody's. The characteristics of the securities in the Fund's portfolio,
such as the maturity and the type of issuer, will affect yields and yield
differentials, which vary over time. The actual yield realized by the investor
is subject, among other things, to the Fund's expenses and the investor's
transaction costs.
There are market and investment risks with any security and the value of an
investment in the Fund may fluctuate over time. In seeking to achieve its
investment objectives, the Fund will invest in fixed income securities based on
the investment manager's analysis without relying on published ratings. The Fund
will invest in a particular security if in the view of the investment manager
the increased yield offered, regardless of published ratings, is sufficient to
compensate for a reasonable element of assumed risk. Since investments will be
based upon the investment manager's analysis rather than upon published ratings,
achievement of the Fund's goals may depend more upon the abilities of the
investment manager than would otherwise be the case. Investment in high yield
securities, while providing greater income and opportunity for gain than
investment in higher rated securities, entails relatively greater risk of loss
of income and principal. See "Special Risk Factors--High Yield (High Risk)
Bonds" below and "Appendix--Ratings of Investments" in the Statement of
Additional Information.
As a secondary objective, the Fund will seek capital gain where consistent with
its primary objective. However, the Fund intends to hold portfolio securities to
maturity unless yields on alternative investments, based on current market
prices, are more attractive than those on securities held in the Fund's
portfolio or unless the investment manager determines defensive strategies
should be implemented.
The Fund anticipates that under normal circumstances 90 to 100% of its assets
will be invested in fixed income securities (debt and preferred stock issues,
including convertibles). The Fund may invest in common stocks, rights or other
equity securities when consistent with the Fund's objectives, but will generally
hold such equity investments only as a result of purchases of unit offerings of
fixed income securities which include such securities or in connection with an
actual or proposed conversion or exchange of fixed income securities.
The Fund may invest all or a portion of its assets in money market instruments
such as obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the three highest grades by Moody's or S&P;
commercial paper rated within the two highest grades by either of such rating
services; bank certificates of deposit or bankers' acceptances of domestic or
Canadian chartered banks having total assets in excess of $1 billion; and any of
the foregoing investments subject to short-term repurchase agreements (an
instrument under which the purchaser acquires ownership of the underlying
obligation and the seller agrees, at the time of sale, to repurchase the
obligation at a mutually agreed upon time and price). The Fund may also purchase
and sell options on securities, index options, financial futures contracts and
options on financial futures contracts in connection with attempts to hedge its
portfolio investments and not for speculation; and it may purchase
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<PAGE> 26
foreign securities and engage in foreign currency transactions. See "Special
Risk Factors--Foreign Securities" and "Additional Investment Information" below.
INCOME AND CAPITAL FUND. The Income and Capital Fund seeks as high a level of
current income as is consistent with prudent investment management, preservation
of capital and ready marketability of its portfolio by investing primarily in a
diversified portfolio of investment grade debt securities. Specifically, at
least 90% of the Fund's assets will be invested in the following categories: (a)
corporate debt securities which are rated Aaa, Aa, A or Baa by Moody's or AAA,
AA, A or BBB by S&P; (b) obligations of, or guaranteed by, the United States,
its agencies or instrumentalities; (c) obligations (payable in U.S. Dollars) of,
or guaranteed by, the government of Canada or any instrumentality or political
subdivision thereof; (d) commercial paper rated Prime-1 or Prime-2 by Moody's or
A-1 or A-2 by S&P; (e) bank certificates of deposit or bankers' acceptances
issued by domestic or Canadian chartered banks having total deposits in excess
of $1 billion; (f) options on securities, index options, financial futures
contracts and options on financial futures contracts as described under
"Additional Investment Information" in connection with attempts to hedge its
portfolio investments and not for speculation; and (g) cash and cash
equivalents.
There are market and investment risks with any security and the value of an
investment in the Fund may fluctuate over time. Normally, the value of the
Fund's investments varies inversely with changes in interest rates. There can be
no assurance that the objective of the Fund will be achieved. Corporate debt
securities rated within the four highest grades by Moody's or S&P are generally
considered to be "investment grade." Like higher rated securities, securities
rated in the BBB or Baa categories are considered to have adequate capacity to
pay principal and interest, although they may have fewer protective provisions
than higher rated securities and thus may be adversely affected by severe
economic circumstances and are considered to have speculative characteristics.
The Fund may invest up to 10% of its total assets in fixed income securities
that are rated below BBB by S&P and Baa by Moody's or are non-rated. For a
discussion of lower rated and non-rated securities, commonly referred to as
"junk bonds," and related risks, see "Special Risk Factors--High Yield (High
Risk) Bonds" below and "Appendix--Ratings of Investments" in the Statement of
Additional Information. The Fund may also invest in foreign securities and
engage in foreign currency transactions. See "Special Risk Factors--Foreign
Securities" below.
MORTGAGE FUND. The Mortgage Fund seeks maximum current return from a portfolio
of U.S. Government Securities. Additionally, the Fund may engage in options and
financial futures transactions which relate to U.S. Government Securities and
may purchase or sell securities on a when-issued or delayed delivery basis. See
"Additional Investment Information" below for a discussion of such transactions
applicable to the Fund.
As a non-fundamental policy, at least 65% of the Fund's total assets normally
will be invested in "Mortgage-Backed Securities." Mortgage-Backed Securities are
securities that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans secured by real property. There are
currently three basic types of Mortgage-Backed Securities: (a) those issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities,
such as the Government National Mortgage Association ("Ginnie Mae" or "GNMA"),
the Federal National Mortgage Association ("Fannie Mae" or "FNMA") and the
Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"); (b) those
issued by private issuers that represent an interest in or are collateralized by
Mortgage-Backed Securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities; and (c) those issued by private issuers that
represent an interest in or are collateralized by whole mortgage loans or
Mortgage-Backed Securities without a government guarantee but usually having
some form of private credit enhancement. The dominant issuers or guarantors of
Mortgage-Backed Securities today are GNMA, FNMA and FHLMC. GNMA creates mortgage
securities from pools of government guaranteed or insured (Federal Housing
Authority or Veterans Administration) mortgages originated by mortgage bankers,
commercial banks, and savings and loan associations. FNMA and FHLMC issue
Mortgage-Backed Securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks, credit
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<PAGE> 27
unions and mortgage bankers. Mortgage-Backed Securities issued by GNMA, FNMA and
FHLMC are considered U.S. Government Securities. The Fund will not invest in
Mortgage-Backed Securities issued by private issuers.
U.S. Government Securities of the type in which the Fund may invest have
historically involved little risk of loss of principal if held to maturity. The
government guarantee of the securities in the Fund, however, does not guarantee
the net asset value of the shares of the Fund. There are market risks inherent
in all investments in securities and the value of an investment in the Fund will
fluctuate over time. Normally, the value of the Fund's investments varies
inversely with changes in interest rates. For example, as interest rates rise,
the value of the Fund's investments will tend to decline and, as interest rates
fall, the value of the Fund's investments will tend to increase. In addition,
the potential for appreciation in the event of a decline in interest rates may
be limited or negated by increased principal prepayments in respect to certain
Mortgage-Backed Securities, such as GNMA Certificates. Prepayment of high
interest rate Mortgage-Backed Securities during times of declining interest
rates will tend to lower the return of the Fund and may even result in losses to
the Fund if some securities were acquired at a premium. Moreover, during periods
of rising interest rates, prepayments of Mortgage-Backed Securities may decline,
resulting in the extension of the Fund's average portfolio maturity. As a
result, the Fund's portfolio may experience greater volatility during periods of
rising interest rates than under normal market conditions.
OPPORTUNITY FUND. The Opportunity Fund seeks total return through high current
income and capital appreciation. The Fund will invest primarily in fixed income
securities and under normal market conditions, the Fund will, invest at least
65% of its total assets in high yield, fixed income securities. The Fund
anticipates that under normal conditions approximately 80 to 90% of its total
assets will be held in high yield, fixed income securities.
The high yield, fixed income securities (debt and preferred stock issues,
including convertibles and assignments or participations in loans) in which the
Fund intends to invest are commonly referred to as "junk bonds" and normally
offer a current yield or yield to maturity that is significantly higher than the
yield available from securities rated in the four highest categories assigned by
S&P or Moody's. The characteristics of the securities in the Fund's portfolio,
such as the maturity and the type of issuer, will affect yields and yield
differentials, which vary over time. The actual yield realized by the investor
is subject, among other things, to the Fund's expenses and the investor's
transaction costs.
There are market and investment risks with any security and the value of an
investment in the Fund may fluctuate over time. In seeking to achieve its
investment objective, the Fund will invest in fixed income securities based on
the investment manager's analysis without relying on published ratings. The Fund
will invest in a particular security if in the view of the investment manager
the increased yield offered, regardless of published ratings, is sufficient to
compensate for a reasonable element of assumed risk. Since investments will be
based upon the investment manager's analysis rather than upon published ratings,
achievement of the Fund's goals may depend more upon the abilities of the
investment manager than would otherwise be the case. Investment in high yield
securities, while providing greater income and opportunity for gain than
investment in higher rated securities, entails relatively greater risk of loss
of income and principal. See "Special Risk Factors--High Yield (High Risk)
Bonds" below and "Appendix--Ratings of Investments" in the Statement of
Additional Information.
The Fund may invest up to a maximum of 20% of its total assets in common stocks,
rights or other equity securities; generally of companies that issue high yield,
fixed income securities. The Fund anticipates that under normal circumstances
approximately 10% of its total assets will be in equity securities.
The Fund may borrow money for leverage purposes, which can exaggerate the effect
on its net asset value for any increase or decrease in the market value of the
Fund's portfolio. Money borrowed for leveraging will be limited to 20% of the
total assets of the Fund, including the amount borrowed. The Fund anticipates
that under normal conditions, the Fund would keep the leverage portion under 10%
of its total assets. These borrowings are subject to interest costs which may or
may not be recovered by the return received on the securities purchased. Under
certain circumstances, the interest costs may exceed the return received on the
securities purchased.
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To help protect the value of the Fund's portfolio primarily from interest rate
fluctuations, the Fund may engage in interest rate swaps and other swap-related
products such as interest rate "caps" and "floors." The Fund will enter into
these transactions normally to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities the Fund anticipates purchasing. There is no assurance that
these transactions will be successful. The Fund will not sell interest rate caps
or floors that it does not own. See "Additional Investment Information--Interest
Rate Swaps and Swap-Related Products" below.
When a defensive position is deemed advisable, all or a significant portion of
the Fund's assets may be held temporarily in cash or defensive type securities,
such as high-grade debt securities, securities of the U.S. Government or its
agencies and high quality money market instruments, including repurchase
agreements. The Fund may also: (i) purchase foreign securities and engage in
foreign currency transactions and (ii) purchase and sell options on securities,
index options, financial futures contracts and options on financial futures
contracts. See "Special Risk Factors--Foreign Securities" and "Additional
Investment Information" below.
SHORT-INTERMEDIATE GOVERNMENT FUND. The Short-Intermediate Government Fund
seeks, with equal emphasis, high current income and preservation of capital from
a portfolio composed primarily of short and intermediate-term U.S. Government
Securities. Under normal market conditions, the Fund will, as a fundamental
policy, invest at least 65% of its total assets in U.S. Government Securities
and repurchase agreements of U.S. Government Securities. See "Government Fund"
above for a discussion of U.S. Government Securities and the risks related to
those securities, including the fact that the government guarantee of U.S.
Government Securities in the Fund does not guarantee the net asset value of the
shares of the Fund.
Under normal market conditions, the Fund will maintain a Dollar-weighted average
portfolio maturity of more than two years but less than five years. The maturity
of a security held by the Fund will generally be considered to be the time
remaining until repayment of the principal amount of such security, except that
the maturity of a security may be considered to be a shorter period in the case
of (a) contractual rights to dispose of a security, because such rights limit
the period during which the Fund bears a market risk with respect to the
security, and (b) Mortgage-Backed Securities, because of possible prepayment of
principal on the mortgages underlying such securities. Short and
intermediate-term securities generally are more stable and less susceptible to
principal decline than longer term securities. While short and intermediate-term
securities in most cases offer lower yields than securities with longer
maturities, the Fund will seek to enhance income through limited investment in
fixed income securities other than U.S. Government Securities. The investment
manager believes that investment in short and intermediate-term securities
allows the Fund to seek both high current income and preservation of capital.
There is, however, no assurance that the Fund's objective will be achieved. The
return and net asset value of the Fund will fluctuate over time.
Up to 35% of the total assets of the Fund may be invested in fixed income
securities other than U.S. Government Securities. Such other fixed income
securities include: (a) corporate debt securities that are rated at the time of
purchase within the four highest grades by either Moody's (Aaa, Aa, A, or Baa)
or S&P (AAA, AA, A, or BBB); (b) commercial paper that is rated at the time of
purchase within the two highest grades by either Moody's (Prime-1 or Prime-2) or
S&P (A-1 or A-2); (c) bank certificates of deposit (including term deposits) or
bankers' acceptances issued by domestic banks (including their foreign branches)
and Canadian chartered banks having total assets in excess of $1 billion; and
(d) repurchase agreements with respect to any of the foregoing. Corporate debt
securities rated within the four highest grades by Moody's or S&P are generally
considered to be "investment grade." Like higher rated securities, securities
rated in the BBB or Baa categories are considered to have adequate capacity to
pay principal and interest, although they may have fewer protective provisions
than higher rated securities and thus may be adversely affected by severe
economic circumstances and are considered to have speculative characteristics.
During temporary defensive periods when the investment manager deems it
appropriate, the Fund may invest all or a portion of its assets in cash or
short-term high quality money market instruments, including short-term U.S.
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<PAGE> 29
Government Securities and repurchase agreements with respect to such securities.
The yields on these securities tend to be lower than the yields on other
securities to be purchased by the Fund.
The Fund may purchase or sell securities on a when-issued or delayed delivery
basis. The Fund may invest in collateralized obligations which, consistent with
the limitations reflected above, may be privately issued or may be issued or
guaranteed by U.S. Government agencies or instrumentalities. The Fund also may
engage in options or financial futures transactions in connection with attempts
to hedge its portfolio investments and not for speculation. See "Additional
Investment Information" below.
SPECIAL RISK FACTORS--HIGH YIELD (HIGH RISK) BONDS. As stated above, the
Diversified Fund may, and the High Yield and Opportunity Funds do, invest a
substantial portion of their assets in fixed income securities offering high
current income. Subject to its specific investment objective and policies as
described above, the Income and Capital Fund may invest up to 10% of its assets
in such securities. Such high yield (high risk), fixed income securities
ordinarily will be in the lower rating categories (securities rated below the
fourth category) of recognized rating agencies or will be non-rated. Lower-rated
and non-rated securities, which are commonly referred to as "junk bonds," have
widely varying characteristics and quality. These lower rated and non-rated
fixed income securities are considered, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories. Accordingly, an investment in the
Diversified, High Yield or Opportunity Funds may not constitute a complete
investment program and may not be appropriate for all investors.
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do those of higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower rated securities also are more sensitive to economic conditions than are
higher rated securities. Adverse publicity and investor perceptions regarding
lower rated bonds, whether or not based on fundamental analysis, may depress the
prices for such securities. These and other factors adversely affecting the
market value of high yield securities will adversely affect each Fund's net
asset value.
The investment philosophy of the Diversified, High Yield and Opportunity Funds
with respect to high yield (high risk) bonds is based upon the premise that over
the long term a broadly diversified portfolio of high yield fixed income
securities should, even taking into account possible losses, provide a higher
net return than that achievable on a portfolio of higher rated securities. The
Funds seek to achieve the highest yields possible while reducing relative risk
through (a) broad diversification, (b) credit analysis by the investment manager
of the issuers in which the Funds invest, (c) purchase of high yield securities
at discounts from par or stated value when practicable and (d) monitoring and
seeking to anticipate changes and trends in the economy and financial markets
that might affect the prices of portfolio securities. The investment manager's
judgment as to the "reasonableness" of the risk involved in any particular
investment will be a function of its experience in managing fixed income
investments and its evaluation of general economic and financial conditions, a
specific issuer's business and management, cash flow, earnings coverage of
interest and dividends, ability to operate under adverse economic conditions,
and fair market value of assets, and of such other considerations as the
investment manager may deem appropriate. The investment manager, while seeking
maximum current yield, will monitor current corporate developments with respect
to portfolio securities and potential investments and to broad trends in the
economy. In some circumstances, defensive strategies may be implemented to
preserve or enhance capital even at the sacrifice of current yield. Defensive
strategies, which may be used singly or in any combination, may include, but are
not limited to, investments in discount securities or investments in money
market instruments as well as futures and options strategies.
High yield (high risk) securities frequently are issued by corporations in the
growth stage of their development. They may also be issued in connection with a
corporate reorganization or a corporate takeover. Companies that issue such high
yielding securities often are highly leveraged and may not have available to
them more traditional methods of financing. Therefore, the risk associated with
acquiring the securities of such issuers generally is greater than is the case
with higher rated securities. For example, during an economic downturn or
recession,
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highly leveraged issuers of high yield securities may experience financial
stress. During such periods, such issuers may not have sufficient revenues to
meet their interest payment obligations. The issuer's ability to service its
debt obligations may also be adversely affected by specific corporate
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss from
default by the issuer is significantly greater for the holders of high yield
securities because such securities are generally unsecured and are often
subordinated to other creditors of the issuer. Although some risk is inherent in
all securities ownership, holders of fixed income securities have a claim on the
assets of the issuer prior to the holders of common stock. Therefore, an
investment in fixed income securities generally entails less risk than an
investment in common stock of the same issuer.
A Fund may have difficulty disposing of certain high yield (high risk)
securities because they may have a thin trading market. Because not all dealers
maintain markets in all high yield securities, the Funds anticipate that such
securities could be sold only to a limited number of dealers or institutional
investors. The lack of a liquid secondary market may have an adverse effect on
the market price and a Fund's ability to dispose of particular issues and may
also make it more difficult for a Fund to obtain accurate market quotations for
purposes of valuing the Fund's assets. Market quotations generally are available
on many high yield issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
Zero coupon securities and pay-in-kind bonds involve additional special
considerations. Zero coupon securities are debt obligations that do not entitle
the holder to any periodic payments of interest prior to maturity or a specified
cash payment date when the securities begin paying current interest (the "cash
payment date") and therefore are issued and traded at a discount from their face
amount or par value. The market prices of zero coupon securities are generally
more volatile than the market prices of securities that pay interest
periodically and are likely to respond to changes in interest rates to a greater
degree than do securities paying interest currently having similar maturities
and credit quality. Zero coupon, pay-in-kind or deferred interest bonds carry
additional risk in that, unlike bonds that pay interest throughout the period to
maturity, a Fund will realize no cash until the cash payment date unless a
portion of such securities is sold and, if the issuer defaults, a Fund may
obtain no return at all on its investment.
Current federal income tax law requires the holder of a zero coupon security or
of certain pay-in-kind bonds (bonds which pay interest through the issuance of
additional bonds) to accrue income with respect to these securities prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and avoid liability for federal income and excise taxes, a
Fund will be required to distribute income accrued with respect to these
securities and may be required to dispose of portfolio securities under
disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.
Additional information concerning high yield (high risk) securities appears
under "Appendix--Portfolio Composition of High Yield Bonds" below and
"Appendix--Ratings of Investments" in the Statement of Additional Information.
SPECIAL RISK FACTORS--FOREIGN SECURITIES. The Diversified, High Yield, Income
and Capital and Opportunity Funds have the discretion to invest a portion of
their assets in foreign securities that are traded principally in securities
markets outside the United States. These Funds currently limit investment in
foreign securities not publicly traded in the United States to 50% of total
assets in the case of the Diversified Fund and 25% of total assets in the case
of the High Yield, Income and Capital and Opportunity Funds. These Funds may
also invest without limit in U.S. Dollar denominated American Depository
Receipts ("ADRs"), which are bought and sold in the United States and are not
subject to the preceding limitation. In connection with their foreign securities
investments, these Funds may, to a limited extent, engage in foreign currency
exchange, options and futures transactions as a hedge and not for speculation.
See "Additional Investment Information--Options and Financial Futures
Transactions and Foreign Currency Transactions." The Short-Intermediate
Government Fund may, subject to its quality standards, invest in U.S.
Dollar-denominated securities of foreign issuers.
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Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possible imposition of exchange controls.
The prices of such securities may be more volatile than those of domestic
securities and the markets for such securities may be less liquid. In addition,
there may be less publicly available information about foreign issuers than
about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks and listed companies abroad than in the United States.
With respect to certain foreign countries, there is a possibility of
expropriation or diplomatic developments that could affect investment in these
countries.
EMERGING MARKETS. A Fund's investments in foreign securities may be in developed
countries or in countries considered by the Fund's investment manager to be
developing or "emerging" markets, which involve exposure to economic structures
that are generally less diverse and mature than in the United States, and to
political systems that may be less stable. A developing or emerging market
country can be considered to be a country that is in the initial stages of its
industrialization cycle. Currently, emerging markets generally include every
country in the world other than the United States, Canada, Japan, Australia, New
Zealand, Hong Kong, Singapore and most Western European countries. Currently,
investing in many emerging markets may not be desirable or feasible because of
the lack of adequate custody arrangements for a Fund's assets, overly burdensome
repatriation and similar restrictions, the lack of organized and liquid
securities markets, unacceptable political risks or other reasons. As
opportunities to invest in securities in emerging markets develop, a Fund may
expand and further broaden the group of emerging markets in which it invests. In
the past, markets of developing or emerging market countries have been more
volatile than the markets of developed countries; however, such markets often
have provided higher rates of return to investors. The investment manager
believes that these characteristics can be expected to continue in the future.
Many of the risks described above relating to foreign securities generally will
be greater for emerging markets than for developed countries. For instance,
economies in individual developing markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross domestic product,
rates of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely by economic conditions in the countries with which they
trade.
Also, the securities markets of developing countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure, regulatory and
accounting standards in many respects are less stringent than in the United
States and other developed markets. There also may be a lower level of
monitoring and regulation of developing markets and the activities of investors
in such markets, and enforcement of existing regulations has been extremely
limited.
In addition, brokerage commissions, custodial services and other costs relating
to investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging markets. Such markets
have different settlement and clearance procedures. In certain markets there
have been times when
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settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Such settlement
problems may cause emerging market securities to be illiquid. The inability of a
Fund to make intended securities purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of a portfolio security caused by settlement problems could result either in
losses to a Fund due to subsequent declines in value of the portfolio security
or, if a Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Certain emerging markets may lack clearing
facilities equivalent to those in developed countries. Accordingly, settlements
can pose additional risks in such markets and ultimately can expose a Fund to
the risk of losses resulting from a Fund's inability to recover from a
counterparty.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading securities may cease or may be
substantially curtailed and prices for a Fund's portfolio securities in such
markets may not be readily available. A Fund's portfolio securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Trustees.
Investment in certain emerging market securities is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in certain emerging market securities and increase the costs
and expenses of a Fund. Emerging markets may require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments, the market could impose temporary
restrictions on foreign capital remittances.
FIXED INCOME. Since most foreign fixed income securities are not rated, a Fund
will invest in foreign fixed income securities based on the investment manager's
analysis without relying on published ratings. Since such investments will be
based upon the investment manager's analysis rather than upon published ratings,
achievement of a Fund's goals may depend more upon the abilities of the
investment manager than would otherwise be the case.
The value of the foreign fixed income securities held by a Fund, and thus the
net asset value of the Fund's shares, generally will fluctuate with (a) changes
in the perceived creditworthiness of the issuers of those securities, (b)
movements in interest rates, and (c) changes in the relative values of the
currencies in which a Fund's investments in fixed income securities are
denominated with respect to the U.S. Dollar. The extent of the fluctuation will
depend on various factors, such as the average maturity of a Fund's investments
in foreign fixed income securities, and the extent to which a Fund hedges its
interest rate, credit and currency exchange rate risks. Many of the foreign
fixed income obligations in which a Fund will invest will have long maturities.
A longer average maturity generally is associated with a higher level of
volatility in the market value of such securities in response to changes in
market conditions.
Investments in sovereign debt, including Brady Bonds, involve special risks.
Brady Bonds are debt securities issued under a plan implemented to allow debtor
nations to restructure their outstanding commercial bank indebtedness. Foreign
governmental issuers of debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or pay
interest when due. In the event of default, there may be limited or no legal
recourse in that, generally, remedies for defaults must be pursued in the courts
of the defaulting party. Political conditions, especially a sovereign entity's
willingness to meet the terms of its fixed income securities, are of
considerable significance. Also, there can be no assurance that the holders of
commercial bank loans to the same sovereign entity may not contest payments to
the holders of sovereign debt in the event of default under commercial bank loan
agreements. In addition, there is no bankruptcy proceeding with respect to
sovereign debt on which a sovereign has defaulted, and a Fund may be unable to
collect all or any part of its investment in a particular issue.
Foreign investment in certain sovereign debt is restricted or controlled to
varying degrees, including requiring governmental approval for the repatriation
of income, capital or proceed of sales by foreign investors. These restrictions
or controls may at times limit or preclude foreign investment in certain
sovereign debt or increase the costs and expenses of a Fund. A significant
portion of the sovereign debt in which a Fund may invest is issued as
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part of debt restructuring and such debt is to be considered speculative. There
is a history of defaults with respect to commercial bank loans by public and
private entities issuing Brady Bonds. All or a portion of the interest payments
and/or principal repayment with respect to Brady Bonds may be uncollateralized.
PRIVATIZED ENTERPRISES. Investments in foreign securities may include securities
issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. A Fund's investments in the
securities of privatized enterprises include privately negotiated investments in
a government or state-owned or controlled company or enterprise that has not yet
conducted an initial equity offering, investments in the initial offering of
equity securities of a state enterprise or former state enterprise and
investments in the securities of a state enterprise following its initial equity
offering.
In certain jurisdictions, the ability of foreign entities, such as a Fund, to
participate in privatizations may be limited by local law, or the price or terms
on which the Fund may be able to participate may be less advantageous than for
local investors. Moreover, there can be no assurance that governments that have
embarked on privatization programs will continue to divest their ownership of
state enterprises, that proposed privatizations will be successful or that
governments will not re-nationalize enterprises that have been privatized.
In the case of the enterprises in which a Fund may invest, large blocks of the
stock of those enterprises may be held by a small group of stockholders, even
after the initial equity offerings by those enterprises. The sale of some
portion or all of those blocks could have an adverse effect on the price of the
stock of any such enterprise.
Prior to making an initial equity offering, most state enterprises or former
state enterprises go through an internal reorganization or management. Such
reorganizations are made in an attempt to better enable these enterprises to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprises's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which a Fund may invest
enjoy the protection of and receive preferential treatment from the respective
sovereigns that own or control them. After making an initial equity offering
these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
effectively operate in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
DEPOSITORY RECEIPTS. For many foreign securities, there are U.S. Dollar
denominated ADRs, which are bought and sold in the United States and are issued
by domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in the domestic bank or a correspondent bank. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers, such as changes in foreign currency exchange rates. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Fund
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs. The Funds may also
invest in securities of foreign issuers in the form of European Depository
Receipts ("EDRs") and Global Depository Receipts ("GDRs") which are receipts
evidencing an arrangement with a European bank similar to that for ADRs and are
designed for use in the European and other foreign securities markets. EDRs and
GDRs are not necessarily denominated in the currency of the underlying security.
ADDITIONAL INVESTMENT INFORMATION. A Fund will not normally engage in the
trading of securities for the purpose of realizing short-term profits, but will
adjust its portfolio as considered advisable in view of prevailing or
anticipated market conditions and its investment objective. Accordingly, a Fund
may sell fixed income securities in anticipation of a rise in interest rates and
purchase such securities for inclusion in its portfolio in anticipation of a
decline in interest rates. Frequency of portfolio turnover will not be a
limiting factor should the investment
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manager deem it desirable to purchase or sell securities. The portfolio turnover
rates for the Funds (except the Opportunity Fund) are listed under "Financial
Highlights." It is anticipated that, under normal circumstances, the portfolio
turnover rate for the Opportunity Fund will not exceed 300%. High portfolio
turnover (over 100%) involves correspondingly greater brokerage commissions or
other transaction costs. Higher portfolio turnover may result in the realization
of greater net short-term capital gains. See "Dividends and Taxes" in the
Statement of Additional Information.
A Fund (other than the Adjustable Rate and Short-Intermediate Government Funds)
may take full advantage of the entire range of maturities of fixed income
securities and may adjust the average maturity of its portfolio from time to
time, depending upon its assessment of relative yields on securities of
different maturities and its expectations of future changes in interest rates.
Thus, the average maturity of a Fund's portfolio may be relatively short (under
5 years, for example) at some times and relatively long (over 10 years, for
example) at other times. Generally, since shorter term debt securities tend to
be more stable than longer term debt securities, the portfolio's average
maturity will be shorter when interest rates are expected to rise and longer
when interest rates are expected to fall. The effective Dollar-weighted average
portfolio maturity of the Adjustable Rate Fund generally will range from less
than one year to five years. The effective Dollar-weighted average portfolio
maturity of the Short-Intermediate Government Fund generally will be more than
two years but less than five years.
The Adjustable Rate, Mortgage and Short-Intermediate Government Funds each may
not borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its total
assets in order to meet redemption requests without immediately selling any
portfolio securities. If, for any reason, the current value of a Fund's total
assets falls below an amount equal to three times the amount of its indebtedness
from money borrowed, the Fund will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary. A Fund will not
borrow for leverage purposes. The Adjustable Rate Fund may pledge up to 15% of
its total assets to secure any such borrowings.
The Diversified, Government, High Yield and Income and Capital Funds may each
borrow money only for temporary or emergency purposes and not for leverage
purposes, and then only in an amount up to 5% of its assets, in order to meet
redemption requests without immediately selling any portfolio securities or
other assets. These Funds, except for the Government Fund, may not pledge their
assets in an amount exceeding the amount of the borrowings secured by such
pledge. The Government Fund may pledge up to 7 1/2% of its assets to secure any
such borrowings.
The maximum amount that the Opportunity Fund may borrow is one-third of the
value of its assets (including the amount borrowed). As a temporary measure for
extraordinary or emergency purposes, the Opportunity Fund may borrow money up to
one-third of the value of its total assets (including the amount borrowed) in
order to meet redemption requests without immediately selling any portfolio
securities. The Opportunity Fund may also borrow money up to 20% of the value of
its total assets (including the amount borrowed) for leverage purposes. See
"Investment Objectives, Policies and Risk Factors--Opportunity Fund" above.
A Fund will not purchase illiquid securities, including repurchase agreements
maturing in more than seven days, if, as a result thereof, more than 15% of the
Fund's net assets, valued at the time of the transaction, would be invested in
such securities, except that the Mortgage Fund may not purchase illiquid
securities if more than 10% of its total assets would be invested in such
securities. See "Investment Policies and Techniques--Over-the-Counter Options"
in the Statement of Additional Information for a description of the extent to
which over-the-counter traded options are in effect considered as illiquid for
purposes of a Fund's limit on illiquid securities. Each Fund may invest in
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933. This rule permits otherwise restricted securities to be sold to certain
institutional buyers, such as the Funds. Such securities may be illiquid and
subject to a Fund's limitation on illiquid securities. A "Rule 144A" security
may be treated as liquid, however, if so determined pursuant to procedures
adopted by the Board of Trustees. Investing in Rule 144A securities could have
the effect of increasing the level of illiquidity in a Fund to the extent that
qualified institutional buyers become uninterested for a time in purchasing Rule
144A securities.
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Each Fund has adopted certain fundamental investment restrictions which are
presented in the Statement of Additional Information and that, together with the
investment objective and policies of a Fund (for the Adjustable Rate and
Opportunity Funds, however, only those policies specifically designated in this
prospectus as fundamental), cannot be changed without approval by holders of a
majority of its outstanding voting shares. As defined in the Investment Company
Act of 1940 ("1940 Act"), this means the lesser of the vote of (a) 67% of the
shares of a Fund present at a meeting where more than 50% of the outstanding
shares are present in person or by proxy; or (b) more than 50% of the
outstanding shares of a Fund. Policies of the Adjustable Rate and Opportunity
Funds that are neither designated as fundamental nor incorporated into any of
the fundamental investment restrictions referred to above may be changed by the
Board of Trustees of the Fund without shareholder approval.
INTEREST RATE SWAPS AND SWAP-RELATED PRODUCTS. As stated above, the Adjustable
Rate and Opportunity Funds may engage in interest rate swaps and other
swap-related products. Swap agreements can take many different forms and are
known by a variety of names. The Adjustable Rate and Opportunity Funds are not
limited to any particular form of swap agreement if the investment manager
determines it is consistent with a fund's investment objective and policies.
Interest rate swaps are the exchange by the Fund with another party of their
respective commitments to pay or receive interest with respect to a notional
(agreed upon) principal amount, for example, an exchange of floating rate
payments for fixed rate payments. Interest rate swaps are generally entered into
to permit the party seeking a floating or fixed rate obligation, as the case may
be, the opportunity to acquire such obligation at a lower rate than is directly
available in the credit market. The success of such a transaction depends in
large part on the availability of fixed rate obligations at a low enough coupon
rate to cover the cost involved.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor.
Additional information concerning interest rate swaps and swap-related products
is contained in the Statement of Additional Information under "Investment
Policies and Techniques--Interest Rate Swaps and Swap-Related Products."
OPTIONS AND FINANCIAL FUTURES TRANSACTIONS. A Fund may deal in options on
securities and securities indexes, which options may be listed for trading on a
national securities exchange or traded over-the-counter. In connection with
their foreign securities investments, the Diversified, High Yield, Income and
Capital and Opportunity Funds may also purchase and sell foreign currency
options.
The Diversified and Mortgage Funds may write (sell) covered call options on up
to 100% of net assets and may write (sell) secured put options on up to 50% of
net assets. The Adjustable Rate, Government, High Yield, Income and Capital and
Opportunity Funds each may write (sell) covered call and secured put options on
up to 25% of its net assets. Each such Fund may purchase put and call options
provided that no more than 5% of its net assets may be invested in premiums on
such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security or other asset at the exercise price
during or at the end of the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security or
other asset at the exercise price during or at the end of the option period. The
writer of a covered call owns securities or other assets that are acceptable for
escrow and the writer of a secured put invests an amount not less than the
exercise price in eligible securities or other assets to the extent that it is
obligated as a writer. If a call written by a Fund is exercised, the Fund
foregoes any possible profit from an increase in the market price of the
underlying security or other asset over the exercise price plus the premium
received. In writing puts, there is a risk that a Fund may be required to take
delivery of the underlying security or other asset at a disadvantageous price.
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Over-the-counter traded options ("OTC options") differ from exchange traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer as a result of the insolvency of such dealer or otherwise, in which event
a Fund may experience material losses. However, in writing options the premium
is paid in advance by the dealer. OTC options are available for a greater
variety of securities and other assets, and a wider range of expiration dates
and exercise prices, than for exchange traded options.
A Fund may engage in financial futures transactions. Financial futures contracts
are commodity contracts that obligate the long or short holder to take or make
delivery of a specified quantity of a financial instrument, such as a security,
or the cash value of a securities index during a specified future period at a
specified price. A Fund will "cover" futures contracts sold by the Fund and
maintain in a segregated account certain liquid assets in connection with
futures contracts purchased by the Fund as described under "Investment Policies
and Techniques" in the Statement of Additional Information. In connection with
their foreign securities investments, the Diversified, High Yield, Income and
Capital and Opportunity Funds may also engage in foreign currency financial
futures transactions. A Fund will not enter into any futures contracts or
options on futures contracts if the aggregate of the contract value of the
outstanding futures contracts of the Fund and futures contracts subject to
outstanding options written by the Fund and, for each of the Adjustable Rate and
Opportunity Funds, the aggregate notional (agreed upon) principal amount of
interest rate swaps, would exceed 50% of the total assets of the Fund.
The Funds may engage in financial futures transactions and may use index options
as an attempt to hedge against market risks. For example, if a Fund owned
long-term bonds and interest rates were expected to rise, it could sell
financial futures contracts. If interest rates did increase, the value of the
bonds in the Fund would decline, but this decline would be offset in whole or in
part by an increase in the value of the Fund's futures contracts. If, on the
other hand, long-term interest rates were expected to decline, the Fund could
hold short-term debt securities and benefit from the income earned by holding
such securities, while at the same time the Fund could purchase futures
contracts on long-term bonds or the cash value of a securities index. Thus, the
Fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them. The futures contracts and short-term debt
securities could then be liquidated and the cash proceeds used to buy long-term
bonds.
Futures contracts entail risks. If the investment manager's judgment about the
general direction of interest rates, markets or exchange rates is wrong, the
overall performance may be poorer than if no such contracts had been entered
into. There may be an imperfect correlation between movements in prices of
futures contracts and portfolio assets being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. For example, if
participants in the futures market elect to close out their contracts rather
than meet margin requirements, distortions in the normal relationship between
the underlying assets and futures market could result. Price distortions also
could result if investors in futures contracts decide to make or take delivery
of underlying securities or other assets rather than engage in closing
transactions because of the resultant reduction in the liquidity of the futures
market. In addition, because, from the point of view of speculators, margin
requirements in the futures market are less onerous than margin requirements in
the cash market, increased participation by speculators in the futures market
could cause temporary price distortions. Due to the possibility of price
distortions in the futures market and because of the imperfect correlation
between movements in the prices of securities or other assets and movements in
the prices of futures contracts, a correct forecast of market trends by the
investment manager still may not result in a successful hedging transaction. If
any of these events should occur, a Fund could lose money on the financial
futures contracts and also on the value of its portfolio assets. The costs
incurred in connection with futures transactions could reduce a Fund's return.
Index options involve risks similar to those risks relating to transactions in
financial futures contracts described above. Also, an option purchased by a Fund
may expire worthless, in which case a Fund would lose the premium paid therefor.
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A Fund may engage in futures transactions only on commodities exchanges or
boards of trade. A Fund will not engage in transactions in index options,
financial futures contracts or related options for speculation, but only as an
attempt to hedge against changes in interest rates or market conditions
affecting the values of securities which the Fund owns or intends to purchase.
FOREIGN CURRENCY TRANSACTIONS. The Diversified, High Yield, Income and Capital
and Opportunity Funds may each invest a limited portion of its assets in
securities denominated in foreign currencies. These Funds may engage in foreign
currency transactions in connection with their investments in foreign securities
but will not speculate in foreign currency exchange.
The value of the foreign securities investments of a Fund measured in U.S.
Dollars may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. A Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded directly between currency traders (usually
large commercial banks) and their customers.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may want to establish the U.S. Dollar cost
or proceeds, as the case may be. By entering into a forward contract in U.S.
Dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the Fund is able to protect itself against a
possible loss between trade and settlement dates resulting from an adverse
change in the relationship between the U.S. Dollar and such foreign currency.
However, this tends to limit potential gains that might result from a positive
change in such currency relationships. A Fund may also hedge its foreign
currency exchange rate risk by engaging in foreign currency financial futures
and options transactions.
When the investment manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. Dollar, it may enter
into a forward contract to sell an amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. The forecasting of short-term currency market movement is extremely
difficult and whether such a short-term hedging strategy will be successful is
highly uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a contract. Accordingly, it may be
necessary for a Fund to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the security is less
than the amount of foreign currency the Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver.
A Fund will not enter into forward contracts or maintain a net exposure in such
contracts where the Fund would be obligated to deliver an amount of foreign
currency in excess of the value of the Fund's securities or other assets
denominated in that currency. The Diversified, High Yield, Income and Capital
and Opportunity Funds do not intend to enter into forward contracts for the
purchase of a foreign currency if they would have more than 15% of the value of
their total assets committed to such contracts. The Funds segregate cash or
liquid securities to the extent required by applicable regulation in connection
with forward foreign currency exchange contracts entered into for the purchase
of a foreign currency. A Fund generally does not enter into a forward contract
with a term longer than one year.
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DERIVATIVES. In addition to options and financial futures transactions,
consistent with its objective, each Fund may invest in a broad array of
financial instruments and securities in which the value of the instrument or
security is "derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate or a foreign currency
("derivatives"). Derivatives are most often used to manage investment risk, to
increase or decrease exposure to an asset class or benchmark (as a hedge or to
enhance return), or to create an investment position indirectly (often because
it is more efficient or less costly than direct investment). The types of
derivatives used by each Fund and the techniques employed by the investment
manager may change over time as new derivatives and strategies are developed or
regulatory changes occur.
SPECIAL RISK FACTORS--OPTIONS, FUTURES, FOREIGN CURRENCIES AND OTHER
DERIVATIVES. The Statement of Additional Information contains further
information about the characteristics, risks and possible benefits of options,
futures, foreign currency and other derivative transactions. See "Investment
Policies and Techniques" in the Statement of Additional Information. The
principal risks are: (a) possible imperfect correlation between movements in the
prices of options, currencies, futures or other derivatives contracts and
movements in the prices of the securities or currencies hedged, used for cover
or that the derivatives intended to replicate; (b) lack of assurance that a
liquid secondary market will exist for any particular option, futures, foreign
currency or other derivatives contract at any particular time; (c) the need for
additional skills and techniques beyond those required for normal portfolio
management; (d) losses on futures contracts resulting from market movements not
anticipated by the investment manager; and (e) the possible non-performance of
the counter-party to the derivative contract.
DELAYED DELIVERY TRANSACTIONS. Any of the Funds may purchase or sell portfolio
securities on a when-issued or delayed delivery basis. When-issued or delayed
delivery transactions involve a commitment by a Fund to purchase or sell
securities with payment and delivery to take place in the future (not to exceed
120 days from trade date for the Government Fund) in order to secure what is
considered to be an advantageous price or yield to the Fund at the time of
entering into the transaction. The value of fixed yield securities to be
delivered in the future will fluctuate as interest rates vary. Because a Fund is
required to set aside cash or other liquid securities to satisfy its commitments
to purchase when-issued or delayed delivery securities, flexibility to manage
the Fund's investments may be limited if commitments to purchase when-issued or
delayed delivery securities were to exceed 25% of the value of its assets.
To the extent a Fund engages in when-issued or delayed delivery transactions, it
will do so for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies. A Fund reserves the right to sell
these securities before the settlement date if deemed advisable.
In when-issued or delayed delivery transactions, delivery of the securities
occurs beyond normal settlement periods, but the Fund would not pay for such
securities or start earning interest on them until they are delivered. However,
when the Fund purchases securities on a when-issued or delayed delivery basis,
it immediately assumes the risks of ownership, including the risk of price
fluctuation. Failure to deliver a security purchased on a when-issued or delayed
delivery basis may result in a loss or missed opportunity to make an alternative
investment. Depending on market conditions, the Fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which its
total assets, including the value of when-issued and delayed delivery securities
it holds, exceed its net assets.
REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements, under
which it acquires ownership of a security and the broker-dealer or bank agrees
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the Fund's holding period. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
might have expenses in enforcing its rights, and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The securities underlying a repurchase agreement will be
marked-to-market every business day so that the value of such securities is at
least equal to the investment value of the repurchase agreement, including any
accrued interest thereon. In addition, the Fund must take physical possession of
the security or receive written confirmation of the purchase and a custodial or
safekeeping receipt from a third party or be recorded as the owner of the
security through the Federal
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Reserve Book-Entry System. Repurchase agreements will be limited to transactions
with financial institutions believed by the investment manager to present
minimal credit risk. The investment manager will monitor on an on-going basis
the creditworthiness of the broker-dealers and banks with which the Funds may
engage in repurchase agreements. Repurchase agreements maturing in more than
seven days will be considered as illiquid for purposes of the Funds' limitations
on illiquid securities.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Funds (other than the Government Fund) may lend securities
(principally to broker-dealers) without limit where such loans are callable at
any time and are continuously secured by segregated collateral (cash or other
liquid securities) equal to no less than the market value, determined daily, of
the securities loaned. The Funds will receive amounts equal to dividends or
interest on the securities loaned. The Funds will also earn income for having
made the loan. Any cash collateral pursuant to these loans will be invested in
short-term money market instruments. As with other extensions of credit, there
are risks of delay in recovery or even loss of rights in the collateral should
the borrower of the securities fail financially. However, the loans would be
made only to firms deemed by the investment manager to be of good standing, and
when the investment manager believes the potential earnings to justify the
attendant risk. Management will limit such lending to not more than one-third of
the value of a Fund's total assets.
COLLATERALIZED OBLIGATIONS. Subject to its investment objective and policies, a
Fund may purchase collateralized obligations, including interest only ("IO") and
principal only ("PO") securities. A collateralized obligation is a debt security
issued by a corporation, trust or custodian, or by a U.S. Government agency or
instrumentality, that is collateralized by a portfolio or pool of mortgages,
Mortgage-Backed Securities, U.S. Government Securities or other assets. The
issuer's obligation to make interest and principal payments is secured by the
underlying pool or portfolio of securities. Collateralized obligations issued or
guaranteed by a U.S. Government agency or instrumentality, such as the Federal
Home Loan Mortgage Corporation, are considered U.S. Government Securities for
purposes of this prospectus. Privately-issued collateralized obligations
collateralized by a portfolio of U.S. Government Securities are not direct
obligations of the U.S. Government or any of its agencies or instrumentalities
and are not considered U.S. Government Securities for purposes of this
prospectus. A variety of types of collateralized obligations are available
currently and others may become available in the future.
Since the collateralized obligations may be issued in classes with varying
maturities and interest rates, the investor may obtain greater predictability of
maturity than with direct investments in mortgage-backed securities. Classes
with shorter maturities may have lower volatility and lower yield while those
with longer maturities may have higher volatility and higher yield. This
provides the investor with greater control over the characteristics of the
investment in a changing interest rate environment. With respect to interest
only and principal only securities, an investor has the option to select from a
pool of underlying collateral the portion of the cash flows that most closely
corresponds to the investor's forecast of interest rate movements. These
instruments tend to be highly sensitive to prepayment rates on the underlying
collateral and thus place a premium on accurate prepayment projections by the
investor.
A Fund may invest in collateralized obligations whose yield floats inversely
against a specified index rate. These "inverse floaters" are more volatile than
conventional fixed or floating rate collateralized obligations and the yield
thereon, as well as the value thereof, will fluctuate in inverse proportion to
changes in the index upon which interest rate adjustments are based. As a
result, the yield on an inverse floater will generally increase when market
yields (as reflected by the index) decrease and decrease when market yields
increase. The extent of the volatility of inverse floaters depends on the extent
of anticipated changes in market rates of interest. Generally, inverse floaters
provide for interest rate adjustments based upon a multiple of the specified
interest index, which further increases their volatility. The degree of
additional volatility will be directly proportional to the size of the multiple
used in determining interest rate adjustments.
Additional information concerning collateralized obligations is contained in the
Statement of Additional Information under "Investment Policies and
Techniques--Collateralized Obligations."
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INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Zurich Kemper Investments, Inc. ("ZKI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, is the investment manager of each Fund and
provides each Fund with continuous professional investment supervision. ZKI is
one of the largest investment managers in the country and has been engaged in
the management of investment funds for more than forty-nine years. ZKI and its
affiliates provide investment advice and manage investment portfolios for the
Kemper Funds, affiliated insurance companies and other corporate, pension,
profit-sharing and individual accounts representing approximately $89 billion
under management (including approximately $16 billion in U.S. Government
securities). ZKI acts as investment manager for 32 open-end and seven closed-end
investment companies, with 86 separate investment portfolios, representing more
than 2.5 million shareholder accounts. ZKI is an indirect subsidiary of Zurich
Insurance Company, a leading internationally recognized provider of insurance
and financial services in property/casualty and life insurance, reinsurance and
structured financial solutions as well as asset management.
Zurich Insurance Company ("Zurich") has entered into a definitive agreement with
Scudder, Stevens & Clark, Inc. ("Scudder") pursuant to which Zurich will acquire
approximately 70% of Scudder. Upon completion of the transaction, Scudder will
change its name to Scudder Kemper Investments, Inc. ("SKI"), and ZKI will be
combined with SKI. Because the transaction would constitute an assignment of the
Funds' investment management agreements with ZKI under the Investment Company
Act of 1940, ZKI sought approval of new agreements. The Funds' boards and
shareholders have approved new agreements with SKI. If any remaining
contingencies are timely met, the transaction is expected to close December 31,
1997. Zurich will own 69.5% of SKI and senior employees of SKI will hold the
remaining 30.5%. SKI will be headquartered in New York City and the chief
executive officer of SKI will be Edmond D. Villani, Scudder's president and
chief executive officer.
Responsibility for overall management of each Fund rests with its Board of
Trustees and officers. Professional investment supervision is provided by ZKI.
The investment management agreements provide that ZKI shall act as each Fund's
investment adviser, manage its investments and provide it with various services
and facilities. Zurich Investment Management Limited ("ZIML"), 1 Fleet Place,
London, U.K. EC4M 7RQ, an affiliate of ZKI, is the sub-adviser for the
Diversified, High Yield, Income and Capital and Opportunity Funds. ZIML is an
indirect subsidiary of Zurich Insurance Company and has served as sub-adviser
for mutual funds since December, 1996 and investment adviser for certain
institutional accounts since August, 1988. Under the terms of the Sub-Advisory
Agreement between ZIML and ZKI, ZIML renders investment advisory and management
services with regard to such portion of the Fund's portfolio as may be allocated
to ZIML by ZKI from time to time for management of foreign securities, including
foreign currency transactions and related investments. ZKI pays ZIML for its
services a sub-advisory fee, payable monthly at the annual rate of .30% of the
portion of the average daily net assets of the Fund allocated by ZKI to ZIML for
management. ZIML is not expected to continue as sub-adviser after the closing of
the acquisition of Scudder by Zurich.
Richard L. Vandenberg (since March, 1996) has been a portfolio manager of the
Government Fund, the Mortgage Fund and portfolio co-manager with Elizabeth A.
Byrnes of the Short-Intermediate Government Fund. Mr. Vandenberg (since March,
1996) and Elizabeth A. Byrnes (since 1994) are portfolio co-managers of the
Adjustable Rate Fund. Mr. Vandenberg joined ZKI in March, 1996 and is a Senior
Vice President of ZKI and a Vice President of the Government, Mortgage,
Adjustable Rate and Short-Intermediate Government Funds. Immediately prior to
joining ZKI, he was a senior vice president and portfolio manager of an
investment management firm. He received a B.B.A. and M.B.A., both in Finance,
Investments and Banking, from the University of Wisconsin, Madison, Wisconsin.
Ms. Byrnes joined ZKI in 1982 and is a First Vice President of ZKI and a Vice
President of the Adjustable Rate Fund. She received a B.A. from Miami
University, Oxford, Ohio.
Michael A. McNamara (since 1990) and Harry E. Resis, Jr. (since 1992) are the
portfolio co-managers of the High Yield Fund. Daniel J. Doyle (since 1997), Mr.
McNamara (since 1997) and Mr. Resis (since 1997) are the portfolio co-managers
of the Opportunity Fund. Mr. Doyle joined ZKI in February 1986 and is First Vice
33
<PAGE> 41
President of ZKI and a Vice President of the Opportunity Fund. He received a
B.S. in Finance from Northern Illinois University, Dekalb, Illinois, and an
M.B.A. in Finance from the University of Chicago, Chicago, Illinois. Mr. Doyle
is a Chartered Financial Analyst. Mr. McNamara joined ZKI in February 1972 and
is a Senior Vice President of ZKI and a Vice President of the High Yield and
Opportunity Funds. He received a B.S. in Business Administration from the
University of Missouri, St. Louis, Missouri, and an M.B.A. in Finance from
Loyola University, Chicago, Illinois. Mr. Resis joined ZKI in June, 1988 and is
currently a Senior Vice President of ZKI and a Vice President of the High Yield
and Opportunity Funds. He received a B.A. in Finance from Michigan State
University, East Lansing, Michigan.
Robert Cessine is the portfolio manager (since 1994) and a Vice President of the
Income and Capital Fund. Mr. Cessine joined ZKI in 1993 and is a Senior Vice
President of ZKI and director of investment grade corporate and sovereign bond
research. Before joining ZKI in 1993, Mr. Cessine was a senior corporate bond
analyst and chairman of the bond selection committee of an investment management
company. He received a B.S. in Economics from the University of Wisconsin,
Madison, Wisconsin, an M.S. in Agricultural and Resource Economics from the
University of Maryland, Baltimore/College Park, Maryland and an M.S. in Finance
from the University of Wisconsin, Madison, Wisconsin. Mr. Cessine is a Chartered
Financial Analyst.
Diversified Income Fund is managed by a team of portfolio managers who are
specialists in the basic sectors in which it invests. Messrs J. Patrick
Beimford, Jr., Robert S. Cessine, Michael A. McNamara, Harry E. Resis, Jr.,
Jonathan W. Trutter and Richard L. Vandenberg are the members of the team. Mr.
Beimford joined ZKI in April 1976 and is currently an Executive Vice President
of ZKI and a Vice President of the Diversified Fund. He received a B.S.I.M. in
Business from Purdue University, West Lafayette, Indiana, and an M.B.A. in
Finance from the University of Chicago, Chicago, Illinois. Mr. Beimford is a
Chartered Financial Analyst. Mr. Trutter has an A.B. with dual majors in East
Asian Languages and International Relations from the University of Southern
California, Los Angeles California and an M.B.A. from Kellogg Graduate School of
Management at Northwestern University, Chicago, Illinois. He is also a Certified
Public Accountant. See above for information on the background of Messrs.
Cessine, McNamara, Resis and Vandenberg.
The Funds pay ZKI investment management fees, payable monthly, at the annual
rates shown below.
<TABLE>
<CAPTION>
ADJUSTABLE RATE, INCOME DIVERSIFIED
AND CAPITAL, MORTGAGE AND
AVERAGE DAILY NET ASSETS AND SHORT-INTERMEDIATE GOV'T HIGH YIELD GOVERNMENT OPPORTUNITY
------------------------ ---------------------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
$0 - $250 million.......................... .55% .58% .45% .65%
$250 million - $1 billion.................. .52 .55 .43 .62
$1 billion - $2.5 billion.................. .50 .53 .41 .60
$2.5 billion - $5 billion.................. .48 .51 .40 .58
$5 billion - $7.5 billion.................. .45 .48 .38 .55
$7.5 billion - $10 billion................. .43 .46 .36 .53
$10 billion - $12.5 billion................ .41 .44 .34 .51
Over $12.5 billion......................... .40 .42 .32 .49
</TABLE>
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with each Fund, Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, a wholly owned
subsidiary of ZKI, is the principal underwriter and distributor of each Fund's
shares and acts as agent of each Fund in the sale of its shares. KDI bears all
its expenses of providing services pursuant to the distribution agreement,
including the payment of any commissions. KDI provides for the preparation of
advertising or sales literature and bears the cost of printing and mailing
prospectuses to persons other than shareholders. KDI bears the cost of
qualifying and maintaining the qualification of Fund shares for sale under the
securities laws of the various states and each Fund bears the expense of
registering its shares with the Securities and Exchange Commission. KDI may
enter into related selling group agreements with various broker-dealers,
34
<PAGE> 42
including affiliates of KDI, that provide distribution services to investors.
KDI also may provide some of the distribution services.
CLASS A SHARES. KDI receives no compensation from the Funds as principal
underwriter for Class A shares and pays all expenses of distribution of each
Fund's Class A shares under the distribution agreements not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays or
allows concessions or discounts to firms for the sale of each Fund's shares.
CLASS B SHARES. For its services under the distribution agreement, KDI receives
a fee from each Fund, payable monthly, at the annual rate of .75% of average
daily net assets of each Fund attributable to Class B shares. This fee is
accrued daily as an expense of Class B shares. KDI also receives any contingent
deferred sales charges. See "Redemption or Repurchase of Shares--Contingent
Deferred Sales Charge--Class B Shares." KDI currently compensates firms for
sales of Class B shares at a commission rate of 3.75%.
CLASS C SHARES. For its services under the distribution agreement, KDI receives
a fee from each Fund, payable monthly, at the annual rate of .75% of average
daily net assets of each Fund attributable to Class C shares. This fee is
accrued daily as an expense of Class C shares. KDI currently advances to firms
the first year distribution fee at a rate of .75% of the purchase price of Class
C shares. For periods after the first year, KDI currently pays firms for sales
of Class C shares a distribution fee, payable quarterly, at an annual rate of
.75% of net assets attributable to Class C shares maintained and serviced by the
firm and the fee continues until terminated by KDI or a Fund. KDI also receives
any contingent deferred sales charges. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Class C Shares."
RULE 12B-1 PLAN. Since each distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares. As of December 1997, each Fund's Rule 12b-1 Plan has
been separated from its distribution agreement. The table below shows amounts
paid in connection with each Fund's Rule 12b-1 Plan during its 1997 fiscal year
(except the Opportunity Fund, which commenced operations on October 1, 1997).
<TABLE>
<CAPTION>
DISTRIBUTION FEES CONTINGENT DEFERRED
DISTRIBUTION EXPENSES PAID BY FUND SALES CHARGES PAID
INCURRED BY UNDERWRITER TO UNDERWRITER TO UNDERWRITER
-------------------------- ---------------------- ----------------------
FUND CLASS B CLASS C CLASS B CLASS C CLASS B CLASS C
- ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate................. $ 676,000 96,000 51,000 9,000 31,000 0
Diversified..................... $ 5,084,000 348,000 2,148,000 83,000 419,000 5,000
Government...................... $ 1,540,000 171,000 528,000 62,000 234,000 1,000
High Yield...................... $26,641,000 2,833,000 8,925,000 657,000 1,473,000 58,000
Income and Capital.............. $ 1,363,000 185,000 600,000 53,000 211,000 2,000
Mortgage........................ $ 1,121,000 60,000 6,685,000 16,000 1,362,000 1,000
Short-Intermediate Government... $ 558,000 155,000 1,071,000 34,000 327,000 3,000
</TABLE>
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of a Fund to make payments to KDI pursuant to the Plan will cease
and the Fund will not be required to make any payments past the termination
date. Thus, there is no legal obligation for the Fund to pay any expenses
incurred by KDI in excess of its fees under a Plan, if for any reason the Plan
is terminated in accordance with its terms. Future fees under the Plan may or
may not be sufficient to reimburse KDI for its expenses incurred.
ADMINISTRATIVE SERVICES. KDI also provides information and administrative
services for shareholders of each Fund pursuant to administrative services
agreements ("administrative agreements"). KDI may enter into related
arrangements with various broker-dealer firms and other service or
administrative firms ("firms"), that provide
35
<PAGE> 43
services and facilities for their customers or clients who are investors of the
Funds. Such administrative services and assistance may include, but are not
limited to, establishing and maintaining accounts and records, processing
purchase and redemption transactions, answering routine inquiries regarding each
Fund and its special features and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. KDI bears all its expenses of providing services pursuant to the
administrative agreement, including the payment of any service fees. For
services under the administrative agreements, each Fund pays KDI a fee, payable
monthly, at an annual rate of up to .25% of average daily net assets of Class A,
B and C shares of such Fund. With respect to Class A shares, KDI then pays each
firm a service fee at an annual rate of (a) up to .15% of net assets (.25% for
the Mortgage and Short-Intermediate Government Funds) of those accounts that it
maintains and services for each Fund attributable to shares acquired prior to
October 1, 1993, and (b) up to .25% of net assets of those accounts that it
maintains and services for each Fund attributable to Class A shares acquired on
or after October 1, 1993. With respect to Class B shares and Class C shares, KDI
pays each firm a service fee, normally payable quarterly, at an annual rate of
up to .25% of net assets of those accounts in the Fund that it maintains and
services attributable to Class B shares and Class C shares, respectively. Firms
to which service fees may be paid include affiliates of KDI.
CLASS A SHARES. For Class A shares, a firm becomes eligible for the service fee
based on assets in the accounts in the month following the month of purchase and
the fee continues until terminated by KDI or a Fund. The fees are calculated
monthly and normally paid quarterly.
CLASS B AND CLASS C SHARES. KDI currently advances to firms the first year
service fee at a rate of up to .25% of the purchase price of such shares. For
periods after the first year, KDI currently intends to pay firms a service fee
at a rate of up to .25% (calculated monthly and normally paid quarterly) of the
net assets attributable to Class B and Class C shares maintained and serviced by
the firm and the fee continues until terminated by KDI or the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreements not paid to firms to compensate
itself for administrative functions performed for each Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which a firm provides administrative services and it is intended
that KDI will pay all the administrative services fee that it receives from each
Fund to firms in the form of service fees. The effective administrative services
fee rate to be charged against all assets of each Fund while this procedure is
in effect will depend upon the proportion of Fund assets that is in accounts for
which a firm provides administrative services as well as, with respect to Class
A shares (except for the Mortgage and Short-Intermediate Government Funds), the
date when shares representing such assets were purchased. In addition, KDI may,
from time to time, from its own resources, pay certain firms additional amounts
for ongoing administrative services and assistance provided to their customers
and clients who are shareholders of the Funds.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary
Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105, as
custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of each Fund maintained in the United States. For Funds that invest in foreign
securities, The Chase Manhattan Bank, Chase MetroTech Center, Brooklyn, New York
11245, as custodian, has custody of all securities and cash of each Fund held
outside the United States. IFTC also is the Funds' transfer agent and
dividend-paying agent. Pursuant to a services agreement with IFTC, Kemper
Service Company ("KSvC"), an affiliate of ZKI, serves as "Shareholder Service
Agent" of the Funds and as such, performs all of IFTC's duties as transfer agent
and dividend-paying agent. For a description of shareholder service agent fees
payable to the Shareholder Service Agent, see "Investment Manager and
Underwriter" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS. ZKI and ZIML place all orders for purchases and sales of
a Fund's securities. Subject to seeking best execution of orders, ZKI and ZIML
may consider sales of shares of a Fund and other funds managed by ZKI or its
affiliates as a factor in selecting broker-dealers. See "Portfolio Transactions"
in the Statement of Additional Information.
36
<PAGE> 44
DIVIDENDS AND TAXES
DIVIDENDS. Each Fund normally declares and distributes monthly dividends of net
investment income and distributes any net realized capital gains at least
annually.
Dividends paid by a Fund as to each class of its shares will be calculated in
the same manner, at the same time and on the same day. The level of income
dividends per share (as a percentage of net asset value) will be lower for Class
B and Class C shares than for Class A shares primarily as a result of the
distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same amount for each
class.
Income dividends and capital gain dividends, if any, of a Fund will be credited
to shareholder accounts in full and fractional shares of the same class of that
Fund at net asset value, except that, upon written request to the Shareholder
Service Agent, a shareholder may select one of the following options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
(2) To receive income and capital gain dividends in cash.
Any dividends of a Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have dividends of a Fund
invested in shares of the same class of another Kemper Fund at the net asset
value of such class of such other fund. See "Special Features--Class A
Shares--Combined Purchases" for a list of such other Kemper Funds. To use this
privilege of investing dividends of a Fund in shares of another Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends. The Funds reinvest dividend checks (and future
dividends) in shares of that same Fund and class if checks are returned as
undeliverable. Dividends and other distributions in the aggregate amount of $10
or less are automatically reinvested in shares of the same Fund unless the
shareholder requests that such policy not be applied to the shareholder's
account.
TAXES. Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code (the "Code") and, if so
qualified, will not be liable for federal income taxes to the extent its
earnings are distributed. Dividends derived from net investment income and net
short-term capital gains are taxable to shareholders as ordinary income and
long-term capital gain dividends are taxable to shareholders as long-term
capital gain regardless of how long the shares have been held and whether
received in cash or shares. Long-term capital gain dividends received by
individual shareholders are taxed at a maximum rate of 20% on gains realized by
a Fund from securities held more than 18 months and at a maximum rate of 28% on
gains realized by a Fund from securities held more than 12 months but not more
than 18 months. Dividends declared in October, November or December to
shareholders of record as of a date in one of those months and paid during the
following January are treated as paid on December 31 of the calendar year
declared. A portion of the dividends paid by the Diversified, High Yield or
Opportunity Funds may qualify for the dividends received deduction available to
corporate shareholders. However, it is anticipated that only a small portion, if
any, of the dividends paid by such Funds will so qualify. No portion of the
dividends paid by the Adjustable Rate, Government, Income and Capital, Mortgage
or Short-Intermediate Government Funds will qualify for the dividends received
deduction.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, will be taxable to the shareholder. If the net asset value of
shares were reduced below the shareholder's cost by dividends representing gains
realized on sales of securities, such dividends would be a return of investment
though taxable as stated above.
Fund dividends that are derived from interest on direct (but not guaranteed)
obligations of the U.S. Government and certain of its agencies and
instrumentalities may be exempt from state and local taxes in certain states. In
other states, arguments can be made that such distributions should be exempt
from state and local taxes based on federal law, 31 U.S.C. Section 3124, and the
U.S. Supreme Court's interpretation of that provision in AMERICAN
37
<PAGE> 45
BANK AND TRUST CO. v. DALLAS COUNTY, 463 U.S. 855 (1983). Shareholders should
consult their tax advisers regarding the possible exclusion of such portion of
their dividends for state and local income tax purposes.
Each Fund is required by law to withhold 31% of taxable dividends and redemption
proceeds paid to certain shareholders who do not furnish a correct taxpayer
identification number (in the case of individuals, a social security number) and
in certain other circumstances. Trustees of qualified retirement plans and
403(b)(7) accounts are required by law to withhold 20% of the taxable portion of
any distribution that is eligible to be "rolled over." The 20% withholding
requirement does not apply to distributions from Individual Retirement Accounts
("IRAs") or any part of a distribution that is transferred directly to another
qualified retirement plan, 403(b)(7) account, or IRA. Shareholders should
consult with their tax advisers regarding the 20% withholding requirement.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving dividend reinvestment and periodic
investment and redemption programs. Information for income tax purposes,
including information regarding any foreign taxes and credits, will be provided
after the end of the calendar year. Shareholders are encouraged to retain copies
of their account confirmation statements or year-end statements for tax
reporting purposes, including information regarding any foreign taxes and
credits. However, those who have incomplete records may obtain historical
account transaction information at a reasonable fee.
When more than one shareholder resides at the same address, certain reports and
communications to be delivered to such shareholders may be combined in the same
mailing package, and certain duplicate reports and communications may be
eliminated. Similarly, account statements to be sent to such shareholders may be
combined in the same mailing package or consolidated into a single statement.
However, a shareholder may request that the foregoing policies not be applied to
the shareholder's account.
NET ASSET VALUE
For each Fund, the net asset value per share is determined separately for each
class by dividing the value of the Fund's net assets attributable to that class
by the number of shares of that class outstanding. The per share net asset value
of the Class B and Class C shares of a Fund will generally be lower than that of
the Class A shares of the Fund because of the higher expenses borne by the Class
B and Class C shares. Fixed income securities are valued by using market
quotations, or independent pricing services that use prices provided by market
makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Portfolio securities
that are primarily traded on a domestic securities exchange or securities listed
on the NASDAQ National Market are valued at the last sale price on the exchange
or market where primarily traded or listed or, if there is no recent sale price
available, at the last current bid quotation. Portfolio securities that are
primarily traded on foreign securities exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges where
primarily traded. A security that is listed or traded on more than one exchange
is valued at the quotation on the exchange determined to be the primary market
for such security by the Board of Trustees or its delegates. Securities not so
traded or listed are valued at the last current bid quotation if market
quotations are available. Equity options are valued at the last sale price
unless the bid price is higher or the ask price is lower, in which event such
bid or asked price is used. Exchange traded fixed income options, financial
futures and options thereon are valued at the settlement price established each
day by the board of trade or exchange on which they are traded. Over-the-counter
traded options, swap agreements and swap-related products are valued based upon
current prices provided by market makers. Financial futures and options thereon
are valued at the settlement price established each day by the board of trade or
exchange on which they are traded. Other securities and assets are valued at
fair value as determined in good faith by the Board of Trustees. Because of the
need to obtain prices as of the close of trading on various exchanges throughout
the world, the calculation of net asset value of a Fund investing in foreign
securities does not necessarily take place contemporaneously with the
determination of the prices of the Fund's foreign securities, which may be made
prior to the determination of net asset value. For purposes of determining the
net asset value of a Fund investing
38
<PAGE> 46
in foreign securities, all assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of such currencies against U.S. Dollars as last
quoted by a recognized dealer. If an event were to occur, after the value of a
security was so established but before the net asset value per share was
determined, which was likely to materially change the net asset value, then that
security would be valued using fair value determinations by the Board of
Trustees or its delegates. On each day the New York Stock Exchange (the
"Exchange") is open for trading, the net asset value is determined as of the
earlier of 3:00 p.m. Chicago time or the close of the Exchange.
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of each Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of each Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. See,
also, "Summary of Expenses." Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class that
best suits their circumstances and objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
---------------------------------- ------------------------ ----------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None Initial sales charge waived or
4.5% of the public offering price reduced for certain purchases
(3.5% for the Adjustable Rate and
Short-Intermediate Government
Funds)
Class B Maximum contingent deferred sales 0.75% Shares convert to Class A shares
charge of 4% of redemption six years after issuance
proceeds; declines to zero after
six years
Class C Contingent deferred sales charge 0.75% No conversion feature
of 1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
The minimum initial investment for each Fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $250 and the minimum subsequent investment is $50. Under
an automatic investment plan, such as Bank Direct Deposit, Payroll Direct
Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion. In order to begin accruing income dividends as soon as
possible, purchasers may wire payment to United Missouri Bank of Kansas City,
N.A., 10th and Grand Avenue, Kansas City, Missouri 64106.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
39
<PAGE> 47
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES. The public offering price of
Class A shares for purchasers of the Adjustable Rate and Short-Intermediate
Government Funds choosing the initial sales charge alternative is the net asset
value plus a sales charge, as set forth below.
ADJUSTABLE RATE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS
<TABLE>
<CAPTION>
Sales Charge
-------------------------------------------------------------
As a Allowed to
As a Percentage of Dealers as a
Percentage of Net Asset Percentage of
Amount of Purchase Offering Price 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........................................ .00** .00** ***
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
*** Commission is payable by KDI as discussed below.
The public offering price of Class A shares for purchasers of the Diversified,
Government, High Yield, Income and Capital, Mortgage and Opportunity Funds
choosing the initial sales charge alternative is the net asset value plus a
sales charge, as set forth below.
DIVERSIFIED, GOVERNMENT, HIGH YIELD, INCOME AND CAPITAL, MORTGAGE AND
OPPORTUNITY FUNDS
<TABLE>
<CAPTION>
Sales Charge
-------------------------------------------------------------
As a Allowed to
As a Percentage of Dealers as a
Percentage of Net Asset Percentage of
Amount of Purchase Offering Price 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........................................ .00** .00** ***
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
*** Commission is payable by KDI as discussed below.
Each Fund receives the entire net asset value of all its Class A shares sold.
KDI, the Funds' principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow up to the full applicable sales charge, as
shown in the above table, during periods and for transactions specified in such
notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of a Fund may be purchased at net asset value to the extent that
the amount invested represents the net proceeds from a redemption of shares of a
mutual fund for which ZKI or an affiliate does not serve as investment manager
("non-Kemper Fund") provided that: (a) the investor has previously paid either
an initial sales charge in connection with the purchase of the non-Kemper Fund
shares redeemed or a contingent deferred
40
<PAGE> 48
sales charge in connection with the redemption of the non-Kemper Fund shares,
and (b) the purchase of Fund shares is made within 90 days after the date of
such redemption. To make such a purchase at net asset value, the investor or the
investor's dealer must, at the time of purchase, submit a request that the
purchase be processed at net asset value pursuant to this privilege. KDI may in
its discretion compensate firms for sales of Class A shares under this privilege
at a commission rate of .50% of the amount of Class A shares purchased. The
redemption of the shares of the non-Kemper fund is, for federal income tax
purposes, a sale upon which a gain or loss may be realized.
Class A shares of a Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in such Fund or other Kemper Mutual
Funds listed under "Special Features--Class A Shares--Combined Purchases" totals
at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features;" or (b) a participant-directed qualified
retirement plan described in Code Section 401(a) or a participant-directed
non-qualified deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 200 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of shares purchased under
the Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of a Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, .50% on the next $45 million and .25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount record keeping system made available
through KSvC. For purposes of determining the appropriate commission percentage
to be applied to a particular sale, KDI will consider the cumulative amount
invested by the purchaser in a Fund and other Kemper Mutual Funds listed under
"Special Features--Class A Shares--Combined Purchases," including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features referred to above. The privilege of purchasing Class A shares
of a Fund at net asset value under the Large Order NAV Purchase Privilege is not
available if another net asset value purchase privilege also applies.
Effective on February 1, 1996, Class A shares of a Fund or any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be purchased at net asset value in any amount by members of the plaintiff
class in the proceeding known as HOWARD AND AUDREY TABANKIN, ET AL. V. KEMPER
SHORT-TERM GLOBAL INCOME FUND, ET AL., Case No. 93 C 5231 (N.D. IL). This
privilege is generally non-transferrable and continues for the lifetime of
individual class members and for a ten year period for non-individual class
members. To make a purchase at net asset value under this privilege, the
investor must, at the time of purchase, submit a written request that the
purchase be processed at net asset value pursuant to this privilege specifically
identifying the purchaser as a member of the "Tabankin Class." Shares purchased
under this privilege will be maintained in a separate account that includes only
shares purchased under this privilege. For more details concerning this
privilege, class members should refer to the Notice of (1) Proposed Settlement
with Defendants; and (2) Hearing to Determine Fairness of Proposed Settlement,
dated August 31, 1995, issued in connection with the aforementioned court
proceeding. For sales of Fund shares at net asset value pursuant to this
privilege, KDI may at its discretion pay investment dealers and other financial
services firms a concession, payable quarterly, at an annual rate of up to .25%
of net assets attributable to such shares maintained and serviced by the firm. A
firm becomes eligible for the concession based upon assets in accounts
attributable to shares purchased under this privilege in the month after the
month of purchase and the concession continues until terminated by KDI. The
privilege of purchasing Class A shares of a Fund at net asset value under this
privilege is not available if another net asset value purchase privilege also
applies.
41
<PAGE> 49
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
a Fund, its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Funds,
for themselves or their spouses or dependent children; (c) shareholders who
owned shares of Kemper Value Fund, Inc. ("KVF") on September 8, 1995, and have
continuously owned shares of KVF (or a Kemper Fund acquired by exchange of KVF
shares) since that date, for themselves or members of their families, and (d)
any trust or pension, profit-sharing or other benefit plan for only such
persons. Class A shares may be sold at net asset value in any amount to selected
employees (including their spouses and dependent children) of banks and other
financial services firms that provide administrative services related to order
placement and payment to facilitate transactions in shares of the Funds for
their clients pursuant to an agreement with KDI or one of its affiliates. Only
those employees of such banks and other firms who as part of their usual duties
provide services related to transactions in Fund Class A shares may purchase
Fund shares at net asset value hereunder. Class A shares may be sold at net
asset value in any amount to unit investment trusts sponsored by Ranson &
Associates, Inc. In addition, unitholders of unit investment trusts sponsored by
Ranson & Associates, Inc. or its predecessors may purchase a Fund's Class A
shares at net asset value through reinvestment programs described in the
prospectuses of such trusts that have such programs. Class A shares of a Fund
may be sold at net asset value through certain investment advisers registered
under the Investment Advisers Act of 1940 and other financial services firms
that adhere to certain standards established by KDI, including a requirement
that such shares be sold for the benefit of their clients participating in an
investment advisory program under which such clients pay a fee to the investment
adviser or other firm for portfolio management and other services. Such shares
are sold for investment purposes and on the condition that they will not be
resold except through redemption or repurchase by the Funds. The Funds may also
issue Class A shares at net asset value in connection with the acquisition of
the assets of or merger or consolidation with another investment company, or to
shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of a Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of .50% of the
amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon
42
<PAGE> 50
redemption of Class B shares. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of a Fund will automatically convert to Class A shares of the
same Fund six years after issuance on the basis of the relative net asset value
per share. Class B shareholders of the Funds who originally acquired their
shares as Initial Shares of Kemper Portfolios, formerly known as Kemper
Investment Portfolios ("KIP"), hold them subject to the same conversion period
schedule as that of their KIP Portfolio. Class B shares originally representing
Initial Shares of a KIP Portfolio will automatically convert to Class A shares
of the applicable Fund six years after issuance of the Initial Shares for shares
issued on or after February 1, 1991 and seven years after issuance of the
Initial Shares for shares issued before February 1, 1991. The purpose of the
conversion feature is to relieve holders of Class B shares from the distribution
services fee when they have been outstanding long enough for KDI to have been
compensated for distribution related expenses. For purposes of conversion to
Class A shares, shares purchased through the reinvestment of dividends and other
distributions paid with respect to Class B shares in a shareholder's Fund
account will be converted to Class A shares on a pro rata basis.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of a
Fund is the next determined net asset value. No initial sales charge is imposed.
Since Class C shares are sold without an initial sales charge, the full amount
of the investor's purchase payment will be invested in Class C shares for his or
her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
C Shares." KDI currently advances to firms the first year distribution fee at a
rate of .75% of the purchase price of such shares. For periods after the first
year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of .75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
WHICH ARRANGEMENT IS BETTER FOR YOU? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. Orders for Class
B shares or Class C shares by employer sponsored employee benefit plans using
the subaccount record keeping system made available through the Shareholder
Service Agent will be invested instead in Class A shares at net asset value
where the combined subaccount value in a Fund or other Kemper Mutual Funds
listed under "Special Features--Class A Shares--Combined Purchases" is in excess
of $5 million including purchases pursuant to the "Combined Purchases," "Letter
of Intent" and "Cumulative Discount" features described under "Special
Features." For more information about the three sales arrangements, consult your
financial representative or the Shareholder Service Agent. Financial services
firms may receive different compensation depending upon which class of shares
they sell.
GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Fund for their clients, and KDI may pay them a transaction fee up to
the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be
43
<PAGE> 51
appropriate. KDI does not believe that termination of a relationship with a bank
would result in any material adverse consequences to a Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of a Fund sold by the firm under the following conditions: (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct "roll over" of a distribution from a qualified retirement plan
account maintained on a participant subaccount record keeping system provided by
KSvC, (iii) the registered representative placing the trade is a member of
ProStar, a group of persons designated by KSvC in acknowledgement of their
dedication to the employee benefit plan area and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell shares
of the Funds. Non-cash compensation includes luxury merchandise and trips to
luxury resorts. In some instances, such discounts, commissions or other
incentives will be offered only to certain firms that sell or are expected to
sell during specified time periods certain minimum amounts of shares of the
Funds or other funds underwritten by KDI.
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day ("trade
date"). The Funds reserve the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly. Collection may take
significantly longer for a check drawn on a foreign bank than for a check drawn
on a domestic bank. Therefore, if an order is accompanied by a check drawn on a
foreign bank, funds must normally be collected before shares will be purchased.
See "Purchase and Redemption of Shares" in the Statement of Additional
Information.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Funds' shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Funds' shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Funds' transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Funds through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Funds through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
The Funds reserve the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders. Also, from time to time, each
Fund may temporarily suspend the offering of any class of its shares to new
investors. During the period of such suspension, persons who are already
shareholders of such class of the Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Shareholders should direct their inquiries to KSvC, 811 Main Street, Kansas
City, Missouri 64105-2005 or to the firm from which they received this
prospectus.
44
<PAGE> 52
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require a Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Funds' transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. When certificates for shares have been
issued, they must be mailed to or deposited with the Shareholder Service Agent,
along with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
The redemption price for shares of a Fund will be the net asset value per share
of that Fund next determined following receipt by the Shareholder Service Agent
of a properly executed request with any required documents as described above.
Payment for shares redeemed will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request
accompanied by any outstanding share certificates in proper form for transfer.
When a Fund is asked to redeem shares for which it may not have yet received
good payment (i.e., purchases by check, EXPRESS-Transfer or Bank Direct
Deposit), it may delay transmittal of redemption proceeds until it has
determined that collected funds have been received for the purchase of such
shares, which will be up to 10 days from receipt by a Fund of the purchase
amount. The redemption within two years of Class A shares purchased at net asset
value under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"), the redemption of Class B shares within six years
may be subject to a contingent deferred sales charge (see "Contingent Deferred
Sales Charge--Class B Shares" below), and the redemption of Class C shares
within the first year following purchase may be subject to a contingent deferred
sales charge (see "Contingent Deferred Sales Charge--Class C Shares" below).
Because of the high cost of maintaining small accounts, effective January 1998,
the Funds may assess a quarterly fee of $9 on an account with a balance below
$1,000 for the quarter. The fee will not apply to accounts enrolled in an
automatic investment program, Individual Retirement Accounts or employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. A Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The SHAREHOLDER WILL BEAR THE RISK OF LOSS,
including loss resulting from fraudulent or unauthorized transactions, as long
as the reasonable verification procedures are followed. The verification
procedures include recording instructions, requiring certain identifying
information before acting upon instructions and sending written confirmations.
TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor
45
<PAGE> 53
or guardian is named in the account registration. Other institutional account
holders and guardian account holders of custodial accounts for gifts and
transfers to minors may exercise this special privilege of redeeming shares by
telephone request or written request without signature guarantee subject to the
same conditions as individual account holders and subject to the limitations on
liability described under "General" above, provided that this privilege has been
pre-authorized by the institutional account holder or guardian account holder by
written instruction to the Shareholder Service Agent with signatures guaranteed.
Telephone requests may be made by calling 1-800-621-1048. Shares purchased by
check or through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed
under this privilege of redeeming shares by telephone request until such shares
have been owned for at least 10 days. This privilege of redeeming shares by
telephone request or by written request without a signature guarantee may not be
used to redeem shares held in certificated form and may not be used if the
shareholder's account has had an address change within 30 days of the redemption
request. During periods when it is difficult to contact the Shareholder Service
Agent by telephone, it may be difficult to use the telephone redemption
privilege, although investors can still redeem by mail. The Funds reserve the
right to terminate or modify this privilege at any time.
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which each Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of a Fund can be redeemed and proceeds sent by federal wire
transfer to a single previously designated account. Requests received by the
Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value of the Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption request of $250,000 or more may be delayed by the Fund for up to
seven days if ZKI deems it appropriate under then current market conditions.
Once authorization is on file, the Shareholder Service Agent will honor requests
by telephone at 1-800-621-1048 or in writing, subject to the limitations on
liability described under "General" above. The Funds are not responsible for the
efficiency of the federal wire system or the account holder's financial services
firm or bank. The Funds currently do not charge the account holder for wire
transfers. The account holder is responsible for any charges imposed by the
account holder's firm or bank. There is a $1,000 wire redemption minimum
(including any contingent deferred sales charge). To change the designated
account to receive wire redemption proceeds, send a written request to the
Shareholder Service Agent with signatures guaranteed as described above or
contact the firm through which shares of the Fund were purchased. Shares
purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may not be
redeemed by wire transfer until such shares have been owned for at least 10
days. Account holders may not use this privilege to redeem shares held in
certificated form. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the expedited
redemption privilege. The Funds reserve the right to terminate or modify this
privilege at any time.
CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and .50% if they
are redeemed during the second year following purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a) or a participant-directed non-qualified
46
<PAGE> 54
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under a Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the commission applicable to such Large Order NAV Purchase.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED
AFTER SALES
PURCHASE CHARGE
- ---------- ----------
<S> <C>
First................................................................. 4%
Second................................................................ 3%
Third................................................................. 3%
Fourth................................................................ 2%
Fifth................................................................. 2%
Sixth................................................................. 1%
</TABLE>
Class B shareholders who originally acquired their shares as Initial Shares of
Kemper Portfolios, formerly known as Kemper Investment Portfolios, hold them
subject to the same CDSC schedule that applied when those shares were purchased,
as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEAR OF ---------------------------------------------------------------------------------------
REDEMPTION SHARES PURCHASED ON OR AFTER
AFTER SHARES PURCHASED ON OR AFTER FEBRUARY 1, 1991 AND BEFORE SHARES PURCHASED BEFORE
PURCHASE MARCH 1, 1993 MARCH 1, 1993 FEBRUARY 1, 1991
---------- ---------------------------- ---------------------------- -----------------------
<S> <C> <C> <C>
First................... 4% 3% 5%
Second.................. 3% 3% 4%
Third................... 3% 2% 3%
Fourth.................. 2% 2% 2%
Fifth................... 2% 1% 2%
Sixth................... 1% 1% 1%
</TABLE>
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below) and (d) for redemptions made
pursuant to any IRA systematic withdrawal based on the shareholder's life
expectancy including, but not limited to, substantially equal periodic payments
described in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2;
and (e) for redemptions to satisfy required minimum distributions after age
70 1/2 from an IRA account (with the maximum amount subject to this waiver being
based only upon the shareholder's Kemper IRA accounts). The contingent deferred
sales charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to
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10% of the total value of plan assets invested in a Fund), (c) redemptions in
connection with distributions qualifying under the hardship provisions of the
Internal Revenue Code and (d) redemptions representing returns of excess
contributions to such plans.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features--Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
and (g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and whose dealer of record has waived
the advance of the first year administrative service and distribution fees
applicable to such shares and agrees to receive such fees quarterly.
CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of a Fund's Class B shares and that 16 months
later the value of the shares has grown by $1,000 through reinvested dividends
and by an additional $1,000 in appreciation to a total of $12,000. If the
investor were then to redeem the entire $12,000 in share value, the contingent
deferred sales charge would be payable only with respect to $10,000 because
neither the $1,000 of reinvested dividends nor the $1,000 of share appreciation
is subject to the charge. The charge would be at the rate of 3% ($300) because
it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 1997 will be eligible for the second year's charge if redeemed on or
after December 1, 1998. In the event no specific order is requested, the
redemption will be made first from shares representing reinvested dividends and
then from the earliest purchase of shares. KDI receives any contingent deferred
sales charge directly.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of a Fund
or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
a Fund or of the other listed Kemper Mutual Funds. A shareholder of a Fund or
other Kemper Mutual Fund who redeems Class A shares purchased under the Large
Order NAV Purchase Privilege (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares") or Class B shares or Class C shares and incurs a
contingent deferred sales charge may reinvest up to the full amount redeemed at
net asset value at the time of the reinvestment in Class A shares, Class B
shares or Class C shares, as the case may be, of a Fund or of other Kemper
Mutual Funds. The amount of any contingent deferred sales charge also will be
reinvested. These reinvested shares will retain their original cost and purchase
date for purposes of the contingent deferred sales charge. Also, a holder of
Class B shares who has redeemed shares may reinvest up to the full amount
redeemed, less any applicable contingent deferred sales charge that may have
been imposed upon the redemption of such shares, at net asset value in Class A
shares of a Fund or of the other Kemper Mutual Funds listed under "Special
Features--Class A Shares--Combined Purchases." Purchases through
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the reinvestment privilege are subject to the minimum investment requirements
applicable to the shares being purchased and may only be made for Kemper Mutual
Funds available for sale in the shareholder's state of residence as listed under
"Special Features--Exchange Privilege." The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the redemption. If a loss is realized on the redemption of a Funds'
shares, the reinvestment in the same Fund may be subject to the "wash sale"
rules if made within 30 days of the redemption, resulting in a postponement of
the recognition of such loss for federal income tax purposes. The reinvestment
privilege may be terminated or modified at any time.
SPECIAL FEATURES
CLASS A SHARES -- COMBINED PURCHASES. Each Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Diversified Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Adjustable Rate
U.S. Government Fund, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper
Target Equity Fund (series are subject to a limited offering period), Kemper
Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund, Kemper U.S.
Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper Value Fund,
Inc., Kemper Value+Growth Fund, Kemper Quantitative Equity Fund, Kemper Horizon
Fund, Kemper Europe Fund, Kemper Asian Growth Fund and Kemper Aggressive Growth
Fund ("Kemper Mutual Funds"). Except as noted below, there is no combined
purchase credit for direct purchases of shares of Zurich Money Funds, Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"),
which are not considered "Kemper Mutual Funds" for purposes hereof. For purposes
of the Combined Purchases feature described above as well as for the Letter of
Intent and Cumulative Discount features described below, employer sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent may include: (a) Money Market Funds as
"Kemper Mutual Funds," (b) all classes of shares of any Kemper Mutual Fund, and
(c) the value of any other plan investments, such as guaranteed investment
contracts and employer stock, maintained on such subaccount record keeping
system.
CLASS A SHARES -- LETTER OF INTENT. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation credit" toward the completion of the Letter, but
no price adjustment will be made on such shares. Only investments in Class A
shares of a Fund are included for this privilege.
CLASS A SHARES -- CUMULATIVE DISCOUNT. Class A shares of a Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a Fund being purchased, the value of all Class A shares of
the above mentioned Kemper Mutual Funds (computed at the maximum offering price
at the time of the purchase for which the discount is applicable) already owned
by the investor.
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CLASS A SHARES -- AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.
CLASS A SHARES. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI.
Class A shares of a Fund purchased under the Large Order NAV Purchase Privilege
may be exchanged for Class A shares of another Kemper Mutual Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of the contingent deferred sales charge.
CLASS B SHARES. Class B shares of a Fund and Class B shares of any other Kemper
Mutual Fund listed under "Special Features --Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class B
shares may be exchanged without any contingent deferred sales charge being
imposed at the time of exchange. For purposes of the contingent deferred sales
charge that may be imposed upon the redemption of the Class B shares received on
exchange, amounts exchanged retain their original cost and purchase date.
CLASS C SHARES. Class C shares of a Fund and Class C shares of any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class C
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For determining whether there is a contingent deferred
sales charge that may be imposed upon the redemption of the Class C shares
received by exchange, they retain the cost and purchase date of the shares that
were originally purchased and exchanged.
GENERAL. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15 Day Hold Policy"). For purposes of
determining whether the 15 Day Hold Policy applies to a particular exchange, the
value of the shares to be exchanged shall be computed by aggregating the value
of shares being exchanged for all accounts under common control, direction, or
advice, including without limitation, accounts administered by a financial
services firm offering market timing, asset allocation or similar services. The
total value of shares being exchanged must at least equal the minimum investment
requirement of the Kemper Fund into which they are being exchanged. Exchanges
are made based on relative dollar values of the shares involved in the exchange.
There is no service fee for an exchange; however, dealers or other firms may
charge for their services in effecting exchange transactions. Exchanges will be
effected by redemption of shares of the fund held and purchase of shares of the
other fund. For federal income tax purposes, any such exchange constitutes a
sale upon which a gain or loss may be realized, depending upon whether the value
of the shares being exchanged is more or less than the shareholder's adjusted
cost basis of such shares. Shareholders interested in exercising the exchange
privilege may obtain prospectuses of the other funds from dealers, other firms
or KDI. Exchanges may be accomplished by a written request to KSvC, Attention:
Exchange Department, P.O. Box 419557, Kansas City, Missouri 64141-6557, or by
telephone if the
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shareholder has given authorization. Once the authorization is on file, the
Shareholder Service Agent will honor requests by telephone at 1-800-621-1048,
subject to the limitations on liability under "Redemption or Repurchase of
Shares -- General." Any share certificates must be deposited prior to any
exchange of such shares. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the telephone
exchange privilege. The exchange privilege is not a right and may be suspended,
terminated or modified at any time. Except as otherwise permitted by applicable
regulations, 60 days' prior written notice of any termination or material change
will be provided. Exchanges may only be made for funds that are available for
sale in the shareholder's state of residence. Currently, Tax-Exempt California
Money Market Fund is available for sale only in California and the portfolios of
Investors Municipal Cash Fund are available for sale only in certain states.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the other
Kemper Fund. Exchanges are subject to the terms and conditions described above
under "Exchange Privilege" except that the $1,000 minimum investment requirement
for the Kemper Fund acquired on exchange is not applicable. This privilege may
not be used for the exchange of shares held in certificated form.
EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in a Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from ANY PERSON to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling
Shareholder Services toll free at 1-800-621-1048 Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to KSvC, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination will become effective as soon as the Shareholder Service
Agent has had a reasonable time to act upon the request. EXPRESS-Transfer cannot
be used with passbook savings accounts or for tax-deferred plans such as
Individual Retirement Accounts ("IRAs").
BANK DIRECT DEPOSIT. A shareholder may purchase additional shares of a Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, investments are made automatically (minimum $50 maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder
authorizes the Fund and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to KSvC, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination by a shareholder will become effective within thirty
days after the Shareholder Service Agent has received the request. A Fund may
immediately terminate a shareholder's Plan in the event that any item is unpaid
by the shareholder's financial institution. The Funds may terminate or modify
this privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in a Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in a Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) A Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
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SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of a Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount up to $50,000 to be paid to the owner or
a designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to Individual Retirement Accounts. The
minimum periodic payment is $100. The maximum annual rate at which Class B
shares may be redeemed (and Class A shares purchased under the Large Order NAV
Purchase Privilege and Class C shares in their first year following the
purchase) under a systematic withdrawal plan is 10% of the net asset value of
the account. Shares are redeemed so that the payee will receive payment
approximately the first of the month. Any income and capital gain dividends will
be automatically reinvested at net asset value. A sufficient number of full and
fractional shares will be redeemed to make the designated payment. Depending
upon the size of the payments requested and fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, a Fund will not knowingly permit additional investments of less
than $2,000 if the investor is at the same time making systematic withdrawals.
KDI will waive the contingent deferred sales charge on redemptions of Class A
shares purchased under the Large Order NAV Purchase Privilege, Class B shares
and Class C shares made pursuant to a systematic withdrawal plan. The right is
reserved to amend the systematic withdrawal plan on 30 days' notice. The plan
may be terminated at any time by the investor or the Funds.
TAX-SHELTERED RETIREMENT PLANS. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
- - Individual Retirement Accounts ("IRAs") with IFTC as custodian. This includes
Savings Incentive Match Plan for Employees of Small Employers ("SIMPLE"), IRA
accounts and Simplified Employee Pension Plan ("SEP") IRA accounts and
prototype documents.
- - 403(b)(7) Custodial Accounts also with IFTC as custodian. This type of plan is
available to employees of most non-profit organizations.
- - Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. The brochures for plans with IFTC as custodian describe the current
fees payable to IFTC for its services as custodian. Investors should consult
with their own tax advisers before establishing a retirement plan.
PERFORMANCE
A Fund may advertise several types of performance information for a class of
shares, including "yield" and "average annual total return" and "total return."
Performance information will be computed separately for Class A, Class B and
Class C shares. Each of these figures is based upon historical results and is
not representative of the future performance of any class of a Fund. A Fund with
fees or expenses being waived or absorbed by ZKI may also advertise performance
information before and after the effect of the fee waiver or expense absorption.
A Fund's yield is a measure of the net investment income per share earned over a
specific one month or 30-day period expressed as a percentage of the maximum
offering price of the Fund's shares at the end of the period. Yield is an
annualized figure, which means that it is assumed that a Fund generates the same
level of net
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investment income over a one year period. Net investment income is assumed to be
compounded semiannually when it is annualized.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in a Fund
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter (or
if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Fund for performance purposes). Average annual
total return figures represent the average annual percentage change over the
period in question. Total return figures represent the aggregate percentage or
dollar value change over the period in question.
A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged bond indexes including, but not limited to, the Salomon
Brothers High Grade Corporate Bond Index, the Lehman Brothers Adjustable Rate
Index, the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Government/
Corporate Bond Index, the Salomon Brothers Long-Term High Yield Index, the
Salomon Brothers 30 Year GNMA Index and the Merrill Lynch Market Weighted Index
and may also be compared to the performance of other mutual funds or mutual fund
indexes with similar objectives and policies as reported by independent mutual
fund reporting services such as Lipper Analytical Services, Inc. ("Lipper").
Lipper performance calculations are based upon changes in net asset value with
all dividends reinvested and do not include the effect of any sales charges.
Information may be quoted from publications such as MORNINGSTAR, INC., THE WALL
STREET JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE,
USA TODAY, INSTITUTIONAL INVESTOR and REGISTERED REPRESENTATIVE. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit and other bank products, money market
funds and U.S. Treasury obligations. Bank product performance may be based upon,
among other things, the BANK RATE MONITOR National Index(TM) or various
certificate of deposit indexes. Money market fund performance may be based upon,
among other things, the IBC/Donoghue's Money Fund Report(R) or Money Market
Insight(R), reporting services on money market funds. Performance of U.S.
Treasury obligations may be based upon, among other things, various U.S.
Treasury bill indexes. Certain of these alternative investments may offer fixed
rates of return and guaranteed principal and may be insured. Economic indicators
may include, without limitation, indicators of market rate trends and cost of
funds, such as Federal Home Loan Bank Board 11th District Cost of Funds Index
("COFI").
A Fund may depict the historical performance of the securities in which the Fund
may invest over periods reflecting a variety of market or economic conditions
either alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A Fund may also describe its
portfolio holdings and depict its size or relative size compared to other mutual
funds, the number and make-up of its shareholder base and other descriptive
factors concerning the Fund.
The yield or price volatility of a Fund (particularly the Adjustable Rate Fund)
may be compared to various securities, such as U.S. Government Securities, or
indexes, such as the COFI referred to above or the Constant Maturity Treasury
Index ("CMT") published by the Federal Reserve Board. A Fund may include in its
sales literature and shareholder reports a quotation of the current
"distribution rate" for the Fund. Distribution rate is simply a measure of the
level of dividends distributed for a specified period. It differs from yield,
which is a measure of the income actually earned by the Fund's investments, and
from total return, which is a measure of the income actually earned by, plus the
effect of any realized and unrealized appreciation or depreciation of, such
investments during the period. Distribution rate is, therefore, not intended to
be a complete measure of performance. Distribution rate may sometimes be greater
than yield since, for instance, it may include gains from the sale of options or
other short-term and possibly long-term gains (which may be non-recurring) and
may not
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include the effect of amortization of bond premiums. As reflected under
"Investment Objectives, Policies and Risk Factors--Additional Investment
Information," option writing can limit the potential for capital appreciation.
Class A shares of each Fund are sold at net asset value plus a maximum sales
charge of 4.5% of the offering price (3.5% for the Adjustable Rate and
Short-Intermediate Government Funds). While the maximum sales charge is normally
reflected in a Fund's Class A performance figures, certain total return
calculations may not include such charge and those results would be reduced if
it were included. Class B shares and Class C shares are sold at net asset value.
Redemptions of Class B shares within the first six years after purchase may be
subject to a contingent deferred sales charge that ranges from 4% during the
first year to 0% after six years. Redemption of Class C shares within the first
year after purchase may be subject to a 1% contingent deferred sales charge.
Average annual total return figures do, and total return figures may, include
the effect of the contingent deferred sales charge for the Class B shares and
Class C shares that may be imposed at the end of the period in question.
Performance figures for the Class B shares and Class C shares not including the
effect of the applicable contingent deferred sales charge would be reduced if it
were included.
Each Fund's returns and net asset value will fluctuate and shares of a Fund are
redeemable by an investor at the then current net asset value, which may be more
or less than original cost. Redemption of Class B shares and Class C shares may
be subject to a contingent deferred sales charge as described above. Additional
information concerning each Fund's performance appears in the Statement of
Additional Information. Additional information about each Fund's performance
also appears in its Annual Report to Shareholders, which is available without
charge from the applicable Fund.
CAPITAL STRUCTURE
The Adjustable Rate, Diversified, Government, Income and Capital Funds, and High
Yield Series are open-end management investment companies, organized as separate
business trusts under the laws of Massachusetts. The Adjustable Rate Fund was
organized as a business trust under the laws of Massachusetts on May 28, 1987.
Prior to January 1, 1992, the Fund was known as "Kemper Enhanced Government
Income Fund." The Diversified Fund was organized as a business trust under the
laws of Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
Option Income Fund, Inc., a Maryland corporation organized in 1977. Prior to
February 1, 1989, the Fund was known as "Kemper Option Income Fund." The
Government Fund was organized as a business trust under the laws of
Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
U.S. Government Securities Fund, Inc., a Maryland corporation (formerly known as
Kemper Fund For Government Guaranteed Securities, Inc.) organized in 1980 as
successor to a Pennsylvania business trust organized in 1977. The High Yield and
Opportunity Funds are separate series, or "Portfolios," of Kemper High Yield
Series. The High Yield Series was organized as a business trust under the laws
of Massachusetts on October 24, 1985 with a single portfolio. Effective January
31, 1986, that Trust, pursuant to a reorganization succeeded to the assets and
liabilities of Kemper High Yield Fund, Inc., a Maryland corporation organized in
1977. Prior to October 1, 1997, the Trust was known as Kemper High Yield Fund.
The Income and Capital Fund was organized as a business trust under the laws of
Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
Income and Capital Preservation Fund, Inc., a Maryland corporation organized in
1972. The Mortgage and Short-Intermediate Government Funds are separate series,
or "Portfolios", of Kemper Portfolios ("KP"), an open-end management investment
company organized as a business trust under the laws of Massachusetts on August
9, 1985. Effective November 20, 1987, KP pursuant to a reorganization succeeded
to the assets and liabilities of Investment Portfolios, Inc., a Maryland
corporation organized on March 26, 1982. After such reorganization, KP was known
as Investment Portfolios until February 1, 1991, and thereafter until May 28,
1994, as Kemper Investment Portfolios, when the name of KP became "Kemper
Portfolios." Until December 1, 1989, the Mortgage Fund was known as the
"Government Plus Portfolio" and prior to May 28, 1994, the Mortgage
54
<PAGE> 62
Fund was known as the "Government Portfolio." Prior to May 28, 1994, the
Short-Intermediate Government Fund was known as the Short-Intermediate
Government Portfolio.
Each Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having no par value, which may be divided by
the Board of Trustees into classes of shares. The Board of Trustees of each
Trust may authorize the issuance of additional classes and additional Portfolios
if deemed desirable, each with its own investment objective, policies and
restrictions. Since the Trusts may offer multiple Portfolios, each is known as a
"series company." Shares of a Portfolio have equal noncumulative voting rights
and equal rights with respect to dividends, assets and liquidation of such
Portfolio and are subject to any preferences, rights or privileges of any
classes of shares of the Portfolio. Currently, each Portfolio offers four
classes of shares. These are Class A, Class B and Class C shares, as well as
Class I shares, which have different expenses, that may affect performance, and
are available for purchase exclusively by the following investors: (a)
tax-exempt retirement plans of ZKI and its affiliates; and (b) the following
investment advisory clients of ZKI and its investment advisory affiliates that
invest at least $1 million in a Portfolio: (1) unaffiliated benefit plans, such
as qualified retirement plans (other than individual retirement accounts and
self-directed retirement plans); (2) unaffiliated banks and insurance companies
purchasing for their own accounts; and (3) endowment funds of unaffiliated
non-profit organizations. Shares of each Portfolio have equal noncumulative
voting rights except that Class B and Class C shares have separate and exclusive
voting rights with respect to each Portfolio's Rule 12b-1 Plan. Shares of each
class also have equal rights with respect to dividends, assets and liquidation
subject to any preferences (such as resulting from different Rule 12b-1
distribution fees), rights or privileges of any classes of shares of a
Portfolio. Shares of each Portfolio are fully paid and nonassessable when
issued, are transferable without restriction and have no preemptive or
conversion rights. The Trusts are not required to hold annual shareholder
meetings and do not intend to do so. However, they will hold special meetings as
required or deemed desirable for such purposes as electing trustees, changing
fundamental policies or approving an investment management agreement. Subject to
the Agreement and Declaration of Trust of each Trust, shareholders may remove
trustees. If shares of more than one Portfolio for any Trust are outstanding,
shareholders will vote by Portfolio and not in the aggregate or by class except
when voting in the aggregate is required under the 1940 Act, such as for the
election of trustees, or when voting by class is appropriate.
55
<PAGE> 63
APPENDIX--PORTFOLIO COMPOSITION OF HIGH YIELD BONDS
The table below reflects the composition by quality rating of the portfolios of
the Diversified, High Yield and Opportunity Funds. Percentages for each Fund
reflect the net asset weighted average of the percentage for each category on
the last day of each month in the twelve month period ended October 31, 1997
(the one-month period for the Opportunity Fund). The table reflects the
percentage of total net assets represented by fixed income securities rated by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P"), by unrated fixed income securities and by other assets. The percentage
shown reflects the higher of the Moody's or S&P rating. U.S. Government
securities, whether or not rated, are reflected as Aaa and AAA (highest
quality). Cash equivalents include money market instruments, repurchase
agreements, net payables and receivables, treasuries with a maturity of less
than one year and cash. Other assets include options, financial futures
contracts and equity securities. As noted under "Investment Objectives, Policies
and Risk Factors" the Diversified, High Yield and Opportunity Funds invest in
high yielding, fixed income securities without relying upon published ratings.
The allocations in the table are not necessarily representative of the
composition of the portfolios at other times. Portfolio composition will change
over time.
END OF THE MONTH COMPOSITION OF PORTFOLIO BY QUALITY AS AN AVERAGE PERCENTAGE OF
NET ASSETS (NOVEMBER 1, 1996-OCTOBER 31, 1997)
<TABLE>
<CAPTION>
MOODY'S/S&P RATING DIVERSIFIED HIGH YIELD OPPORTUNITY GENERAL DEFINITION OF
CATEGORY FUND FUND FUND BOND QUALITY
------------------ ----------- ---------- ----------- ---------------------
<S> <C> <C> <C> <C>
Cash Equivalents........................ (1)% 5% 12%
Aaa/AAA................................. 50 2 0 Highest quality
Aa/AA................................... 0 0 0 High quality
A/A..................................... 3 0 0 Upper medium grade
Baa/BBB................................. 4 1 0 Medium grade
Ba/BB................................... 11 16 8 Some speculative elements
B/B..................................... 27 68 75 Speculative
Caa/CCC................................. 1 3 0 More speculative
Ca/CC, C/C.............................. 0 0 0 Very speculative
D....................................... 0 0 0 In default
Not Rated............................... 3 4 4
Other Assets............................ 0 1 1
--- --- ---
Net Assets.............................. 100% 100% 100%
</TABLE>
The description of each bond quality category set forth in the table above is
intended to be a general guide and not a definitive statement as to how Moody's
and S&P define such rating category. A more complete description of the rating
categories is set forth under "Appendix--Ratings of Investments" in the
Statement of Additional Information. The ratings of Moody's and S&P represent
their opinions as to the quality of the securities that they undertake to rate.
It should be emphasized, however, that ratings are relative and subjective and
are not absolute standards of quality.
56
<PAGE> 64
PROSPECTUS
KEMPER INCOME FUNDS
DECEMBER 30, 1997
--------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND
KEMPER DIVERSIFIED INCOME FUND
KEMPER U.S. GOVERNMENT
SECURITIES FUND
KEMPER HIGH YIELD FUND
KEMPER HIGH YIELD
OPPORTUNITY FUND
KEMPER INCOME AND CAPITAL
PRESERVATION FUND
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE
GOVERNMENT FUND
--------------
KEMPER
[KEMPER LOGO]
[KEMPER LOGO] Investment Manager
Zurich Kemper Investments, Inc.
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
KFIF-1 (12/97) [RECYCLED PAPER LOGO]
KDI712237
<PAGE> 65
KEMPER DIVERSIFIED INCOME FUND
CROSS-REFERENCE SHEET
BETWEEN ITEMS ENUMERATED IN PART B
OF FORM N-1A AND STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
ITEM NUMBER LOCATION IN STATEMENT OF
OF FORM N-1A ADDITIONAL INFORMATION
---------------------------------------------
<S> <C> <C>
10. Cover Page............................... Cover Page
11. Table of Contents........................ Table of Contents
12. General Information and History.......... Inapplicable
13. Investment Objectives and Policies....... Investment Policies and Techniques;
Investment Restrictions
14. Management of the Fund................... Investment Manager and Underwriter;
Officers and Trustees
15. Control Persons and Principal Holders of
Securities............................... Officers and Trustees
16. Investment Advisory and Other Services... Investment Manager and Underwriter;
Officers and Trustees
17. Brokerage Allocation and Other
Practices................................ Portfolio Transactions
18. Capital Stock and Other Securities....... Shareholder Rights
19. Purchase, Redemption and Pricing of
Securities Being Offered................. Purchase and Redemption of Shares
20. Tax Status............................... Dividends and Taxes
21. Underwriters............................. Investment Manager and Underwriter
22. Calculations of Performance Data......... Performance
23. Financial Statements..................... Financial Statements
</TABLE>
<PAGE> 66
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 30, 1997
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND (THE "ADJUSTABLE
RATE FUND")
KEMPER DIVERSIFIED INCOME FUND (THE "DIVERSIFIED FUND")
KEMPER U.S. GOVERNMENT SECURITIES FUND (THE "GOVERNMENT FUND")
KEMPER HIGH YIELD FUND (THE "HIGH YIELD FUND")
KEMPER HIGH YIELD OPPORTUNITY FUND (THE "OPPORTUNITY FUND")
KEMPER INCOME AND CAPITAL PRESERVATION FUND (THE "INCOME AND
CAPITAL FUND")
KEMPER U.S. MORTGAGE FUND (THE "MORTGAGE FUND")
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND (THE "SHORT-INTERMEDIATE
GOVERNMENT 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 December 30, 1997. The prospectus may be obtained without charge
from the Funds.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Restrictions..................................... B-1
Investment Policies and Techniques.......................... B-10
Portfolio Transactions...................................... B-17
Investment Manager and Underwriter.......................... B-19
Purchase and Redemption of Shares........................... B-26
Dividends and Taxes......................................... B-27
Performance................................................. B-29
Officers and Trustees....................................... B-44
Shareholder Rights.......................................... B-50
Opportunity Fund -- Report of Independent Auditors
(September 18, 1997)...................................... B-52
Opportunity Fund -- Statement of Net Assets (September 18,
1997)..................................................... B-53
Appendix--Rating of Investments............................. B-54
</TABLE>
The financial statements appearing in each Fund's 1997 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.
KFIF-13 12/97 (RECYCLE LOGO) printed on recycled paper
<PAGE> 67
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental investment restrictions which,
together with the investment objective and fundamental policies of such Fund,
cannot be changed without approval of a majority of its outstanding voting
shares. As defined in the Investment Company Act of 1940, 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.
THE ADJUSTABLE RATE FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of the total value of the Fund's assets would be invested in
securities of that issuer.
(2) Purchase more than 10% of any class of voting securities of any issuer.
(3) Make loans to others provided that the Fund may purchase debt obligations or
repurchase agreements and it may lend its securities in accordance with its
investment objective and policies.
(4) 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 the 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. The Fund will not
borrow for leverage purposes and will not purchase securities or make
investments while borrowings are outstanding.
(5) Pledge, hypothecate, mortgage or otherwise encumber more than 15% of its
total assets and then only to secure borrowings permitted by restriction 4
above. (The collateral arrangements with respect to options, financial futures
and delayed delivery transactions and any margin payments in connection
therewith are not deemed to be pledges or other encumbrances.)
(6) Purchase 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.
(7) 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.
(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 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.
(9) Purchase securities (other than securities of the U.S. Government, its
agencies or instrumentalities including collateralized obligations thereof) if
as a result of such purchase 25% or more of the Fund's total assets would be
invested in any one industry.
(10) Invest in commodities or commodity futures contracts, although it may buy
or sell financial futures contracts and options on such contracts; or in real
estate, although it may invest in securities which are secured by real estate
and securities of issuers which invest or deal in real estate.
B-1
<PAGE> 68
(11) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(12) Issue senior securities except as permitted under the Investment Company
Act of 1940.
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 4 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:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) Invest more than 15% of its net assets in illiquid securities.
THE DIVERSIFIED FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) With respect to 75% of the Fund's total assets, purchase securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in securities of that issuer, or (b) the
Fund would hold more than 10% of the outstanding voting securities of that
issuer.
(2) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited and the Fund
may lend its portfolio securities as described in the prospectus.
(3) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or 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) Engage in margin purchases except to obtain such short-term credits as may
be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with financial futures and options transactions;
nor may the Fund make short sales of securities or maintain a short position
unless, at all times when a short position is open, the Fund owns an equal
amount of such securities or securities convertible into or exchangeable for
securities, without payment of additional consideration, which are equal in
amount to and of the same issue as the securities sold short and such securities
are not subject to outstanding call options, and unless not more than 10% of the
Fund's net assets is held as collateral for such sales at any one time.
(Management does not intend to make such sales except for the purpose of
deferring realization of gain or loss for federal income tax purposes.)
(5) 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.
(6) Concentrate more than 25% of the value of its assets in any one industry.
Water, communications, electric and gas utilities shall each be considered a
separate industry.
(7) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options of such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
B-2
<PAGE> 69
(8) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(9) Issue senior securities except as permitted under the Investment Company Act
of 1940.
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
Diversified Fund may not:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) 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.
(iii) Invest more than 15% of its net assets in illiquid securities.
THE GOVERNMENT FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase any securities other than obligations issued or guaranteed by the
United States Government or its agencies, some of which may be subject to
repurchase agreements, except that the Fund may engage in options and financial
futures transactions.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the Fund's total assets would be invested in securities
of that issuer.
(3) 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.
(4) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts; or in real
estate (including real estate limited partnerships), although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate including real estate investment trusts.
(5) Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the value of the Fund's assets at the time of such
borrowing; or 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. (This borrowing provision is
not for investment leverage, but solely to facilitate management of the
portfolio by enabling the Fund to meet redemption requests where the liquidation
of portfolio securities is deemed to be disadvantageous or inconvenient.)
Borrowings may take the form of a sale of portfolio securities accompanied by a
simultaneous agreement as to their repurchase.
(6) Make loans, except that the Fund may purchase or hold debt obligations in
accordance with the investment restrictions set forth in paragraph 1 above and
may enter into repurchase agreements for such securities, and may lend its
portfolio securities against collateral consisting of cash, or securities issued
or guaranteed by the U.S. Government or its agencies, which is equal at all
times to at least 100% of the value of the securities loaned.
(7) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the disposition of portfolio
securities.
B-3
<PAGE> 70
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 Government Fund has adopted the following non-fundamental restriction
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.
THE HIGH YIELD FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) With respect to 75% of the Fund's total assets, purchase securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in securities of that issuer, or (b) the
Fund would hold more than 10% of the outstanding voting securities of that
issuer.
(2) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objectives and policies are not prohibited and it may
lend its securities as discussed under "Investment Objectives, Policies and Risk
Factors -- Additional Investment Information" in the prospectus.
(3) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or 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) 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) 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 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.
(7) Concentrate more than 25% of the value of its assets in any one industry.
Water, communications, electric and gas utilities shall each be considered a
separate industry.
(8) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(9) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
B-4
<PAGE> 71
(10) Issue senior securities except as permitted under the Investment Company
Act of 1940.
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:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) 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.
(iii) Invest more than 15% of its net assets in illiquid securities.
THE INCOME AND CAPITAL FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Invest in securities other than those specified under "Investment
Objectives, Policies and Risk Factors" 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 "Investment Objectives,
Policies and Risk Factors" after purchase by the Fund.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States or Canadian governments, their agencies or
instrumentalities) if, as a result, more than 5% of the Fund's total assets
would be invested in securities of that issuer.
(3) 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.
(4) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited and the Fund
may lend its portfolio securities as described under "Investment Objectives,
Policies and Risk Factors -- Additional Investment Information" in the
prospectus.
(5) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or 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) 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.
(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.
(8) Concentrate more than 25% of the value of its assets in any one industry.
Water, communications, electric and gas utilities shall each be considered a
separate industry.
B-5
<PAGE> 72
(9) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(10) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(11) Issue senior securities except as permitted under the Investment Company
Act of 1940.
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:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
(iii) Invest more than 15% of its net assets in illiquid securities.
THE MORTGAGE FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities or make investments other than in accordance with its
investment objective and policies.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of the value of the Fund's net assets would be invested in
securities of that issuer.
(3) 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.
(4) 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.
(5) 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.
(6) Make loans to others (except through the purchase of debt obligations or
repurchase agreements or by lending its portfolio securities in accordance with
its investment objective and policies).
(7) 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 (any such borrowings under this section will not be collateralized). If,
for any reason, the current value of the 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 business days, reduce its indebtedness to the extent
necessary. [The Fund will not borrow for leverage purposes, and while borrowings
are outstanding securities will not be purchased.]
(8) Concentrate more than 25% of the Fund's net assets in any one industry.
(9) 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.
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(10) 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. [Repurchase
agreements maturing in more than 7 days are considered illiquid for purposes of
this restriction.]
(11) Invest for the purpose of exercising control or management of another
issuer.
(12) 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.
(13) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
(14) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(15) Issue senior securities as defined in the Investment Company Act of 1940.
(16) 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.
(17) 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.
(18) Invest in commodities or commodity futures contracts although the Fund may
buy or sell financial futures contracts and options on such contracts; or in
real estate, although it may invest in securities which are secured by real
estate and securities of issuers which invest or deal in real estate.
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 OPPORTUNITY FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) With respect to 75% of the Fund's total assets, purchase securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in securities of that issuer, or (b) the
Fund would hold more than 10% of the outstanding voting securities of that
issuer.
(2) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objectives and policies are not prohibited and it may
lend its securities as discussed under "Investment Objectives, Policies and Risk
Factors -- Additional Investment Information" in the prospectus.
(3) Borrow money except (i) for leverage purposes, but not for more than 20% of
the Fund's total assets, including the amount borrowed, and (ii) 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, including the amount borrowed, in
order to meet redemption requests without immediately selling any portfolio
securities. The maximum amount that the Fund may borrow is one-third of the
value of its assets (including the amount borrowed). If, for any reason, the
current value of the Fund's total assets falls below an amount equal to three
times the amount of its indebtedness
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from money borrowed, the Fund will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary.
(4) Engage in margin purchases except to obtain such short-term credits as may
be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with financial futures and options transactions;
nor may the Fund make short sales of securities or maintain a short position
unless, at all times when a short position is open, the Fund owns an equal
amount of such securities or securities convertible into or exchangeable for
securities, without payment of additional consideration, which are equal in
amount to and of the same issue as the securities sold short and such securities
are not subject to outstanding call options, and unless not more than 10% of the
Fund's net assets is held as collateral for such sales at any one time.
(Management does not intend to make such sales except for the purpose of
deferring realization of gain or loss for federal income tax purposes.)
(5) Invest 25% or more of its total assets in any one industry.
(6) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(7) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(8) Issue senior securities except as permitted under the Investment Company Act
of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation except as
otherwise provided for in restriction number (3) above. The Fund has adopted the
following non-fundamental restrictions, which may be changed by the Board of
Trustees without shareholder approval. The Opportunity Fund may not:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) 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.
(iii) Invest more than 15% of its net assets in illiquid securities.
(iv) 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.
THE SHORT-INTERMEDIATE GOVERNMENT FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities or make investments other than in accordance with its
investment objective and policies.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of the value of the Fund's net assets would be invested in
securities of that issuer.
(3) 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.
(4) Make loans to others (except through the purchase of debt obligations or
repurchase agreements or by lending its portfolio securities in accordance with
its investment objective and policies).
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(5) 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 (any such borrowings under this section will not be collateralized). If,
for any reason, the current value of the 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 business days, reduce its indebtedness to the extent
necessary. [The Fund will not borrow for leverage purposes, and while borrowings
are outstanding securities will not be purchased.]
(6) Concentrate more than 10% of the Fund's net assets in any one industry.
(7) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(8) Issue senior securities except as permitted under the Investment Company Act
of 1940.
(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) Engage in put or call option transactions; however, the Fund may write
(sell) put or call options on up to 25% of its net assets and may purchase put
or call options if no more than 5% of its net assets would be invested in
premiums on put and call options, combinations thereof or similar options; and
the Fund may buy and sell options on financial futures contracts.
(11) Invest in commodities or commodity futures contracts, although it may buy
or sell financial futures contracts and options on such contracts; or in real
estate, although it may invest in securities which are secured by real estate
and securities of issuers which invest or deal in real estate.
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 Short-
Intermediate Government Fund may not:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets. This
restriction does not apply to the Fund to the extent that certain collateralized
obligations may be considered to be issued by an "investment company" (see
"Investment Policies and Techniques --Collateralized Obligations").
(iii) Invest more than 15% of its net assets in illiquid securities.
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INVESTMENT POLICIES AND TECHNIQUES
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.
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 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.
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OVER-THE-COUNTER OPTIONS. As indicated in the prospectus (see "Investment
Objectives, Policies and Risk Factors"), the Funds may deal in over-the-counter
traded options ("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. The Funds have adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse effect of such
transactions upon the liquidity of the Funds' portfolios. A brief description of
such procedures is set forth below.
A Fund will only engage in OTC options transactions with dealers that have been
specifically approved by the investment manager pursuant to procedures adopted
by the Fund's Board of Trustees. 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 above 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.
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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 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
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<PAGE> 79
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 above. 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 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.
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.
REGULATORY RESTRICTIONS. To the extent required to comply with applicable
regulation, 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.
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<PAGE> 80
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.
FOREIGN CURRENCY OPTIONS. The Diversified, High Yield, 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 Diversified, High Yield, 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 Diversified, High Yield, 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. A Fund will not speculate in foreign
currency exchange.
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
B-14
<PAGE> 81
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 when 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. See "Foreign Currency Transactions" under
"Investment Objectives, Policies and Risk Factors--Additional Investment
Information" in the prospectus. A Fund segregates eligible securities to the
extent required by applicable regulation in connection with forward foreign
currency exchange contracts entered into for the purchase of foreign currency.
The Diversified, High Yield, Income and Capital and Opportunity Funds do not
intend to enter into forward contracts for the purchase of a foreign currency if
they would have more than 15% of the value of their total assets committed to
such contracts. A Fund generally will not enter into a forward contract with a
term longer than one year.
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. No Fund currently
intends to invest more than 5% of its total assets in collateralized obligations
that are collateralized by a pool of credit card or automobile receivables or
other types of assets rather than a pool of mortgages, Mortgage-Backed
Securities or U.S. Government Securities. Currently, none of the Funds intends
to invest more than 10% of its total assets in inverse floaters.
Payments of principal and interest on the underlying collateral securities are
not passed through directly to the holders of the collateralized obligations as
such. Collateralized obligations often are issued in two or more classes with
varying maturities and stated rates of interest. Because interest and principal
payments on the underlying securities are not passed through directly to holders
of collateralized obligations, such obligations of varying maturities may be
secured by a single portfolio or pool of securities, the payments on which are
used to pay interest on each class and to retire successive maturities in
sequence. These relationships may in effect "strip" the interest payments from
principal payments of the underlying securities and allow for the separate
purchase of either the interest or the principal payments, sometimes called
interest only (IO) and principal only (PO) securities. Collateralized
obligations are designed to be retired as the underlying securities are repaid.
In the event of prepayment on or call of such securities, the class of
collateralized obligation first to mature generally will be paid down first.
Therefore, although in most cases the issuer of collateralized obligations will
not supply additional collateral in the event of such prepayment, there will be
sufficient collateral to secure collateralized obligations that remain
outstanding. It is anticipated that no more than 10% of a Fund's total assets
will be invested in IO and PO securities. Governmentally-issued and
privately-issued IO's and PO's will be considered illiquid for purposes of a
Fund's limitation on illiquid securities, however, the Board of Trustees of a
Fund may adopt guidelines under which governmentally-issued IO's and PO's may be
determined to be liquid.
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
B-15
<PAGE> 82
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 (see "Investment
Objectives, Policies and Risk Factors--Additional Investment
Information--Collateralized Obligations" in the prospectus). 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 5% of its net assets
in zero coupon U.S. Government Securities during the current year.
SHORT SALES AGAINST-THE-BOX. The Adjustable Rate, Diversified 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. Each of the Adjustable Rate 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 Adjustable Rate 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 Adjustable
Rate 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
Adjustable Rate 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.
ADDITIONAL INFORMATION--ADJUSTABLE RATE SECURITIES. The interest rates paid on
the adjustable rate securities in which the Adjustable Rate 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
B-16
<PAGE> 83
maturity Treasury rates, the three-month Treasury bill rate, the 180-day
Treasury bill rate, rates on longer-term Treasury securities, the 11th District
Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the
one-month, three-month, six-month or one-year London Interbank Offered Rate
("LIBOR"), the prime rate of a specific bank or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th District Home
Loan Bank Cost of Funds index, tend to lag behind changes in market rate levels
and tend to be somewhat less volatile.
The Mortgage-Backed Securities either issued or guaranteed by GNMA, FHLMC or
FNMA ("Certificates") are called pass-through Certificates because a pro rata
share of both regular interest and principal payments (less GNMA's FHLMC's or
FNMA's fees and any applicable loan servicing fees), as well as unscheduled
early prepayments on the underlying mortgage pool, are passed through monthly to
the holder of the Certificate (i.e., the Fund). The principal and interest on
GNMA securities are guaranteed by GNMA and backed by the full faith and credit
of the U.S. Government. FNMA guarantees full and timely payment of all interest
and principal, while FHLMC guarantees timely payment of interest and ultimate
collection of principal. Mortgage-Backed Securities from FNMA and FHLMC are not
backed by the full faith and credit of the United States; however, they are
generally considered to offer minimal credit risks. The yields provided by these
Mortgage-Backed Securities have historically exceeded the yields on other types
of U.S. Government Securities with comparable maturities in large measure due to
the prepayment risk discussed below.
If prepayments of principal are made on the underlying mortgages during periods
of rising interest rates, the Adjustable Rate Fund generally will be able to
reinvest such amounts in securities with a higher current rate of return.
However, the Adjustable Rate 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 the
Adjustable Rate Fund to exceed the maximum allowable annual or lifetime reset
limits (or "cap rates") for a particular mortgage. Also, the Adjustable Rate
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 the Adjustable Rate 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 the Fund
believes make them attractive investments in seeking to accomplish the
Adjustable Rate Fund's objective.
PORTFOLIO TRANSACTIONS
Zurich Kemper Investments, Inc. ("ZKI") and its affiliates furnish investment
management services for the Kemper Funds, Zurich Money Market Funds and other
clients including affiliated insurance companies. Zurich Investment Management
Limited ("ZIML") is the sub-adviser for the Diversified, High Yield, Income and
Capital and Opportunity Funds. ZKI and its affiliates share some common research
and trading facilities. ZIML is the subadviser for other Kemper Funds. At times
investment decisions may be made to purchase or sell the same investment
securities for a Fund and for one or more of the other clients managed by ZKI or
its affiliates. When two or more of such clients are simultaneously engaged in
the purchase or sale of the same security through the
B-17
<PAGE> 84
same trading facility, the transactions are allocated as to amount and price in
a manner considered equitable to each.
National securities exchanges have established limitations governing the maximum
number of options in each class which may be written by a single investor or
group of investors acting in concert. An exchange may order the liquidation of
positions found to be in violation of these limits, and it may impose certain
other sanctions. These position limits may restrict the number of options a Fund
will be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the quantities or
prices of securities, options or futures contracts available to a Fund. On the
other hand, the ability of a Fund to participate in volume transactions may
produce better executions for a Fund in some cases.
ZKI and ZIML, in effecting purchases and sales of portfolio securities for the
account of a Fund, will implement each Fund's policy of seeking best execution
of orders. ZKI and ZIML may be permitted to pay higher brokerage commissions for
research services as described below. Consistent with this policy, orders for
portfolio transactions are placed with broker-dealer firms giving consideration
to the quality, quantity and nature of each firm's professional services, which
include execution, financial responsibility, responsiveness, clearance
procedures, wire service quotations and statistical and other research
information provided to a Fund and ZKI and its affiliates. Subject to seeking
best execution of an order, brokerage is allocated on the basis of all services
provided. Any research benefits derived are available for all clients of ZKI and
its affiliates. In selecting among firms believed to meet the criteria for
handling a particular transaction, ZKI and ZIML may give consideration to those
firms that have sold or are selling shares of the Funds and of other funds
managed by ZKI or its affiliates, as well as to those firms that provide market,
statistical and other research information to a Fund and ZKI and its affiliates,
although ZKI and ZIML are not authorized to pay higher commissions to firms that
provide such services, except as described below.
ZKI and ZIML may in certain instances be permitted to pay higher brokerage
commissions solely for receipt of market, statistical and other research
services as defined in Section 28(e) of the Securities Exchange Act of 1934 and
interpretations thereunder. Such services may include, among other things:
economic, industry or company research reports or investment recommendations;
computerized databases; quotation and execution equipment and software; and
research or analytical computer software and services. Where products or
services have a "mixed use," a good faith effort is made to make a reasonable
allocation of the cost of the products or services in accordance with the
anticipated research and non-research uses and the cost attributable to
non-research use is paid by ZKI or one of its affiliates in cash. Subject to
Section 28(e) and procedures adopted by the Board of Trustees of each Fund, a
Fund (except the Mortgage and Short-Intermediate Government Funds) could pay a
firm that provides research services commissions for effecting a securities
transaction for the Fund in excess of the amount other firms would have charged
for the transaction if ZKI or ZIML determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing firm viewed in terms either of a particular
transaction or ZKI's or ZIML's overall responsibilities to the Fund and other
clients. Not all of such research services may be useful or of value in advising
a particular Fund. Research benefits will be available for all clients of ZKI
and its affiliates. The investment management fee paid by a Fund to ZKI is not
reduced because these research services are received.
B-18
<PAGE> 85
The table below shows total brokerage commissions paid by each Fund for the last
three fiscal years and for the most recent fiscal year, the percentage thereof
that was allocated to firms based upon research information provided (except the
Opportunity Fund which commenced operations on October 1, 1997).
<TABLE>
<CAPTION>
ALLOCATED TO FIRMS
BASED ON
RESEARCH IN
FUND FISCAL 1997 FISCAL 1997 FISCAL 1996 FISCAL 1995
---- ----------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Adjustable Rate............................ $ 8,000 0% $ 29,000 $ 99,000
Diversified................................ $ 3,860,000 11% $ 2,927,000 $ 1,323,000
Government................................. $ 887,000 0% $ 806,000 $ 823,000
High Yield................................. $43,566,000 18% $46,280,000 $21,136,000
Income and Capital......................... $ 2,156,000 0% $ 1,624,000 $ 1,576,000
Mortgage................................... $ 570,000 0% $ 545,000 $ 1,598,000+
Short-Intermediate Government.............. $ 15,000 0% $ 44,000 $ 125,000+
</TABLE>
- ---------------
+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.
The change in portfolio turnover rates during the last two fiscal years for the
Income and Capital Fund (see "Financial Highlights" in the prospectus) was due
primarily to strategies related to Government securities transactions.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Zurich Kemper Investments, Inc. ("ZKI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, is each Fund's investment manager. ZKI is wholly
owned by ZKI Holding Corp. ZKI Holding Corp. is a more than 90% owned subsidiary
of Zurich Holding Company of America, Inc., which is a wholly owned subsidiary
of Zurich Insurance Company, a leading internationally recognized provider of
insurance and financial services in property/casualty and life insurance,
reinsurance and structured financial solutions as well as asset management.
Pursuant to investment management agreements, ZKI acts as each Fund's investment
adviser, manages its investments, administers its business affairs, furnishes
office facilities and equipment, provides clerical, bookkeeping 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 ZKI), 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, taxes and membership dues. Each Fund bears
the expenses of registration of its shares with the Securities and Exchange
Commission, while Kemper Distributors, Inc. ("KDI"), as principal underwriter,
pays the cost of qualifying and maintaining the qualification of each Fund's
shares for sale under the securities laws of the various states. ZKI has agreed
to reimburse the Government Fund should all operating expenses of the Fund,
including the compensation of ZKI, 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 ZKI 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
ZKI 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
B-19
<PAGE> 86
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.
The current investment management fee rates paid by the Funds are in the
prospectus, see "Investment Manager and Underwriter." The investment management
fees paid by each Fund for its last three fiscal years are shown in the table
below (except for the Opportunity Fund which commenced operations on October 1,
1997).
<TABLE>
<CAPTION>
FUND 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C>
Adjustable Rate............................................. $ 493,000 627,000 887,000
Diversified................................................. $ 4,664,000 4,239,000 4,152,000
Government.................................................. $15,888,000 18,159,000 19,681,000
High Yield.................................................. $23,419,000 19,436,000 17,917,000
Income and Capital.......................................... $ 3,162,000 3,194,000 2,923,000
Mortgage.................................................... $13,793,000 16,340,000 21,526,000+
Short-Intermediate Government............................... $ 1,014,000 1,230,000 1,626,000+
</TABLE>
- ---------------
+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.
FUND SUB-ADVISER. ZIML, 1 Fleet Place, London, U.K. EC4M 7RQ, an affiliate of
ZKI, is the sub-adviser for the foreign securities portion of the Diversified,
High Yield, Opportunity, and Income and Capital Funds. ZIML acts as sub-adviser
pursuant to the terms of a Sub-Advisory Agreement between it and ZKI for each
such Fund.
Under the terms of the Sub-Advisory Agreement for a Fund, ZIML renders
investment advisory and management services with regard to that portion of the
Fund's portfolio as may be allocated to ZIML by ZKI from time to time for
management of foreign securities, including foreign currency transactions and
related investments. ZIML may, under the terms of each Sub-Advisory Agreement,
render similar services to others including other investment companies. For its
services, ZIML receives from ZKI a monthly fee at the annual rate of .30% of the
portion of the average daily net assets of each Fund allocated by ZKI to ZIML
for management. ZIML permits any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.
Each Sub-Advisory Agreement provides that ZIML will not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Sub-Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
ZIML in the performance of its duties or from reckless disregard by ZIML of its
obligations and duties under the Sub-Advisory Agreement.
Each Sub-Advisory Agreement continues in effect from year to year so long as its
continuation is approved at least annually (a) by 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. Each Sub-Advisory Agreement may be terminated at any time for
a Fund upon 60 days notice by ZKI, ZIML or the Board of Trustees, or by a
majority vote of the outstanding shares of the Fund, and will terminate
automatically upon assignment or upon the termination of the Fund's investment
management agreement. If additional Funds become subject to a Sub-Advisory
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. The sub-advisory fees paid by ZKI to ZIML for the Diversified, High
Yield and Income and Capital Fund's 1997 fiscal year were $3,821, $0 and $0,
respectively. The Opportunity Fund commenced operations on October 1, 1997.
B-20
<PAGE> 87
PRINCIPAL UNDERWRITER. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), KDI, a wholly owned subsidiary
of ZKI, is the principal underwriter and distributor for the shares of each Fund
and acts as agent of each Fund in the continuous offering of its shares. KDI
bears all its expenses of providing services pursuant to the distribution
agreement, including the payment of any commissions. Each Fund pays the cost for
the prospectus and shareholder reports to be set in type and printed for
existing shareholders, and KDI, as principal underwriter, pays for the printing
and distribution of copies thereof used in connection with the offering of
shares to prospective investors. KDI also pays for supplementary sales
literature and advertising costs.
Each distribution agreement continues in effect from year to year so long as
such continuance is approved for each class at least annually by a vote of the
Board of Trustees of the Fund, including the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
agreement. Each agreement automatically terminates in the event of its
assignment and may be terminated for a class at any time without penalty by a
Fund or by KDI upon 60 days notice. Termination by a Fund with respect to a
class may be by vote of a majority of the Board of Trustees, or a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the agreement, or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
Investment Company Act of 1940. 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.
B-21
<PAGE> 88
CLASS A 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 (except for the Opportunity Fund which commenced operations
on October 1, 1997).
<TABLE>
<CAPTION>
COMMISSIONS
COMMISSIONS COMMISSIONS PAID TO
CLASS A SHARES FISCAL YEAR RETAINED BY KDI KDI PAID TO ALL FIRMS KDI AFFILIATED FIRMS
-------------- ----------- --------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Adjustable Rate...................... 1997 $ 8,000 58,000 0
1996 $ 11,000 88,000 0
1995 $ 22,000 161,000 40,000
Diversified.......................... 1997 $ 178,000 1,166,000 0
1996 $ 129,000 737,000 69,000
1995 $ 75,000 462,000 68,000
Government........................... 1997 $ 221,000 1,410,000 10,000
1996 $ 330,000 2,024,000 91,000
1995 $ 380,000 2,427,000 325,000
High Yield........................... 1997 $1,714,000 11,779,000 181,000
1996 $ 857,000 6,035,000 226,000
1995 $ 476,000 3,430,000 435,000
Income and Capital................... 1997 $ 53,000 1,283,000 0
1996 $ 115,000 914,000 74,000
1995 $ 96,000 767,000 110,000
Mortgage............................. 1997 $ 29,000 201,000 0
1996 $ 38,000 226,000 11,000
1995+ $ 20,000 183,000 29,000
Short-Intermediate Government........ 1997 $ 8,000 82,000 0
1996 $ 9,000 70,000 1,000
1995+ $ 23,000 220,000 77,000
</TABLE>
- ---------------
+ Includes amounts paid during fiscal year ended July 31, 1995 and fiscal
period from August 1, 1995 to September 30, 1995.
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 (see the prospectus under "Investment Manager and
Underwriter"), 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
Investment Company Act of 1940, 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.
B-22
<PAGE> 89
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 (except for the Opportunity Fund
which commenced operations on October 1, 1997). A portion of the marketing,
sales and operating expenses shown below could be considered overhead expense.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED DISTRIBUTION
DISTRIBUTION SALES TOTAL FEES PAID BY
FEES PAID CHARGES DISTRIBUTION KDI TO KDI
FISCAL BY FUND PAID TO FEES PAID BY AFFILIATED
CLASS B SHARES YEAR TO KDI KDI KDI TO FIRMS FIRMS
-------------- ------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Adjustable Rate...... 1997 $ 51,000 31,000 112,000 0
1996 $ 42,000 19,000 56,000 5,000
1995 $ 35,000 30,000 116,000 41,000
Diversified.......... 1997 $ 2,148,000 419,000 2,911,000 0
1996 $ 1,909,000 446,000 1,739,000 54,000
1995 $ 1,925,000 688,000 1,155,000 133,000
Government........... 1997 $ 528,000 234,000 665,000 0
1996 $ 475,000 181,000 1,206,000 34,000
1995 $ 254,000 91,000 1,495,000 200,000
High Yield........... 1997 $ 8,925,000 1,473,000 16,578,000 0
1996 $ 7,450,000 1,324,000 7,288,000 91,000
1995 $ 7,344,000 1,785,000 3,986,000 574,000
Income and
Capital............ 1997 $ 600,000 211,000 588,000 0
1996 $ 572,000 146,000 1,393,000 89,000
1995 $ 289,000 86,000 876,000 113,000
Mortgage............. 1997 $ 6,685,000 1,362,000 640,000 0
1996 $ 9,328,000 2,147,000 982,000 22,000
1995+ $15,132,000 4,977,000 1,496,000 156,000
Short-Intermediate
Government......... 1997 $ 1,071,000 327,000 335,000 0
1996 $ 1,403,000 486,000 378,000 2,000
1995+ $ 1,979,000 1,011,000 699,000 64,000
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY KDI
------------------------------------------------------------
ADVERTISING MARKETING MISC.
AND PROSPECTUS AND SALES OPERATING INTEREST
CLASS B SHARES LITERATURE PRINTING EXPENSES EXPENSES EXPENSE
-------------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Adjustable Rate...... 10,000 1,000 25,000 492,000 36,000
13,000 1,000 31,000 12,000 26,000
13,000 3,000 69,000 22,000 18,000
Diversified.......... 368,000 26,000 1,018,000 121,000 640,000
409,000 33,000 871,000 165,000 468,000
115,000 16,000 586,000 97,000 452,000
Government........... 116,000 8,000 303,000 43,000 405,000
336,000 27,000 690,000 135,000 308,000
131,000 8,000 681,000 86,000 136,000
High Yield........... 2,127,000 153,000 5,700,000 583,000 1,500,000
1,549,000 119,000 3,416,000 638,000 567,000
335,000 45,000 2,075,000 281,000 461,000
Income and
Capital............ 97,000 7,000 254,000 39,000 378,000
390,000 31,000 804,000 132,000 295,000
70,000 7,000 354,000 59,000 104,000
Mortgage............. 116,000 8,000 300,000 57,000 -0-
325,000 23,000 656,000 119,000 514,000
165,000 72,000 979,000 147,000 1,911,000
Short-Intermediate
Government......... 52,000 4,000 136,000 31,000 -0-
111,000 9,000 235,000 44,000 -0-
78,000 21,000 416,000 73,000 14,000
</TABLE>
- ---------------
+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.
B-23
<PAGE> 90
<TABLE>
<CAPTION>
DISTRIBUTION
CONTINGENT TOTAL FEES PAID
DISTRIBUTION DEFERRED DISTRIBUTION BY KDI
FEES PAID SALES FEES PAID TO KDI
BY FUND CHARGES BY KDI TO AFFILIATED
CLASS C SHARES FISCAL YEAR TO KDI TO KDI FIRMS FIRMS
-------------- ----------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Adjustable Rate...... 1997 $ 9,000 0 8,000 0
1996 $ 9,000 0 9,000 0
1995 $ 8,000 N/A 11,000 4,000
Diversified.......... 1997 $ 83,000 5,000 106,000 0
1996 $ 33,000 0 52,000 0
1995 $ 14,000 N/A 14,000 1,000
Government........... 1997 $ 62,000 1,000 72,000 0
1996 $ 51,000 1,000 60,000 0
1995 $ 19,000 N/A 19,000 2,000
High Yield........... 1997 $657,000 58,000 944,000 0
1996 $245,000 3,000 370,000 0
1995 $ 68,000 N/A 67,000 8,000
Income and Capital... 1997 $ 53,000 2,000 60,000 0
1996 $ 31,000 1,000 42,000 0
1995 $ 12,000 N/A 12,000 1,000
Mortgage............. 1997 $ 16,000 1,000 21,000 0
1996 $ 12,000 0 15,000 0
1995+ $ 5,000 N/A 5,000 1,000
Short-Intermediate
Government......... 1997 $ 34,000 3,000 42,000 0
1996 $ 25,000 1,000 29,000 0
1995+ $ 19,000 N/A 42,000 3,000
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY KDI
-----------------------------------------------------------
ADVERTISING MARKETING MISC.
AND PROSPECTUS AND SALES OPERATING INTEREST
CLASS C SHARES LITERATURE PRINTING EXPENSES EXPENSES EXPENSES
-------------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Adjustable Rate...... 4,000 0 11,000 61,000 12,000
9,000 1,000 20,000 8,000 8,000
6,000 2,000 32,000 14,000 4,000
Diversified.......... 49,000 4,000 136,000 24,000 29,000
34,000 3,000 54,000 14,000 12,000
8,000 1,000 42,000 14,000 5,000
Government........... 16,000 1,000 44,000 8,000 30,000
57,000 5,000 113,000 8,000 19,000
11,000 1,000 60,000 14,000 4,000
High Yield........... 411,000 29,000 1,111,000 128,000 210,000
316,000 23,000 559,000 90,000 79,000
41,000 4,000 250,000 44,000 18,000
Income and Capital... 23,000 2,000 60,000 16,000 24,000
40,000 3,000 86,000 2,000 12,000
7,000 1,000 34,000 11,000 2,000
Mortgage............. 7,000 0 19,000 5,000 8,000
8,000 1,000 17,000 1,000 5,000
4,000 1,000 23,000 12,000 2,000
Short-Intermediate
Government......... 18,000 1,000 50,000 16,000 28,000
36,000 3,000 76,000 12,000 17,000
15,000 4,000 79,000 21,000 8,000
</TABLE>
- ---------------
+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.
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 .25%
of average daily net assets of Class A, B and C shares 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 .15% (.25% for the
Mortgage and Short-Intermediate Government Funds) 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 .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 .25% of the purchase price
of such shares. For periods after the first year, KDI currently intends to pay
firms a service fee at an annual rate of up to .25% (calculated monthly and
normally paid quarterly) of the net assets attributable to Class B and Class C
shares
B-24
<PAGE> 91
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 (except the Opportunity Fund which commenced operations on October
1, 1997).
<TABLE>
<CAPTION>
ADMINISTRATIVE SERVICE FEES TOTAL SERVICE FEES PAID BY SERVICE FEES PAID BY KDI
PAID BY FUND KDI TO FIRMS TO KDI AFFILIATED FIRMS
-------------------------------- --------------------------- ------------------------
FUND FISCAL YEAR CLASS A CLASS B CLASS C
---- ----------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate.......... 1997 $ 169,000 17,000 3,000 188,000 0
1996 $ 213,000 14,000 3,000 231,000 5,000
1995 $ 299,000 11,000 2,000 320,000 76,000
Diversified.............. 1997 $1,131,000 705,000 28,000 1,930,000 9,000
1996 $1,020,000 624,000 11,000 1,692,000 55,000
1995 $ 952,000 620,000 5,000 1,582,000 203,000
Government............... 1997 $6,821,000 173,000 19,000 7,053,000 35,000
1996 $7,542,000 159,000 15,000 7,728,000 329,000
1995 $7,831,000 84,000 6,000 7,965,000 1,161,000
High Yield............... 1997 $6,462,000 2,917,000 217,000 10,067,000 49,000
1996 $5,075,000 2,469,000 83,000 7,844,000 134,000
1995 $4,323,000 2,400,000 22,000 6,730,000 783,000
Income and Capital....... 1997 $ 992,000 199,000 18,000 1,207,000 6,000
1996 $ 950,000 185,000 10,000 1,167,000 39,000
1995 $ 856,000 95,000 4,000 980,000 108,000
Mortgage................. 1997 $4,354,000 2,139,000 5,000 6,503,000 73,000
1996 $4,751,000 2,978,000 4,000 7,729,000 301,000
1995+ $5,402,000 4,811,000 2,000 10,164,000 1,280,000
Short-Intermediate
Government............. 1997 $ 88,000 345,000 12,000 450,000 0
1996 $ 80,000 453,000 8,000 546,000 11,000
1995+ $ 69,000 640,000 6,000 698,000 60,000
</TABLE>
- ---------------
+ Includes amounts paid during fiscal year ended July 31, 1995 and the fiscal
period from August 1, 1995 to September 30, 1995.
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, however,
the administrative services fee payable to KDI is based only upon Fund assets in
accounts for which a firm provides administrative services and it is intended
that KDI will pay all the administrative services fee that it receives from a
Fund to firms in the form of service fees. 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 and Short-Intermediate Government Funds), 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 basing the fee to KDI on
all Fund assets in the future.
Certain trustees or officers of the Funds are also directors or officers of ZKI,
ZIML or KDI as indicated under "Officers and Trustees."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary
Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105, as
custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of each Fund maintained in the United States. The Chase Manhattan Bank, Chase
MetroTech Center, Brooklyn,
B-25
<PAGE> 92
New York 11245, as custodian, has custody of all securities and cash of each
Fund held outside of the United States. They attend to the collection of
principal and income, and payment for and collection of proceeds of securities
bought and sold by each Fund. IFTC is also each Fund's transfer agent and
dividend-paying agent. Pursuant to a services agreement with IFTC, Kemper
Service Company ("KSvC"), an affiliate of ZKI, serves as "Shareholder Service
Agent" of 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
ZKSC, annual account fees of $6 per account plus account set up, transaction and
maintenance charges, annual fees associated with the contingent deferred sales
charge (Class B only) and out-of-pocket expense reimbursement. IFTC's fee is
reduced by certain earnings credits in favor of the Fund. The following shows
for each Fund's 1997 fiscal year the shareholder service fees IFTC remitted to
KSvC (except for the Opportunity Fund which commenced operations on October 1,
1997).
<TABLE>
<CAPTION>
FUND FEES TO KSVC
---- ------------
<S> <C>
Adjustable Rate............................................. $ 249,000
Diversified................................................. 1,681,000
Government.................................................. 3,598,000
High Yield.................................................. 4,802,000
Income and Capital.......................................... 937,000
Mortgage.................................................... 3,192,000
Short-Intermediate Government............................... 560,000
</TABLE>
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.
PURCHASE AND REDEMPTION OF SHARES
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. See the prospectus for certain exceptions to these
minimums. 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 as described in the prospectus 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
B-26
<PAGE> 93
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 as described in the prospectus.
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 will
be reinvested in shares of the Fund paying such dividends unless shareholders
indicate in writing that they wish to receive them in cash or in shares of other
Kemper Funds as described in the prospectus.
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.
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. One of the
Subchapter M requirements to be satisfied is that less than 30% of a Fund's
gross income during its fiscal year must be derived from gains (not reduced by
losses) from the sale or other disposition of securities and certain other
investments held for less than three months. This requirement has been
eliminated by the Taxpayer Relief Act of 1997 for fiscal years beginning after
August 5, 1997. As long as the requirement applies a Fund may be limited in its
options, futures and foreign currency transactions in order to prevent
recognition of such gains.
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.
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
B-27
<PAGE> 94
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.
At August 31, 1997 the Adjustable Rate Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $10,622,000, which
is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 1998 through 2004. The Fund does not intend
to distribute realized capital gains until the capital loss carryover is
exhausted.
At October 31, 1997 the Diversified Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $126,968,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 1998 through 2003. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At October 31, 1997, the Government Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $679,036,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 1998 through 2004. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At October 31, 1997, the Income and Capital Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $16,124,000, 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, 1997, the High Yield Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $151,654,000,
which is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 1998 through 2006. The Fund does not intend
to distribute realized capital gains until the capital loss carryover is
exhausted.
At September 30, 1997, the Mortgage Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $894,044,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 1998 through 2006. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At September 30, 1997, the Short-Intermediate Government Fund had an accumulated
net realized capital loss for federal income tax purposes of approximately
$22,500,000, 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.
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 in the prospectus
B-28
<PAGE> 95
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 under "Redemption or Repurchase of
Shares--Reinvestment Privilege." 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 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.
PERFORMANCE
As described in the prospectus, each Fund's historical performance or return for
a class of shares may be shown in the form of "yield" and "average annual total
return" and "total return" figures. These various measures of performance are
described below. Performance information will be computed separately for each
class. ZKI agreed to waive its management fee and to absorb certain operating
expenses for the Adjustable Rate Fund for the periods and to the extent
specified in this Statement of Additional Information. See "Investment Manager
and Underwriter." Because of this waiver and expense absorption, the performance
results for the Adjustable Rate Fund 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.
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 (except for the
Opportunity Fund which commenced operations on October 1, 1997).
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
FUND (PERIOD ENDED) SHARES SHARES SHARES
------------------- ------- ------- -------
<S> <C> <C> <C>
Adjustable Rate (8/31/97)................................... 5.00% 4.48% 4.52%
Diversified (10/31/97)...................................... 6.54 5.86 5.95
Government (10/31/97)....................................... 6.11 5.44 5.48
High Yield (9/30/97)........................................ 7.86 7.34 7.36
Income and Capital (10/31/97)............................... 5.42 4.75 4.77
Mortgage (9/30/97).......................................... 6.07 5.48 5.60
Short-Intermediate Government (9/30/97)..................... 4.87 4.23 4.38
</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:
a - b
----- 6
YIELD = 2 [ ( cd +1) - 1]
B-29
<PAGE> 96
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).
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 and Class
C 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.
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.
The figures below show performance information for the Funds for various
periods. Comparative information with respect to certain indices is also
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
B-30
<PAGE> 97
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. No adjustment has been made for taxes payable on dividends. The
period indicated was one of fluctuating securities prices and interest rates. As
indicated previously, the Opportunity Fund commenced operations on October 1,
1997.
ADJUSTABLE RATE FUND--AUGUST 31, 1997
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
TOTAL INITIAL CAPITAL GAIN INCOME ENDING PERCENTAGE ENDING
RETURN $10,000 DIVIDENDS DIVIDENDS VALUE INCREASE VALUE
TABLE INVESTMENT(*) REINVESTED REINVESTED(**) (ADJUSTED)(*) (ADJUSTED)(*) (UNADJUSTED)(*)
------------ ------------- ------------ -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,949 9 9,372 18,330 83.3 19,002
Five Years 9,338 0 2,767 12,105 21.1 12,540
One Year 9,799 0 500 10,299 3.0 10,674
CLASS B SHARES
Life of Fund(++) 9,980 0 1,589 11,370 13.7 11,569
One Year 10,150 0 446 10,296 3.0 10,596
CLASS C SHARES
Life of Fund(++) 9,993 0 1,602 * * 11,595
One Year 10,150 0 448 * * 10,598
<CAPTION>
---------------
TOTAL PERCENTAGE
RETURN INCREASE
TABLE (UNADJUSTED)(*)
----------- ----------------
<S> <C>
CLASS A SHARES
Life of Fund(+) 90.0
Five Years 25.4
One Year 6.7
CLASS B SHARES
Life of Fund(++) 15.7
One Year 6.0
CLASS C SHARES
Life of Fund(++) 16.0
One Year 6.0
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
------------------------------------------------
CONSUMER SALOMON LEHMAN LEHMAN
TOTAL PRICE BROS. HIGH BROS. BROS.
RETURN INDEX GRADE CORP. GOVT./CORP. ARM
TABLE (1) INDEX(2) INDEX(3) INDEX(4)
-------- --------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Life of Fund(+) 40.6 172.4 137.0 *
Life of Fund(++) 9.0 36.8 28.3 26.0
Five Years 14.1 48.8 39.6 33.2
One Year 2.2 13.0 9.8 8.0
</TABLE>
<TABLE>
<CAPTION>
SALOMON LEHMAN LEHMAN
AVERAGE ANNUAL FUND FUND FUND CONSUMER BROS. HIGH BROS. BROS.
TOTAL RETURN CLASS A CLASS B CLASS C PRICE GRADE CORP. GOVT./CORP. ARM
TABLE SHARES SHARES SHARES INDEX(1) INDEX(2) INDEX(3) INDEX(4)
------------- -------- -------- ------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 6.3 * * 3.5 10.5 9.0 *
Life of Fund(++) * 4.0 4.6 2.7 10.1 8.2 7.4
Five Years 3.9 * * 2.7 8.3 6.9 5.9
One Year 3.0 3.0 6.0 2.2 13.0 9.8 8.0
</TABLE>
- ---------------
* -- Data not available or not applicable.
(+) Since September 1, 1987 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
B-31
<PAGE> 98
DIVERSIFIED FUND--OCTOBER 31, 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(***)
------ ------------- ------------ -------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 5,589 712 68,480 74,781 647.8 78,322
Fifteen Years 6,206 339 35,907 42,452 324.5 44,442
Ten Years 9,324 0 20,416 29,740 197.4 31,149
Since 2/1/89(+++) 9,281 0 15,228 24,509 145.1 25,664
Five Years 10,071 0 5,716 15,787 57.9 16,533
One Year 9,505 0 824 10,329 3.3 10,812
<CAPTION>
-----------------
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(***)
------ -----------------
<S> <C>
CLASS A SHARES
Life of Fund(+) 683.2
Fifteen Years 344.4
Ten Years 211.5
Since 2/1/89(+++) 156.6
Five Years 65.3
One Year 8.1
CLASS B SHARES
Life of Fund(++) 31.4
One Year 7.1
CLASS C SHARES
Life of Fund(++) 31.2
One Year 7.4
<CAPTION>
-------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(***)
------ ------------- ------------ -------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Life of Fund(++) 10,034 0 3,103 12,937 29.4 13,137
One Year 9,950 0 763 10,414 4.1 10,713
CLASS C SHARES
Life of Fund(++) 10,067 0 3,147 * * 13,124
One Year 9,967 0 770 * * 10,737
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------
Salomon Lehman Merrill Lynch
TOTAL Consumer Bros. Bros. High Yield
RETURN Price High Grade Govt./Corp. Master
TABLE Index(1) Corp. Index(2) Index(3) Index(5)
------ -------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Life of Fund(+) 166.2 592.3 536.1 *
Life of Fund(++) 9.6 42.6 33.4 50.8
Fifteen Years 64.6 443.4 333.4 *
Ten Years 40.2 182.1 140.9 219.2
Since 2/1/89(+++) 33.4 141.5 116.6 166.7
Five Years 14.0 55.9 44.4 75.4
One Year 2.1 10.8 8.8 13.8
</TABLE>
<TABLE>
<CAPTION>
Salomon Merrill Lynch
AVERAGE ANNUAL Fund Fund Fund Consumer Bros. Lehman Bros. High Yield
TOTAL RETURN Class A Class B Class C Price High Grade Govt./Corp. Master
TABLE Shares Shares Shares Index(1) Corp. Index(2) Index(3) Index(5)
- -------------- ------- ------- ------- -------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 10.4 * * 4.9 10.0 9.5 *
Life of
Fund(++) * 7.8 8.5 2.7 10.9 8.8 12.8
Fifteen Years 10.1 * * 3.4 12.0 10.3 *
Ten Years 11.5 * * 3.4 10.9 9.2 12.3
Five Years 9.6 * * 2.7 9.3 7.6 11.9
One Year 3.3 4.1 7.4 2.1 10.8 8.8 13.8
</TABLE>
- ---------------
* -- Data not available on not applicable.
(+) Since June 23, 1977 for Class A Shares. (Index begins 6/30/77)
(++) Since May 31, 1994 for Class B and Class C Shares.
(+++) The Fund's current objective became effective February 1, 1989.
B-32
<PAGE> 99
GOVERNMENT FUND--OCTOBER 31, 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
TOTAL INITIAL CAPITAL GAIN INCOME ENDING PERCENTAGE ENDING
RETURN $10,000 DIVIDENDS DIVIDENDS VALUE INCREASE VALUE
TABLE INVESTMENT(*) REINVESTED REINVESTED(**) (ADJUSTED)(*) (ADJUSTED)(*) (UNADJUSTED)(*)
- ------------- ------------ -------------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 7,901 0 39,531 47,432 374.3 49,659
Fifteen Years 9,402 0 29,417 38,819 288.2 40,641
Ten Years 9,215 0 12,272 21,487 114.9 22,499
Five Year 9,045 0 4,022 13,067 30.7 13,685
One Year 9,628 0 726 10,354 3.5 10,840
CLASS B SHARES
Life of Fund(++) 10,150 0 2,500 12,450 24.5 12,650
One Year 10,080 0 659 10,439 4.4 10,739
CLASS C SHARES
Life of Fund(++) 10,173 0 2,518 * * 12,691
One Year 10,080 0 661 * * 10,241
<CAPTION>
-----------------
TOTAL PERCENTAGE
RETURN INCREASE
TABLE (UNADJUSTED)(*)
- --------------- -----------------
<S> <C>
CLASS A SHARES
Life of Fund(+) 396.6
Fifteen Years 306.4
Ten Years 125.0
Five Year 36.9
One Year 8.4
CLASS B SHARES
Life of Fund(++) 26.5
One Year 7.4
CLASS C SHARES
Life of Fund(++) 26.9
One Year 7.4
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------
CONSUMER SALOMON LEHMAN SALOMON
TOTAL PRICE BROS. HIGH BROS. BROS. 30 YR.
RETURN INDEX GRADE CORP. GOVT./CORP. GNMA
TABLE (1) INDEX(2) INDEX(3) INDEX(6)
------ --------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Life of Fund(+) 116.6 564.4 491.5 *
Life of Fund(++) 9.6 42.6 33.4 35.0
Fifteen Years 64.6 443.4 333.4 368.2
Ten Years 40.2 182.1 140.9 151.5
Five Year 14.0 55.9 44.4 43.0
One Year 2.1 10.8 8.8 9.1
</TABLE>
<TABLE>
<CAPTION>
SALOMON LEHMAN SALOMON
AVERAGE ANNUAL FUND FUND FUND CONSUMER BROS. HIGH BROS. BROS. 30 YR.
TOTAL RETURN CLASS A CLASS B CLASS C PRICE GRADE CORP. GOVT./CORP. GNMA
TABLE SHARES SHARES SHARES INDEX(1) INDEX(2) INDEX(3) INDEX(6)
-------------- ------- ------- ------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 9.0 * * 4.4 11.0 10.3 *
Life of Fund(++) * 6.6 7.2 2.7 10.9 8.8 9.2
Fifteen Years 9.5 * * 3.4 12.0 10.3 10.8
Ten Years 8.0 * * 3.4 10.9 9.2 9.7
Five Year 5.5 * * 2.7 9.3 7.6 7.4
One Year 3.5 4.4 7.4 2.1 10.8 8.8 9.1
</TABLE>
- ---------------
* -- Data not available or not applicable.
(+) 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.
B-33
<PAGE> 100
HIGH YIELD FUND--SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Capital
TOTAL Initial Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*)
------ ------------- ---------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,426 1,164 80,645 90,235 802.4 94,452
Fifteen Years 10,692 821 52,106 63,619 536.2 66,639
Ten Years 8,798 368 19,387 28,553 185.5 29,896
Five Years 10,320 0 6,372 16,692 66.9 17,473
One Year 9,861 0 993 10,854 8.5 11,368
CLASS B SHARES
Life of Fund(++) 10,666 0 3,614 14,080 40.8 14,280
One Year 10,328 0 943 10,971 9.7 11,271
CLASS C SHARES
Life of Fund(++) 10,703 0 3,644 * * 14,347
One Year 10,340 0 947 * * 11,287
<CAPTION>
-----------------
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)
------ ------------
<S> <C>
Life of Fund(+) 844.5
Fifteen Years 566.4
Ten Years 199.0
Five Years 74.7
One Year 13.7
Life of Fund(++) 42.8
One Year 12.7
Life of Fund(++) 43.5
One Year 12.9
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------
Salomon
Consumer Bros. Lehman Merrill Lynch
TOTAL Price High Grade Bros. High Yield
RETURN Index Corp. Govt./Corp. Master
TABLE (1) Index(2) Index(3) Index(5)
------ -------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Life of Fund(+) 157.9 583.7 522.4 *
Life of Fund(++) 9.3 39.9 31.3 49.8
Fifteen Years 64.7 473.7 348.5 *
Ten Years 40.2 190.9 146.0 208.6
Five Years 14.1 50.6 39.9 72.1
One Year 2.2 12.7 9.6 14.3
</TABLE>
<TABLE>
<CAPTION>
Salomon
Fund Bros. Lehman Merrill Lynch
AVERAGE ANNUAL Fund Class Fund Consumer High Grade Bros. High Yield
TOTAL RETURN Class A B Class C Price Corp. Govt./Corp. Master
TABLE Shares Shares Shares Index(1) Index(2) Index(3) Index(5)
- -------------- ------- ------ ------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 11.8 * * 4.9 10.3 9.7 *
Life of Fund
(++) * 10.8 11.4 2.7 10.6 8.5 12.9
Fifteen Years 13.1 * * 3.4 12.4 10.5 *
Ten Years 11.1 * * 3.4 11.3 9.4 11.9
Five Years 10.8 * * 2.7 8.5 7.0 11.5
One Year 8.5 9.7 12.9 2.2 12.7 9.6 14.3
</TABLE>
- ---------------
* -- Data not available or not applicable.
(+) Since January 26, 1978 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
B-34
<PAGE> 101
INCOME AND CAPITAL FUND--OCTOBER 31, 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Capital
Total Initial Gain Income Ending Percentage Ending
Return $10,000 Dividends Dividends Value Increase Value
Table Investment(*) Reinvested Reinvested(**) (Adjusted)(*) (Adjusted)(*) (Unadjusted)(*)
- --------------- ------------- ---------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,156 463 71,794 80,143 704.1 84,193
Fifteen Years 9,884 178 31,381 41,443 314.4 43,402
Ten Years 9,660 97 12,783 22,540 125.4 23,609
Five Years 9,783 60 4,161 14,004 40.0 14,659
One Year 9,639 0 674 10,313 3.1 10,800
CLASS B SHARES
Life of Fund(++) 10,429 0 2,473 12,702 27.0 12,902
One Year 10,095 0 607 10,402 4.0 10,702
CLASS C SHARES
Life of Fund(++) 10,454 0 2,480 * * 12,934
One Year 10,095 0 608 * * 10,703
<CAPTION>
-----------------
Total Percentage
Return Increase
Table (Unadjusted)(*)
-------- -----------------
<S> <C>
Life of Fund(+) 741.9
Fifteen Years 334.0
Ten Years 136.1
Five Years 46.6
One Year 8.0
Life of Fund(++) 29.0
One Year 7.0
Life of Fund(++) 29.3
One Year 7.0
</TABLE>
<TABLE>
<CAPTION>
Compared To
-----------------------------------------------
Salomon Lehman
BROS. BROS. Lehman
Total Consumer High Grade Aggregate Bros.
Return Price Corp. Bond Bond Govt./Corp.
Table Index(1) Index(2) Index(7) Index(3)
------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Life of Fund(+) 238.1 859.7 * 760.7
Life of Fund(++) 9.6 42.6 33.7 33.4
Fifteen Years 64.6 443.4 340.7 333.4
Ten Years 40.2 182.1 142.3 140.9
Five Years 14.0 55.9 43.6 44.4
One Year 2.1 10.8 8.9 8.8
</TABLE>
<TABLE>
<CAPTION>
Lehman
Salomon Bros.
Bros. Aggregate Lehman
AVERAGE ANNUAL Fund Fund Fund Consumer High Grade Bond Bros.
TOTAL RETURN Class A Class B Class C Price Corp. Bond Index Govt./Corp.
TABLE Shares Shares Shares Index(1) Index(2) (7) Index(3)
- -------------- ------- ------- ------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of
Fund(+) 9.3 * * 5.3 10.1 * 9.6
Life of
Fund(++) * 7.2 7.8 2.7 10.9 8.9 8.8
Fifteen Years 9.9 * * 3.4 12.0 10.4 10.3
Ten Years 8.5 * * 3.4 10.9 9.3 9.2
Five Years 7.0 * * 2.7 9.3 7.5 7.6
One Year 3.1 4.0 7.0 2.1 10.8 8.9 8.8
</TABLE>
- ---------------
* -- Data not available or not applicable.
(+) Since April 15, 1974 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
B-35
<PAGE> 102
MORTGAGE FUND--SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Capital
TOTAL Initial Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(***) (adjusted)(*) (unadjusted)(*)
------ ------------- ---------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,570 0 4,726 13,296 33.0 13,926
One Year 9,682 0 746 10,428 4.3 10,926
Five Years 8,622 0 3,922 12,544 25.4 13,142
CLASS B SHARES
Life of Fund(++) 8,235 0 16,059 * * 24,294
Ten Years 9,126 0 11,143 * * 20,269
Five Years 9,032 0 3,579 12,521 25.2 12,611
One Year 10,131 0 686 10,517 5.2 10,817
CLASS C SHARES
Life of Fund(+++) 10,015 0 2,492 * * 12,507
One Year 10,145 0 700 * * 10,845
<CAPTION>
---------------
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(*)
------ ---------------
<S> <C>
Life of Fund(+) 39.3
One Year 9.3
Five Years 31.4
Life of Fund(++) 142.9
Ten Years 102.7
Five Years 26.1
One Year 8.2
Life of Fund(+++) 25.1
One Year 8.5
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------
Salomon
Bros. Lehman Merrill Lynch
TOTAL Consumer 30 Yr. Brothers Mortgage
RETURN Price GNMA Govt./Corp. Master
TABLE Index(1) Index(6) Index(3) Index(8)
------ -------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Life of Fund(+) 16.9 49.8 50.4 49.4
Life of Fund(++) 53.1 171.7 244.0 265.2
Life of Fund(+++) 9.3 33.7 31.3 33.3
Ten Years 40.2 157.3 146.0 154.6
Five Years 14.1 40.6 39.9 40.2
One Year 2.2 10.2 9.6 10.1
</TABLE>
<TABLE>
<CAPTION>
SALOMON
AVERAGE BROS. LEHMAN MERRILL LYNCH
ANNUAL FUND FUND FUND CONSUMER 30 YR. BROTHERS MORTGAGE
TOTAL RETURN CLASS A CLASS B CLASS C PRICE GNMA GOVT./CORP. MASTER
TABLE SHARES SHARES SHARES INDEX(1) INDEX(6) INDEX(3) INDEX(8)
- ------------ ------- ------- ------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 5.1 * * 2.8 7.3 7.4 7.2
Life of Fund(++) * 7.1 * 3.4 8.1 10.0 10.6
Life of Fund(+++) * * 6.9 2.7 9.1 8.5 9.0
Ten Years * 7.3 * 3.4 9.9 9.4 9.8
Five Years 4.6 4.6 * 2.7 7.1 7.0 7.0
One Year 4.3 5.2 8.5 2.2 10.2 9.6 10.1
</TABLE>
- ---------------
* -- Data not available or not applicable.
(+) Since January 10, 1992 for Class A Shares.
(++) Since October 26, 1984 for Class B Shares.
(+++) Since May 31, 1994 for Class C Shares.
B-36
<PAGE> 103
SHORT-INTERMEDIATE GOVERNMENT FUND--SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Initial Capital Gain Income Ending Percentage Ending
TOTAL $10,000 Distributions Dividends Value Increase Value
RETURN TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*)
------------ ------------- ------------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,764 70 3,956 12,790 27.9 13,252
Five Years 8,647 66 3,275 11,988 19.9 12,429
One Year 9,535 0 669 10,204 2.0 10,579
CLASS B SHARES
Life of Fund(++) 9,141 92 6,936 * * 16,169
Five Years 8,941 68 2,913 11,833 18.3 11,922
One Year 9,898 0 612 10,213 2.1 10,510
CLASS C SHARES
Life of Fund(+++) 9,617 0 2,089 * * 11,706
One Year 9,898 0 626 * * 10,524
<CAPTION>
---------------
Percentage
TOTAL Increase
RETURN TABLE (unadjusted)(*)
------------ ---------------
<S> <C>
Life of Fund(+) 32.5
Five Years 24.3
One Year 5.8
Life of Fund(++) 61.7
Five Years 19.2
One Year 5.1
Life of Fund(+++) 17.1
One Year 5.2
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
----------------------------------------------------------------------------------------
TOTAL Consumer Salomon Bros. Lehman Bros. Govt./Corp. Lehman Govt Bond
RETURN TABLE Price Index(1) 30 Yr. GNMA Index(6) Index(3) Intermediate Index(9)
------------ -------------- -------------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
Life of Fund(+) 16.9 49.8 50.4 42.6
Life of Fund(++) 33.1 118.7 113.2 98.9
Life of Fund(+++) 9.3 33.7 31.3 26.3
Five Years 14.1 40.6 39.9 32.9
One Year 2.2 10.2 9.6 7.8
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL Fund Fund Fund Consumer Salomon Bros. Lehman Bros. Lehman Govt Bond
TOTAL RETURN Class A Class B Class C Price 30 Yr. Govt./Corp. Intermediate
TABLE Shares Shares Shares Index(1) GNMA Index(6) Index(3) Index(9)
-------------- ------- ------- ------- -------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 4.4 * * 2.8 7.3 7.4 6.4
Life of Fund(++) * 5.7 * 3.4 9.4 9.1 8.3
Life of Fund(+++) * * 4.8 2.7 9.1 8.5 7.3
Five Years 3.7 3.4 * 2.7 7.1 7.0 5.9
One Year 2.0 2.1 5.2 2.2 10.2 9.6 7.8
</TABLE>
- ---------------
* -- Data not available or not applicable.
(+) Since January 10, 1992 for Class A Shares. (Index at December 31, 1991)
(++) Since February 1, 1989 for Class B Shares. (Index at January 31, 1989)
(+++) Since May 31, 1994 for Class C Shares.
FOOTNOTES FOR ALL FUNDS
* The Initial Investment and adjusted amounts for Class A shares were adjusted
for the maximum initial sales charge at the beginning of the period, which is
4.5% for the Diversified Fund, Government Fund, High Yield Fund, Income and
Capital Fund and Mortgage Fund and 3.5% for the Adjustable Rate Fund and
Short-Intermediate Government Fund. The Initial Investment for Class B and Class
C shares was not adjusted. Amounts were adjusted for Class B shares for the
contingent deferred sales charge that may be imposed at the end of the period
based upon the schedule for shares sold currently, see "Redemption or Repurchase
of Shares" in the prospectus. No adjustments were made to Class C shares.
** Includes short-term capital gain dividends.
(1) The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. Source is Towers Data Systems.
(2) Salomon Brothers High Grade Corporate Bond Index is on a total return basis
with all dividends reinvested and is comprised of high grade long-term
industrial and utility bonds rated in the top two rating categories. This index
is unmanaged. Source is Towers Data Systems.
(3) The Lehman Brothers Government/Corporate Bond Index is on a total return
basis and is comprised of all publicly issued, non-convertible, domestic debt of
the U.S. Government or any agency thereof, quasi-federal corporation, or
corporate debt guaranteed by the U.S. Government and all publicly issued,
fixed-rate, non-convertible, domestic debt of the three major corporate
classifications: industrial, utility, and financial. Only notes and bonds with a
minimum outstanding principal amount of $1,000,000 and a minimum of one year to
maturity are included. Bonds included must have a rating of at least Baa by
Moody's Investors Service, Inc., BBB by Standard & Poor's Corporation or in the
case of bank bonds not rated by either Moody's or S&P, BBB by Fitch Investors
Service. This index is unmanaged. Source is Towers Data Systems.
(4) The Lehman Brothers Adjustable Rate Mortgage Index is a broad market
capitalization index of the U.S. Government agency adjustable rate mortgage
market. All securities in the index have coupons that periodically adjust based
on a spread over a published index, and all are guaranteed by an agency of the
U.S. Government. This index is unmanaged. Source is Lehman Brothers Inc.
(5) Merrill Lynch High Yield Master Index consists of fixed-rate, coupon-bearing
bonds with an outstanding par which is greater than or equal to $50 million, a
maturity range greater than or equal to one year and must be less than BBB/Baa3
rated but not in default.
(6) The Salomon Brothers 30 Year GNMA Index 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. This index is unmanaged. Source is Salomon Brothers Inc.
(7) The Lehman Brothers Aggregate Bond Index is on a total return basis and is
comprised of intermediate and long-term government bonds, investment grade
corporate debt securities and mortgage-backed securities. This index is
unmanaged. Source is Lipper Analytical Services, Inc.
(8) Merrill Lynch Mortgage Master Index consists of fixed-rate, coupon-bearing
bonds which are comprised of generic pass-through securities which are composed
of numerous mortgage pools with various maturities. The amount outstanding in
each agency/type/coupon subdivision of the mortgage index must be greater than
or equal to $200 million. CMOs are excluded to avoid double-counting.
(9) The Lehman Government Bond Intermediate Index is made up of the Treasury
Bond Index (all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues) and the Agency Bond Index (all publicly issued debt
of U.S. Government agencies and quasi-federal corporations, and corporate debt
guaranteed by the U.S. Government). Includes securities with maturities between
1 and 10 years.
B-37
<PAGE> 104
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 Adjustable Rate, Government, Mortgage and Short-Intermediate Government
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 Adjustable Rate 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.
The following tables illustrate an assumed $10,000 investment in Class A shares
of each Fund other than the Mortgage, Opportunity and Short-Intermediate
Government Funds, which includes the current maximum sales charge of 4.5% (3.5%
for the Adjustable Rate Fund), with income and capital gain dividends reinvested
in additional shares. The tables for the Mortgage and Short-Intermediate
Government Funds illustrate an assumed $10,000 investment in Class B shares of
these Funds, with income and capital gain dividends reinvested in additional
shares, and do not include the effect of the contingent deferred sales charge.
Each table covers the period from commencement of operations of the Fund to
December 31, 1996.
ADJUSTABLE RATE FUND (9/1/87)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
----------------------------- --------------------------------------------------
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1987 $ 96 $ 0 $9,722 $ 96 $ 0 $ 9,818
1988 1,098 0 9,132 1,159 0 10,291
1989 1,122 10 9,185 2,294 10 11,489
1990 1,137 0 8,918 3,388 9 12,315
1991 1,222 0 9,207 4,756 10 13,973
1992 824 0 9,217 5,592 10 14,819
1993 767 0 9,196 6,341 10 15,547
1994 747 0 8,724 6,745 9 15,478
1995 948 0 8,929 7,857 9 16,795
1996 913 0 8,864 8,716 9 17,589
- ---------------------------------------------------------------------------------------------------------
</TABLE>
B-38
<PAGE> 105
- --------------------------------------------------------------------------------
DIVERSIFIED FUND (6/23/77)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
----------------------------- -----------------------------------------------
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1977 $ 427 $ 0 $9,141 $ 427 $ 0 $ 9,567
1978 1,006 132 8,591 1,367 132 10,090
1979 1,350 18 8,898 2,787 154 11,839
1980 1,672 30 9,774 4,830 201 14,805
1981 2,052 0 8,738 6,297 179 15,214
1982 2,420 27 8,592 8,771 204 17,567
1983 2,941 0 8,577 11,697 204 20,478
1984 3,449 0 7,667 13,803 182 21,652
1985 3,604 66 7,534 17,181 248 24,963
1986 3,163 307 6,748 18,381 522 25,651
1987 3,379 367 5,412 17,484 690 23,586
1988 3,847 0 5,475 21,566 698 27,739
1989 4,603 0 5,064 24,238 646 29,948
1990 4,215 0 3,819 21,868 487 26,174
1991 4,665 0 5,050 34,010 644 39,704
1992 4,604 0 5,363 40,723 684 46,770
1993 5,096 0 5,879 49,906 749 56,534
1994 4,438 0 5,217 48,486 665 54,368
1995 5,061 0 5,734 58,572 731 65,037
1996 6,336 0 5,656 64,235 721 70,612
</TABLE>
================================================================================
GOVERNMENT FUND (10/1/79)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
--------------------------- --------------------------------------------------------
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1979 $ 203 $ 0 $9,192 $ 207 $ 0 $ 9,399
1980 1,009 0 8,164 1,145 0 9,309
1981 1,197 0 7,180 2,181 0 9,361
1982 1,314 0 8,119 3,912 0 12,031
1983 1,442 0 7,878 5,225 0 13,103
1984 1,686 0 7,806 6,903 0 14,709
1985 1,925 0 8,468 9,523 0 17,991
1986 2,076 0 8,853 12,061 0 20,913
1987 2,228 0 8,173 13,301 0 21,473
1988 2,265 0 7,851 14,985 0 22,836
1989 2,454 0 8,092 17,941 0 26,033
1990 2,526 0 8,066 20,486 0 28,552
1991 2,762 0 8,629 24,849 0 33,478
1992 2,781 0 8,341 26,780 0 35,125
1993 2,662 0 8,242 29,094 0 37,336
1994 2,684 0 7,422 28,770 0 36,192
1995 2,942 0 8,155 34,684 0 42,839
1996 3,097 0 7,797 36,255 0 44,052
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
B-39
<PAGE> 106
- --------------------------------------------------------------------------------
HIGH YIELD FUND (1/26/78)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
--------------------------- --------------------------------------------------
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
- ---------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
1978 $ 826 $ 0 $8,950 $ 786 $ 0 $ 9,736
1979 1,098 0 8,227 1,744 0 9,971
1980 1,306 0 7,140 2,737 0 9,877
1981 1,515 0 6,678 4,057 0 10,735
1982 1,793 0 8,041 6,935 0 14,976
1983 2,048 0 8,365 9,254 0 17,620
1984 2,359 0 8,090 11,327 0 19,417
1985 2,684 0 8,787 15,108 0 23,895
1986 2,929 0 9,290 18,968 0 28,258
1987 3,375 1,196 8,690 20,917 1,200 30,807
1988 4,142 0 8,787 25,246 1,215 35,248
1989 4,632 0 7,635 26,155 1,055 34,845
1990 5,116 0 5,688 23,849 786 30,322
1991 5,417 0 7,262 36,262 1,003 44,527
1992 5,075 0 7,678 43,409 1,061 52,148
1993 5,492 0 8,393 53,178 1,159 62,730
1994 5,892 0 7,493 53,104 1,035 61,632
1995 6,500 0 7,994 63,314 1,104 72,412
1996 7,289 0 8,245 72,790 1,139 82,174
=========================================================================================================
</TABLE>
INCOME AND CAPITAL FUND (4/15/74)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
----------------------------- -----------------------------------------------------
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1974 $ 425 $ 0 $ 9,819 $ 436 $ 0 $ 10,255
1975 939 0 10,077 1,421 0 11,498
1976 955 69 10,535 2,481 72 13,088
1977 1,052 75 10,077 3,415 144 13,636
1978 1,133 0 9,580 4,365 137 14,082
1979 1,397 0 8,873 5,393 127 13,393
1980 1,701 0 7,632 6,229 109 13,970
1981 1,861 0 6,858 7,438 98 14,394
1982 2,183 0 7,994 11,122 115 19,231
1983 2,478 0 7,889 13,422 113 21,424
1984 2,892 0 7,775 16,175 111 24,061
1985 3,191 0 8,396 20,803 120 29,319
1986 3,273 0 8,673 24,793 124 33,590
1987 3,590 0 8,042 26,474 115 34,631
1988 3,933 0 7,975 30,152 114 38,241
1989 4,207 0 7,794 33,607 112 41,513
1990 4,209 0 7,507 36,590 108 44,205
1991 4,313 0 8,080 43,926 116 52,122
1992 4,168 0 8,061 48,039 115 56,215
1993 4,029 355 8,376 53,946 476 62,798
1994 4,578 0 7,507 52,743 426 60,676
1995 4,939 0 8,462 64,690 480 73,632
1996 4,957 0 8,061 66,597 458 75,116
===========================================================================================================
</TABLE>
B-40
<PAGE> 107
- --------------------------------------------------------------------------------
MORTGAGE FUND (10/26/84)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
----------------------------- --------------------------------------------------
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1984 $ 0 $0 $10,024 $ 0 $0 $10,024
1985 1,028 0 10,035 1,051 0 11,086
1986 1,286 0 10,036 2,344 0 12,380
1987 1,270 0 9,212 3,389 0 12,600
1988 1,315 0 8,694 4,474 0 13,168
1989 1,326 0 8,800 5,867 0 14,667
1990 1,325 0 8,612 7,098 0 15,710
1991 1,442 0 9,235 9,149 0 18,384
1992 1,457 0 8,917 10,285 0 19,202
1993 1,381 0 8,718 11,410 0 20,128
1994 1,259 0 7,835 11,461 0 19,296
1995 1,387 0 8,576 13,988 0 22,564
1996 1,433 0 8,177 14,785 0 22,962
=====================================================================================================
</TABLE>
SHORT-INTERMEDIATE GOVERNMENT FUND (2/1/89)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
----------------------------- --------------------------------------------------
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1989 $741 $ 0 $10,024 $ 737 $ 0 $10,761
1990 946 0 9,847 1,679 0 11,526
1991 934 0 10,118 2,690 0 12,808
1992 795 0 10,024 3,461 0 13,485
1993 769 100 9,859 4,157 99 14,115
1994 697 0 9,197 4,555 93 13,845
1995 853 0 9,577 5,609 96 15,282
1996 888 0 9,234 6,291 93 15,618
-----------------------------------------------------------------------------------------------------
</TABLE>
* Includes short-term capital gain dividends
The following tables compare the performance of the Class A shares of the Funds
(other than the Mortgage, Opportunity and Short-Intermediate Government Funds,
for which the performance is of the Class B shares) over various periods with
that of other mutual funds within the categories described below according to
data reported by Lipper Analytical Services, Inc. ("Lipper"), New York, New
York, which is a mutual fund reporting service. Lipper performance figures are
based on changes in net asset value, with all income and capital gain dividends
reinvested. Such calculations do not include the effect of any sales charges.
Future performance cannot be guaranteed. Lipper publishes performance analyses
on a regular basis. Each category includes funds with a variety of objectives,
policies and market and credit risks that should be considered in reviewing
these rankings.
B-41
<PAGE> 108
ADJUSTABLE RATE FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
------------
Adjustable Rate
Mortgage Funds
---------------
<S> <C>
One Year (Period ended 9/30/97)............................. 23 of 44
Five Years (Period ended 9/30/97)........................... 15 of 27
</TABLE>
The Lipper Adjustable Rate Mortgage Funds category includes funds that invest at
least 65% of assets in adjustable rate mortgage securities or other securities
collateralized by or representing an interest in mortgages.
DIVERSIFIED FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
------------
Multi-Sector
Income
------------
<S> <C>
One Year (Period ended 9/30/97)............................. 66 of 75
Five Years (Period ended 9/30/97)........................... 2 of 13
Ten Years (Period ended 9/30/97)............................ 1 of 4
</TABLE>
The Lipper Multi-Sector Income Funds Category includes funds that intend to keep
the bulk of their assets in corporate and government debt issues.
GOVERNMENT FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
Certificate
Edition
------------
GNMA Funds
----------
<S> <C>
One Year (Period ended 9/30/97)............................. 32 of 53
Five Years (Period ended 9/30/97)........................... 21 of 30
Ten Years (Period ended 9/30/97)............................ 13 of 24
</TABLE>
The Lipper GNMA Funds category includes funds that invest a minimum of 65% of
their portfolio in Government National Mortgage Association securities.
B-42
<PAGE> 109
HIGH YIELD FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
------------
High Current
Yield Funds
------------
<S> <C>
One Year (Period ended 9/30/97)............................. 134 of 171
Five Years (Period ended 9/30/97)........................... 21 of 65
Ten Years (Period ended 9/30/97)............................ 9 of 45
</TABLE>
The Lipper High Current Yield Funds category includes funds which are managed
with an emphasis on high current (relative) yield. There are no quality or
maturity restrictions. The Fund was ranked number 222 out of 4,997, 28 out of
2,152 and 14 out of 965 funds in the Fixed Income category for the one, five and
ten year periods ended September 30, 1997 according to data reported by Lipper
in the Lipper Mutual Fund Performance Analysis. The Lipper Fixed Income category
reported in the Lipper Mutual Fund Performance Analysis includes funds which
normally have more than 75% of their assets in fixed income issues.
INCOME AND CAPITAL FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
------------
Corporate
Bond Funds:
"A" Rated
-----------
<S> <C>
One Year (Period ended 9/30/97)............................. 52 of 126
Five Years (Period ended 9/30/97)........................... 12 of 54
Ten Years (Period ended 9/30/97)............................ 19 of 33
</TABLE>
The Lipper Corporate Bond Funds "A" Rated category includes funds which invest
65% of their corporate holdings in the top three grades.
MORTGAGE FUND
B SHARES
<TABLE>
<CAPTION>
Lipper
Performance
Analysis
-------------
U.S. Mortgage
Funds
-------------
<S> <C>
One Year (Period ended 9/30/97)............................. 52 of 59
Five Years (Period ended 9/30/97)........................... 32 of 34
Ten Years (Period ended 9/30/97)............................ 17 of 17
</TABLE>
The Lipper U.S. Mortgage Funds category includes funds that invest at least 65%
of their assets in U.S. Mortgages/Securities issued or guaranteed as to
principal and interest by the U.S. government and certain federal agencies.
SHORT-INTERMEDIATE GOVERNMENT FUND
B SHARES
<TABLE>
<CAPTION>
Lipper
Performance
Analysis
-----------
Short U.S.
Gov't Funds
-----------
<S> <C>
One Year (Period ended 9/30/97)............................. 96 of 96
Five Years (Period ended 9/30/97)........................... 40 of 41
</TABLE>
The Lipper Short (1-5 year) U.S. Government Funds category includes funds that
invest at least 65% of their assets in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities with average maturities of
five years or less.
B-43
<PAGE> 110
OFFICERS AND TRUSTEES
The officers and trustees of the Funds, their birthdates, their principal
occupations and their affiliations, if any, with ZKI, the investment manager,
ZIML, the sub-adviser of certain Funds, and KDI, the principal underwriter, are
as follows (the number following each person's title is the number of investment
companies managed by ZKI and its affiliates, for which he or she holds similar
positions):
ALL FUNDS:
DAVID W. BELIN (6/20/28), Trustee (26), 2000 Financial Center, 7th and Walnut,
Des Moines, Iowa; Member, Belin Lamson McCormick Zumbach Flynn, P.C.
(attorneys).
LEWIS A. BURNHAM (1/8/33), Trustee (26), 16410 Avila Boulevard, Tampa, Florida;
Director, Management Consulting Services, McNulty & Company; formerly Executive
Vice President, Anchor Glass Container Corporation.
DONALD L. DUNAWAY (3/8/37), Trustee (26), 7515 Pelican Bay Blvd., Naples,
Florida; Retired; formerly, Executive Vice President, A. O. Smith Corporation
(diversified manufacturer).
ROBERT B. HOFFMAN (12/11/36), Trustee (26), 800 N. Lindbergh Boulevard, St.
Louis, Missouri; Vice Chairman, Monsanto Company (chemical products); prior
thereto, Vice President, FMC Corporation (manufacturer of machinery and
chemicals); prior thereto, Director, Executive Vice President and Chief
Financial Officer, Staley Continental, Inc. (food products).
DONALD R. JONES (1/17/30), Trustee (26), 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.
SHIRLEY D. PETERSON (9/3/41), Trustee (26), 401 Rosemont Avenue, Frederick,
Maryland; President, Hood College, Maryland; prior thereto, Partner, Steptoe &
Johnson (attorneys); prior thereto, Commissioner, Internal Revenue Service;
prior thereto, Assistant Attorney General, U.S. Department of Justice; Director,
Bethlehem Steel Corp.
WILLIAM P. SOMMERS (7/22/33), Trustee (26), 333 Ravenswood Avenue, Menlo Park,
California; 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) (retired), Director, Rohr, Inc., Therapeutic Discovery Corp. and Litton
Industries.
STEPHEN B. TIMBERS (8/8/44), President and Trustee* (39), 222 South Riverside
Plaza, Chicago, Illinois; President, Chief Executive Officer, Chief Investment
Officer and Director, ZKI; Director, KDI, and LTV Corporation; formerly,
President and Chief Operating Officer of Kemper Corporation.
CHARLES R. MANZONI, JR. (1/23/47), Vice President* (39), 222 South Riverside
Plaza, Chicago, Illinois; Executive Vice President, Secretary and General
Counsel of ZKI; Secretary, ZKI Holding Corp.; Secretary, ZKI Agency, Inc.;
formerly, Partner, Gardner, Carton & Douglas (attorneys).
JOHN E. NEAL (3/9/50), Vice President* (39), 222 South Riverside Plaza, Chicago,
Illinois; President, Kemper Funds Group, a unit of ZKI; Director, ZKI, Zurich
Kemper Value Advisors, Inc. and KDI.
JEROME L. DUFFY (6/29/36), Treasurer* (39), 222 South Riverside Plaza, Chicago,
Illinois; Senior Vice President, ZKI.
PHILIP J. COLLORA (11/15/45), Vice President and Secretary* (39), 222 South
Riverside Plaza, Chicago, Illinois; Attorney, Senior Vice President and
Assistant Secretary, ZKI.
B-44
<PAGE> 111
ELIZABETH C. WERTH (10/1/47), Assistant Secretary* (32), 222 South Riverside
Plaza, Chicago, Illinois; Vice President, ZKI; Vice President and Director of
State Registrations, KDI.
ROBERT C. PECK, JR. (10/1/46), Vice President* (16), 222 South Riverside Plaza,
Chicago, Illinois; Executive Vice President, ZKI; formerly, Executive Vice
President and Chief Investment Officer with an unaffiliated investment
management firm from 1988 to June 1997.
ADJUSTABLE RATE FUND:
ELIZABETH A. BYRNES (2/8/57), Vice President* (2), 222 South Riverside Plaza,
Chicago, Illinois; First Vice President, ZKI.
RICHARD L. VANDENBERG (11/16/49), Vice President* (4), 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President, ZKI; formerly, Senior Vice
President and Portfolio Manager with an unaffiliated investment management firm.
DIVERSIFIED FUND:
J. PATRICK BEIMFORD, JR. (5/25/50), Vice President* (3), 222 South Riverside
Plaza, Chicago, Illinois; Executive Vice President, ZKI.
ROBERT S. CESSINE (1/5/50), Vice President* (3), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, ZKI; formerly, Vice President,
Wellington Management Company.
MICHAEL A. McNAMARA (12/28/44), Vice President* (6), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, ZKI.
HARRY E. RESIS, JR. (11/24/45), Vice President* (6), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, ZKI; formerly, First Vice President,
PaineWebber Incorporated.
JONATHAN W. TRUTTER (11/29/57), Vice President* (3), 222 South Riverside Plaza,
Chicago, Illinois; First Vice President, ZKI.
GOVERNMENT FUND:
RICHARD L. VANDENBERG, see above.*
HIGH YIELD AND OPPORTUNITY FUNDS (KEMPER HIGH YIELD SERIES):
MICHAEL A. McNAMARA, see above.*
HARRY E. RESIS, JR., see above.*
INCOME AND CAPITAL PRESERVATION FUND:
ROBERT S. CESSINE, see above.*
MORTGAGE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS (KEMPER PORTFOLIOS):
FRANK J. RACHWALSKI, JR. (3/26/45), Vice President* (10), 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President, ZKI.
RICHARD L. VANDENBERG, see above.*
* Interested persons of the Fund as defined in the Investment Company Act of
1940.
B-45
<PAGE> 112
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Fund. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during the
Fund's 1997 fiscal year except that the information in the last column is for
calendar year 1996. The Opportunity Fund has not yet adopted a trustee
compensation table.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION FROM
----------------------------------------------------------------------------
INCOME & TOTAL COMPENSATION
ADJUSTABLE DIVERSIFIED GOVERNMENT HIGH YIELD CAPITAL KEMPER KEMPER FUNDS
NAME OF TRUSTEE RATE FUND FUND FUND SERIES++ FUND PORTFOLIOS+ PAID TO TRUSTEES**
--------------- ---------- ----------- ---------- ---------- -------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
David W. Belin*............... $2,500 6,600 12,400 10,700 5,500 16,100 143,400
Lewis A. Burnham.............. 1,700 3,400 6,400 6,000 3,100 10,200 88,800
Donald L. Dunaway*............ 2,700 6,000 11,900 10,600 5,400 16,700 141,200
Robert B. Hoffman............. 1,800 3,400 6,400 6,000 3,100 9,600 92,100
Donald R. Jones............... 1,800 3,600 6,700 6,300 3,400 10,400 92,100
Shirley D. Peterson........... 1,700 3,400 6,300 5,900 3,000 9,900 89,800
William P. Sommers............ 1,700 3,300 6,100 5,700 3,000 9,700 87,500
</TABLE>
- ---------------
+ Includes Kemper Cash Reserves Fund, Mortgage Fund and Short-Intermediate
Government Fund.
++ Includes High Yield Fund only.
* Includes deferred fees and interest thereon 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 and interest accrued through each Fund's
fiscal year are $16,900, $55,900, $106,400, $78,400, $40,800 and $96,900 for
Mr. Belin and $14,900, $30,000, $70,100, $54,700, $27,000 and $73,900 for
Mr. Dunaway for the Adjustable Rate Fund, Diversified 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 46 fund portfolios.
As of December 15, 1997, the officers and trustees of the Funds, as a group,
owned less than 1% of the then outstanding shares of each Fund, except that
officers and trustees, as a group, owned 6.47% of Kemper Income and Capital
Preservation Fund, Class I shares and 1.18% of Kemper High Yield Fund, Class I
shares. No person owned of record 5% or more of the outstanding shares of any
class of any Fund, except that the following owned of record shares of the
following Funds.
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
---- ---------------- ----- ----------
<S> <C> <C> <C>
Adjustable Rate Prudential Securities FBO A 7.42%
Standard Savings Bank
228 W. Garvey Ave.
Monterey Park, CA 91754
Builders Prime Window & Supply B 6.79
401K FBO Forfeiture Account
2nd & Merion
Bridgeport, PA 19405
National Financial Services Corp. B 9.10
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
MLPF&S B 8.25
4800 Deer Lake Dr. East
Jacksonville, FL 32246
Junior Junction Inc. C 6.56
1400 Noyes York
Utica, NY 13502
MLPF&S C 16.43
4800 Deer Lake Dr. East
Jacksonville, FL 32246
</TABLE>
B-46
<PAGE> 113
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
---- ---------------- ----- ----------
<S> <C> <C> <C>
Ameritrade Clearing C 10.35
P.O. Box 2226
Omaha, NE 68103
Estate of Arthur A. Ulrich C 6.21
870 84th LN NW
Minneapolis, MN 55433
Income & Capital MLPF&S A 21.75
4800 Deer Lake Dr. East
Jacksonville, FL 32246
BHC Securities, Inc. B 6.92
Attn: Mutual Funds
One Commerce Square
Philadelphia, PA 19103
Paul K. Christoff TTEE C 10.30
Lindsay Concrete Prod Inc. PSP
137 S. Main St., Suite 301
Akron, OH 44308-1136
MLPF&S C 24.29
4800 Deer Lake Dr. East
Jacksonville, FL 32246
ZKI Inc. I 6.06
Retirement Plan EE
811 Main Street
Kansas City, MO 64105
ZKI Inc. I 12.11
Retirement Plan PS
811 Main
Kansas City, MO 64105
High Yield National Financial Service Corp. C 6.27
One World Financial Center
200 Liberty Street, 4th fl.
New York, NY 10281-1003
MLPP&S FTSBO ITS Customers C 8.04
4800 Deer Lake Road
Jacksonville, FL 32246
PNB Personal Trust Account I 15.22
P.O. Box 7829
Philadelphia, PA 19101
Mutual Trust Life Ins. Co. I 11.11
1200 Jovis Boulevard
Oak Brook, IL 60523
High Yield Opportunity James C. Calano A 5.51
200 Boulder View Ln.
Boulder, CO 80304
National City Bank of PA TTEE A 11.98
McKeesport Healthcare Pension
P.O. Box 94777
Cleveland, OH 44101
Alan K. Schroeder, TOD A 5.61
2002 Cedar Dr.
Rapid City, SD 57702
Rauscher Pierce Refsnes C/F A 9.68
5945 S. Atlanta
Tulsa, OK 74105
</TABLE>
B-47
<PAGE> 114
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
---- ---------------- ----- ----------
<S> <C> <C> <C>
Advest Inc. B 9.57
90 State House Square
Hartford, CT 06103
Donaldson Lufkin Jenrette B 16.83
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303
Khalil I. Hani B 7.59
2200 Bouterse St.
Park Ridge, IL 60068
Alexander L. Abraham & B 7.38
Adeline Y. Abraham Jiwros
2829 Harrison St.
Glenview, IL 60025
Stephens Inc. B 10.41
111 Center St.
Little Rock, AR 72201
M. L. Stern & Co. Inc. C 6.65
8350 Wilshire Blvd.
Beverly Hills, CA 90211
FBO Harper Family 1993 TR C 9.91
1 Baltusrol St.
Moraga, CA 94556
Zurich Kemper Investments C 13.21
222 S. Riverside Plaza
Chicago, IL 60606
BT Alex Brown Inc. C 10.51
P.O. Box 1346
Baltimore, MD 21203
Melvin H. Ploeckelman C 6.77
HCR 1 Box 27P
Athelstane, WI 54104
Leamon M. Fite C 7.69
511 Hillyer High Rd.
Anniston, AL 36207
Karin Muchemore C 9.85
3124 Quail Avenue North
Golden Valley, MN 55422
M. L. Stern & Co. Inc. (FBO) C 5.08
8350 Wilshire Blvd.
Beverly Hills, CA 90211
Diversified National Financial Service Corp. A 7.19
One World Financial Center
200 Liberty Street
New York, NY 10281
National Financial Service Corp. C 10.86
One World Financial Center
200 Liberty Street
New York, NY 10281
</TABLE>
B-48
<PAGE> 115
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
---- ---------------- ----- ----------
<S> <C> <C> <C>
MLPF&S C 18.77
4800 Deer Lake Dr. East
Jacksonville, FL 32246
Donaldson Lufkin Jenrette C 5.84
Securities Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
Invest Financial Corp. SSRP I 5.57
FBO Ian G. Clarke-Pounder
32 Saint Laurent Dr.
Hudson, NH 03051
Invest Financial Corp. SSRP I 6.11
FBO Craig B. Cacase
121 Fox Run Ct.
Newington CT, 06111
Invest Financial Corp. I 7.03
FBO Alfred J. Diorio
1011 Olde Hickory Rd.
Lancaster, PA 17601
Invest Financial Corp. SSRP I 16.51
FBO Sandra L. Tressler
23 Larkin Ln.
Harwich, MA 02645
Invest Financial Corp. I 14.66
FBO George R. Swyoert
6316 Pine Ln.
Lakeland, FL 33813
Invest Financial Corp. I 19.47
FBO Mary L. Sanders
1107 W. Charter St.
Tampa, FL 33602
Invest Financial Corp. I 6.15
FBO Debra S. Harrison
4804 Ridge Point Dr.
Tampa, FL 33624
Invest Financial Corp. I 11.74
FBO Ryland E. Syverson
3418 Belmont Rd.
Grand Forks, ND 58201
Government NFSC FEBO B 6.05
Home Savings of America
815 E. 6th St.
Ontario, CA 91764
BHC Securities Inc. B 5.72
Attn: Mutual Funds Dept.
One Commerce Square
Philadelphia, PA 19103
Donald Lufkin Jenrette C 5.45
Securities Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
MLPF&S C 9.61
4800 Deer Lake Dr. East
Jacksonville, FL 32246
</TABLE>
B-49
<PAGE> 116
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- ---- ---------------- ----- ----------
<S> <C> <C> <C>
ZKI Inc. I 13.39
Retirement Plan
811 Main
Kansas City, MO 64105
ZKI Inc. I 10.22
Retirement Plan PS
811 Main
Kansas City, MO 64105
Mortgage PaineWebber C 26.29
P.O. Box 3321
Weehawken, NJ 07087-6727
MLPF&S C 12.86
Attn. Fund Administration
4800 Deer Lake Dr. East
Jacksonville, FL 32246
Robert W. Baird & Co. Inc. C 5.26
777 E. Wisconsin Ave
Milwaukee, WI 53202
Morango Bandof Mission Indians C 24.96
Community Service Reserve Act
11581 Portrero Rd
Banning CA 92220
Short-Intermediate Government National Financial Service Corp. B 9.49
One World Financial Center
200 Liberty Street, 4th Floor
New York, NY 10281-1003
PaineWebber C 7.48
P.O. Box 3321
Weehawken, NJ 07087-6727
National Financial Service Corp. C 28.81
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
First Trust Corp. C 5.03
P.O. Box 173201
Denver, CO 80217
</TABLE>
SHAREHOLDER RIGHTS
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 Investment Company Act of 1940 ("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.
B-50
<PAGE> 117
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.
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 affected 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 ZKI 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.
B-51
<PAGE> 118
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder
Kemper High Yield Series
Kemper High Yield Opportunity Fund
We have audited the accompanying statement of net assets of Kemper High Yield
Series--Kemper High Yield Opportunity Fund as of September 18, 1997. This
statement of net assets is the responsibility of Fund management. Our
responsibility is to express an opinion on this statement of net assets based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of net assets is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of net assets. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall statement of net assets
presentation. We believe that our audit of the statement of net assets provides
a reasonable basis for our opinion.
In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of Kemper High Yield
Series--Kemper High Yield Opportunity Fund at September 18, 1997 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
September 18, 1997
B-52
<PAGE> 119
KEMPER HIGH YIELD SERIES--
KEMPER HIGH YIELD OPPORTUNITY FUND
STATEMENT OF NET ASSETS--SEPTEMBER 18, 1997
<TABLE>
<S> <C>
ASSETS
Cash.......................................................... $100,000
========
NET ASSETS
Net assets, applicable to shares of beneficial interest
(unlimited number of shares authorized, no par value)
outstanding as follows:
Class A--3,508.773
Class B--3,508.772
Class C--3,508.772.......................................... $100,000
========
THE PRICING OF SHARES
Net asset value and redemption price per share
Class A ($33,333.34 / 3,508.773 shares outstanding)......... $ 9.50
Class B* ($33,333.33 / 3,508.772 shares outstanding)........ $ 9.50
Class C* ($33,333.33 / 3,508.772 shares outstanding)........ $ 9.50
Maximum offering price per share
Class A (net asset value, plus 4.71% of net asset value or
4.50% of offering price)................................. $ 9.95
Class B (net asset value)................................... $ 9.50
Class C (net asset value)................................... $ 9.50
</TABLE>
- ---------------
* Subject to contingent deferred sales charge.
NOTES:
Kemper High Yield Series ("KHYS") was organized as a business trust under the
laws of the commonwealth of Massachusetts on October 24, 1985. All shares of
beneficial interest of Kemper High Yield Opportunity Fund ("Fund") were issued
to Zurich Kemper Investments, Inc. ("ZKI"), the investment manager for the Fund,
on September 18, 1997 for $100,000 cash. KHYS may establish multiple series;
currently two series have been established.
The costs of organization of the KHYS will be paid by ZKI.
B-53
<PAGE> 120
RATINGS OF INVESTMENTS
COMMERCIAL PAPER RATINGS
Commercial paper rated by Standard & Poor's Corporation ("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 CORPORATION 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.
B-54
<PAGE> 121
AA. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
B-55
<PAGE> 122
PORTFOLIO OF INVESTMENTS
KEMPER DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--36.2% PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Note, 6.125%, 2007 $ 25,275 $ 25,816
U.S. Treasury Bonds
10.75%, 2005 17,270 22,435
9.125%, 2009 29,300 34,203
13.875%, 2011 4,350 6,616
12.00%, 2013 9,200 13,474
13.25%, 2014 18,000 28,583
10.625%, 2015 28,210 41,716
6.50%, 2026 2,145 2,236
6.625%, 2027 28,325 30,033
6.375%, 2027 20,000 20,613
U.S. Treasury Strip, zero coupon, 2019 80,000 21,110
Federal Home Loan Mortgage Corp.,
6.50%, 2023 26,681 26,389
Government National Mortgage Association,
6.50%, 2023-2027 39,132 38,728
-------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost: $306,658) 311,952
-------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT OBLIGATIONS--9.8%
- -------------------------------------------------------------------------------------------------------------------------
(Principal amount in local currency, (a)Republic of Argentina
unless otherwise indicated) (principal amount in U.S. dollars)
6.687%, 2005 1,334 1,131
5.50%, 2023 5,750 3,910
Commonwealth of Australia,
9.50%, 2003 1,136 950
Republic of Austria,
5.875%, 2000 10,340 878
Kingdom of Belgium,
9.00%, 2003 71,715 2,371
(a)Federal Republic of Brazil,
(principal amount in U.S. dollars)
6.687%, 2006 100 78
Government of Canada,
7.50%, 2003 4,071 3,229
Kingdom of Denmark,
7.00%, 2004 9,127 1,551
Republic of Finland,
10.00%, 2001 2,000 452
French Treasury
5.50%, 2001 21,324 3,790
8.50%, 2008 14,192 3,034
German Bundesrepublic,
8.25%, 2001 13,436 8,733
Government of Ireland,
9.25%, 2003 202 356
Italian Treasury,
10.50%, 2000 9,400,000 6,223
Government of the Netherlands,
7.00%, 2003 5,464 3,056
Commonwealth of New Zealand,
8.00%, 2001 268 173
Republic of the Philippines,
(principal amount in U.S. dollars)
6.25%, 2017 2,240 1,854
</TABLE>
10
<PAGE> 123
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Republic of Poland,
(principal amount in U.S. dollars)
4.00%, 2014 $ 6,000 $ 4,905
Republic of Portugal,
11.875%, 2005 53,260 410
Russia Ministry of Finance,
(principal amount in U.S. dollars)
9.25%, 2001 2,000 1,893
Kingdom of Spain,
8.00%, 2004 362,520 2,806
Kingdom of Sweden,
10.25%, 2003 9,300 1,484
United Kingdom
7.00%, 2002 1,348 2,293
7.25%, 2007 2,067 3,645
United Mexican States
(principal amount in U.S. dollars)
8.00%, 2002 2,310 2,171
11.375%, 2016 4,000 4,160
6.835%, 2019 2,000 1,780
6.25%, 2019 6,000 4,680
11.50%, 2026 1,450 1,508
Republic of Venezuela,
(principal amount in U.S. dollars)
6.75%, 2007 12,250 10,596
----------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $88,075) 84,100
----------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--48.2%
- -------------------------------------------------------------------------------------------------------------------------
AEROSPACE--.9% Airlines Pass Through Trust, 10.875%, 2019 1,200 1,344
Fairchild Corp., 12.00%, 2001 1,545 1,553
Howmet, Inc., 10.00%, 2003 1,560 1,700
RHI Holdings, 11.875%, 1999 1,037 1,042
Tracor, 8.50%, 2007 1,000 1,003
Valujet, Inc., 10.25%, 2001 1,100 1,020
----------------------------------------------------------------------------
7,662
- -------------------------------------------------------------------------------------------------------------------------
BROADCASTING, Affinity Group, Inc., 11.50%, 2003 1,480 1,569
CABLESYSTEMS (b)Bell Cablemedia, PLC, 11.875%, 2005 100 87
AND PUBLISHING--5.7% Busse Broadcasting, 11.625%, 2000 430 460
Cablevision Systems Corp.
8.125%, 2009 2,990 3,005
10.50%, 2016 1,200 1,353
Capstar Broadcasting
9.25%, 2007 510 515
(b) 12.75%, 2009 2,910 2,037
Century Communications Corp., 8.75%, 2007 580 577
(b)Charter Communications, 14.00%, 2007 1,530 1,148
Comcast Cablevision
8.875%, 2017 1,225 1,399
8.50%, 2027 625 709
(b)Comcast UK Cable Partners, Ltd., 11.20%,
2007 4,200 3,297
(b)Diamond Cable Communications, PLC
13.25%, 2004 920 803
11.75%, 2005 1,840 1,375
10.75%, 2007 2,830 1,832
EZ Communications, 9.75%, 2005 590 648
</TABLE>
11
<PAGE> 124
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foxkids Worldwide
(b) 10.25%, 2007 $ 2,000 $ 1,145
9.25%, 2007 1,350 1,298
Frontiervision
11.00%, 2006 1,060 1,147
(b) 11.875%, 2007 1,000 685
Granite Broadcasting Corp., 10.375%, 2005 1,590 1,648
Intermedia Capital Partners, 11.25%, 2006 1,360 1,476
(b)International Cabletel, Inc., 12.75%,
2005 2,840 2,300
Multicanal Participacoes, 12.625%, 2004 1,240 1,271
NTL, 10.00%, 2007 380 391
News America Holdings, Inc.
9.25%, 2013 600 695
8.25%, 2018 1,375 1,457
Newsquest Capital, PLC, 11.00%, 2006 190 211
Salem Communication Corp., 9.50%, 2007 980 980
Sinclair Broadcasting Group, Inc., 10.00%,
2003 1,660 1,722
STC Broadcasting, 11.00%, 2007 590 631
Sullivan Broadcasting, 10.25%, 2005 1,160 1,230
Tele-Communications, Inc., 9.80%, 2012 950 1,148
(b)TeleWest Communications, PLC, 11.00%,
2007 3,065 2,291
Time Warner Entertainment, 8.375%, 2023 1,050 1,147
Time Warner, Inc.
7.25%, 2017 800 787
9.15%, 2023 1,425 1,682
(b)UIH Australia Pacific, Inc., 14.00%, 2006 330 229
U.S. West Cap Funding
7.90%, 2027 1,500 1,581
7.95%, 2097 1,250 1,337
----------------------------------------------------------------------------
49,303
- -------------------------------------------------------------------------------------------------------------------------
CHEMICALS AND Agriculture, Mining and Chemicals, Inc.,
AGRICULTURE--1.7% 10.75%, 2003 710 763
Atlantis Group, Inc., 11.00%, 2003 1,328 1,335
Hines Horticulture, 11.75%, 2005 2,690 2,959
Huntsman Corp., 9.50%, 2007 1,740 1,836
Huntsman Polymer Corp., 11.75%, 2004 1,900 2,147
(b)NL Industries, Inc., 13.00%, 2005 280 277
PCI Chemicals, 9.25%, 2007 620 608
Terra Industries, Inc., 10.50%, 2005 650 705
Texas Petrochemicals, 11.125%, 2006 2,000 2,200
UCC Investors Holdings, Inc., 10.50%, 2002 1,460 1,650
----------------------------------------------------------------------------
14,480
- -------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--6.4% (b)Call-Net Enterprise, Inc.
13.25%, 2004 370 334
9.27%, 2007 1,080 702
(b)Cellular, Inc., 11.75%, 2003 705 694
Comcast Cellular, 9.50%, 2007 1,860 1,925
CommNet Cellular, 11.25%, 2005 370 423
Communication and Power Industry, Inc.,
12.00%, 2005 550 611
Dobson Communications, 11.75%, 2007 2,000 2,050
Econophone, 13.50%, 2007 1,425 1,617
GCI General Communication, 9.75%, 2007 1,700 1,734
Highwaymaster, 13.75%, 2005 910 896
(b)ICG Holdings, 13.50%, 2005 2,435 1,924
Interamerica, 14.00%, 2007 320 320
Intermedia Communications of Florida, Inc.,
with warrants expiring 2000
</TABLE>
12
<PAGE> 125
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(b) 11.25%, 2006 $ 1,350 $ 1,087
(b) 11.25%, 2007 2,080 1,362
8.875%, 2007 770 753
(b)Knology Corp., 11.875%, 2007 600 318
McLeod USA
(b) 10.50%, 2007 4,060 2,801
9.25%, 2007 960 979
Metronet Communication
12.00%, 2007 560 627
(b) 10.75%, 2007 500 298
MGC Communications, 13.00%, 2004 1,300 1,287
(b)Millicom International Cellular, S.A.,
13.50%, 2006 1,890 1,422
Netia Holdings
(b) 11.25%, 2007 425 242
10.25%, 2007 300 288
(b)Nextel Communication, 9.75%, 2007 4,100 2,245
Nextlink Communications, 12.50%, 2006 1,285 1,462
(b)PanAmSat, L.P., 11.375%, 2003 1,880 1,859
Primus Telecom Group, 11.75%, with warrants,
2004 1,000 1,070
(b)PTC International Finance, 10.00%, 2007 6,670 4,269
RCN Corp., 10.00%, 2007 330 326
Rogers Cantel
8.80%, 2007 1,900 1,891
9.375%, 2008 1,570 1,652
9.75%, 2016 415 446
(b)Telegroup, 10.50%, 2004 420 313
Telex Communications, 10.50%, 2007 960 950
USA Mobile Communications, Inc. II
14.00%, 2004 1,280 1,434
9.50%, 2004 840 823
Vanguard Cellular Systems, 9.375%, 2006 1,600 1,648
Viasystems, 9.75%, 2007 2,000 2,045
Western Wireless
10.50%, 2006 and 2007 3,340 3,594
Winstar Equipment, 12.50%, 2004 2,400 2,502
Worldcom, Inc.,
7.75%, 2007 and 2027 2,025 2,151
----------------------------------------------------------------------------
55,374
- -------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION (b)Building Materials Corporation of America,
MATERIALS--1.1% 11.75%, 2004 2,700 2,511
Falcon Building
9.50%, 2007 320 328
(b) 10.50%, 2007 3,030 1,954
New Millen Home Building, 12.00%, 2004 250 249
Nortek, Inc., 9.125%, 2007 3,080 3,088
Waxman Industries, Inc.
(b) 12.75%, 2004 370 328
(c) 222,607 warrants expiring 2004 646
----------------------------------------------------------------------------
9,104
- -------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AFC Enterprises, 10.25%, 2007 3,120 3,268
AND SERVICES--4.9% Ameriserve Food, 8.875%, 2006 1,300 1,300
AMF Group
(b) 12.25%, 2006 580 439
10.875%, 2006 3,010 3,266
Avondale Mills, 10.25%, 2006 60 65
Bally Total Fitness, 9.875%, 2007 510 506
</TABLE>
13
<PAGE> 126
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cinemark USA, Inc., 9.625%, 2008 $ 3,030 $ 3,121
Coinmach Corp., 11.75%, 2005 3,120 3,432
Commemorative Brands, 11.00%, 2007 290 296
Dimon, Inc., 8.875%, 2006 2,000 2,145
Doskocil Manufacturing Co., 10.125%, 2007 1,030 1,066
(b)Dr. Pepper Bottling Holdings, Inc.,
11.625%, 2003 1,290 1,338
Dyersburg Corp., 9.75%, 2007 2,465 2,539
Hedstrom Corp., 10.00%, 2007 2,800 2,828
Herff Jones, Inc., 11.00%, 2005 1,050 1,134
Hollywood Entertainment, 10.625%, 2004 1,170 1,188
Hollywood Theaters, 10.625%, 2007 420 443
Kinder-Care Learning Centers, 9.50%, 2009 2,990 2,938
NBTY, 8.625%, 2007 680 665
Premier Parks, Inc., 12.00%, 2003 660 732
Regal Cinemas, 8.50%, 2007 400 398
Royal Caribbean, 8.25%, 2005 1,500 1,615
(b)Six Flags Theme Park, 12.25%, 2005 4,330 4,568
Van De Kamps, Inc., 12.00%, 2005 900 1,001
Windy Hill Pet Food, 9.75%, 2007 2,000 2,030
----------------------------------------------------------------------------
42,321
- -------------------------------------------------------------------------------------------------------------------------
DRUGS AND Dade International, Inc., 11.125%, 2006 1,000 1,120
HEALTH CARE--1.7% DVI, Inc., 9.875%, 2004 360 371
Genesis Eldercare, 9.00%, 2007 1,665 1,640
Graham-Field Health, 9.75%, 2007 580 600
Integrated Health Services
9.50%, 2007 3,220 3,260
9.25%, 2008 1,500 1,496
MedPartners, Inc., 7.375%, 2006 920 892
Packard Bioscience, 9.375%, 2007 1,000 1,005
Tenet Healthcare, 8.625%, 2003 2,000 2,106
Vencor, 8.625%, 2007 2,320 2,262
----------------------------------------------------------------------------
14,752
- -------------------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED AES, 8.50%, 2007 780 766
SERVICES--3.7% Bellweather Exploration, 10.875%, 2007 2,000 2,145
Benton Oil & Gas Co.
11.625%, 2003 2,000 2,200
9.375%, 2007 770 768
Coda Energy, 10.50%, 2006 1,600 1,688
Commonwealth Edison, 7.375%, 2004 1,150 1,176
Dailey Petro Service, 9.75%, 2007 1,000 1,040
Espirito Santo, 10.00%, 2007 1,910 1,767
Forcenergy, 9.50%, 2006 2,800 2,961
Forman Petro, 13.50%, 2004 500 508
Gulf Canada Resources, Ltd., 8.35%, 2006 1,200 1,305
National Energy, 10.75%, 2006 1,000 1,043
Ocean Energy, 9.75%, 2006 615 649
Pacalta Resources, 10.75%, 2004 2,830 2,802
Plains Resources, 10.25%, 2006 2,000 2,130
Rutherford Moran, 10.75%, 2004 740 729
Southwest Royal, 10.50%, 2004 650 644
Stone Energy Corp., 8.75%, 2007 780 772
Transamerica Energy Corp., 11.50%, 2002 2,000 2,045
United Meridian Corp., 10.375%, 2005 1,570 1,707
Wiser Oil Co., 9.50%, 2007 2,960 2,930
----------------------------------------------------------------------------
31,775
</TABLE>
14
<PAGE> 127
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL SERVICES, BCH Cayman Islands, 7.70%, 2006 $ 2,000 $ 2,094
HOMEBUILDERS AND CIT Cap Trust I, 7.70%, 2027 2,000 2,040
REAL ESTATE--5.0% Corporation Andina De Formento, 7.79%, 2017 2,000 2,036
Del Webb Corp., 9.75%, 2008 3,630 3,666
Den Danske Bank, 7.40%, 2010 2,000 2,056
Emergent Group, 10.75%, 2004 650 637
Felcor Suites
7.375%, 2004 1,600 1,594
7.625%, 2007 575 572
Forecast Group, L.P., 11.375%, 2000 825 786
Fortress Group, 13.75%, 2003 2,560 2,842
Hovnanian Enterprises, 11.25%, 2002 1,984 2,063
Intertek Finance, 10.25%, 2006 650 683
Kaufman & Broad Homes, 7.75%, 2004 1,000 983
Lehman Brothers Holdings
7.25%, 2003 650 669
7.375%, 2007 2,000 2,066
MBNA Capital, 8.278%, 2026 2,000 2,033
Mellon Capital, 7.72%, 2026 2,000 2,040
Peoples Bank Bridgeport, 7.20%, 2006 2,000 2,026
Presley Companies, 12.50%, 2001 90 86
Scotland International, 8.80%, 2004 700 777
Simon DeBartolo, 7.125%, 2007 1,600 1,626
Societe Generale, 7.85%, 2049 1,000 1,041
Southern Pacific Funding, 11.50%, 2004 930 930
Svenska Handlsbanken, 7.125%, 2049 2,000 2,010
Trinet Corp Realty Trust, 7.70%, 2017 2,000 2,057
UDC Homes, 12.50%, 2000 600 600
Williams Scotsman, 9.875%, 2007 2,790 2,874
----------------------------------------------------------------------------
42,887
- -------------------------------------------------------------------------------------------------------------------------
HOTELS AND Eldorado Resorts, 10.50%, 2006 1,120 1,221
GAMING--1.9% Empress River Casino, 10.75%, 2002 810 871
Harvey's Casino Resorts, 10.625%, 2006 2,380 2,570
Hilton Hotels
7.375%, 2002 1,000 1,026
7.95%, 2007 1,300 1,385
HMH Properties
9.50%, 2005 430 447
8.875%, 2007 2,070 2,117
Marriott International, 6.75%, 2009 2,000 1,987
Players International, 10.875%, 2005 1,475 1,578
Trump Atlantic City, 11.25%, 2006 3,100 3,054
----------------------------------------------------------------------------
16,256
</TABLE>
15
<PAGE> 128
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING, METALS Aftermarket Technology, 12.00%, 2004 $ 885 $ 983
AND MINING--5.6% Alvey Systems, 11.375%, 2003 1,325 1,381
Bar Technologies, 13.50%, 2001 2,030 2,208
Collins & Aikman Corp., 11.50%, 2006 2,090 2,356
Crain Industries, Inc., 13.50%, 2005 890 1,006
Day International Group, Inc.,11.125%, 2005 3,060 3,305
Euramax International, PLC, 11.25%, 2006 1,695 1,835
EV International, 11.00%, 2007 2,000 2,000
Foamex L.P., 9.875%, 2007 2,510 2,566
GS Technologies
12.00%, 2004 330 362
12.25%, 2005 650 730
Hayes Wheels International, 9.125%, 2007 4,200 4,305
IMO Industries, 11.75%, 2006 2,035 2,239
Johnstown America, 11.75%, 2005 820 886
JPS Automotive Products Corp., 11.125%, 2001 1,530 1,698
Knoll, Inc., 10.875%, 2006 1,638 1,802
MMI Products, 11.250%, 2007 2,150 2,301
Motors and Gears, Inc., 10.75%, 2006 1,620 1,701
Neenah Corp., 11.125%, 2007 2,860 3,103
Newflo Corp., 13.25%, 2002 1,070 1,128
Oxford Auto, 10.125%, 2007 2,000 2,060
Thermadyne Industries, Inc.
10.25%, 2002 1,497 1,557
10.75%, 2003 262 282
Venture Holdings, 9.50%, 2005 1,480 1,462
WCI Steel, Inc., 10.00%, 2004 1,600 1,668
Weirton Steel Corp., 11.375%, 2004 760 817
Wells Aluminum Corp., 10.125%, 2005 2,800 2,898
----------------------------------------------------------------------------
48,639
- -------------------------------------------------------------------------------------------------------------------------
PAPER, FOREST Berry Plastics Corp., 12.25%, 2004 505 556
PRODUCTS, AND BPC Holding Corp., 12.50%, 2006 810 891
CONTAINERS--3.0% BWAY Corp., 10.25%, 2007 310 333
Fonda Group, 9.50%, 2007 3,610 3,430
Gaylord Container Corp.
12.75%, 2005 2,220 2,409
9.75%, 2007 520 528
Maxxam Group, Inc.
(b) 12.25%, 2003 150 148
11.25%, 2003 2,080 2,194
National Fiberstock Corp., 11.625%, 2002 800 840
Pindo Finance, 10.75%, 2007 700 630
Printpack, Inc.
9.875%, 2004 170 179
10.625%, 2006 1,600 1,672
Riverwood International
10.25%, 2006 690 702
10.625%, 2007 525 545
10.875%, 2008 4,365 4,278
Spinnaker Industries, 10.75%, 2006 1,560 1,607
Stone Container Corp.
9.875%, 2001 2,370 2,414
12.25%, 2002 190 197
11.50%, 2006 800 848
TJIWI Kimia Finance, 10.00%, 2004 1,000 910
U.S. Can Corp., 10.125%, 2006 480 505
----------------------------------------------------------------------------
25,816
</TABLE>
16
<PAGE> 129
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RETAILING--3.5% Ameriking, 10.75%, 2006 $ 1,999 $ 2,119
Cole National Group
9.875%, 2006 500 531
8.625%, 2007 2,000 1,980
Federated Department Stores, Inc., 10.00%,
2001 2,000 2,211
Finlay Fine Jewelry Corp., 10.625%, 2003 3,905 4,100
Flagstar Corp.
10.750%, 2001 2,075 2,106
10.875%, 2002 590 603
Guitar Center Management, 11.00%, 2006 307 341
J. Crew
10.375%, 2007 1,040 1,030
(b) 13.12%, 2008 440 242
Krystal Co., 10.25%, 2007 530 529
Nine West Group, 9.00%, 2007 760 756
Pathmark Stores
12.625%, 2002 290 293
9.625%, 2003 1,600 1,504
Petro Shopping Centers, 10.50%, 2007 3,050 3,180
Riddell Sports, 10.50%, 2007 2,730 2,828
Specialty Retailers
8.50%, 2005 260 265
9.00%, 2007 460 467
Staples, Inc., 7.125%, 2007 1,000 1,010
Travelcenters America, 10.25%, 2007 3,830 3,993
----------------------------------------------------------------------------
30,088
- -------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS--3.1% Allied Waste Industries
10.25%, 2006 600 650
(b) 11.30%, 2007 2,350 1,613
Case Corp., 6.75%, 2007 1,350 1,359
Continental Airlines
7.75%, 2014 1,021 1,097
6.90%, 2018 1,000 1,015
Corporate Express, Inc., 9.125%, 2004 940 959
Delta Air Lines, 9.875%, 2008 1,347 1,537
Harman International, 7.32%, 2007 1,500 1,548
Outdoor Systems
9.375%, 2006 1,870 1,968
8.875%, 2007 1,550 1,600
TFM, S.A. de CV, 10.25%, 2007 5,370 5,289
(b)Transtar Holdings, L.P., 13.375%, 2003 670 576
United Airlines, 9.56%, 2018 2,000 2,408
Universal Outdoor, 9.75%, 2006 2,800 3,108
USA Waste Services, 7.00%, 2004 2,000 2,032
----------------------------------------------------------------------------
26,759
----------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $402,944) 415,216
----------------------------------------------------------------------------
</TABLE>
17
<PAGE> 130
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES
COMMON AND PREFERRED STOCKS--.3% OR PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(c)Capital Pacifics Holdings 4,435shs. $ 4
Clark USA, PIK, preferred 3,500 355
Crown American Realty, preferred 16,450 892
(c)Empire Gas Corp., warrants 2,208 11
(c)Foamex International, warrants 1,200 34
(c)Intelcom Group, Inc. 4,026 56
Sinclair Capital, preferred 13,500 1,465
----------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCKS
(Cost: $2,556) 2,818
----------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yield--5.53% to 5.69%
INSTRUMENTS--2.6% Due--November and December, 1997
(Cost: $22,441) $ 22,500 22,441
----------------------------------------------------------------------------
TOTAL INVESTMENTS--97.1%
(Cost: $822,674) 836,527
----------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--2.9% 25,016
----------------------------------------------------------------------------
NET ASSETS--100% $861,543
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Variable rate security. Rate shown is effective rate on October 31, 1997 and
date shown represents the final maturity of the obligation.
(b) Deferred interest obligation; currently zero coupon under the terms of the
initial offering.
(c) Non-income producing security.
Based on the cost of investments of $822,674,000 for federal income tax purposes
at October 31, 1997, the gross unrealized appreciation was $22,757,000, the
gross unrealized depreciation was $8,904,000 and the net unrealized appreciation
on investments was $13,853,000.
See accompanying Notes to Financial Statements.
18
<PAGE> 131
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER DIVERSIFIED INCOME FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Diversified Income Fund as of
October 31, 1997, the related statements of operations for the year then ended
and changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the fiscal periods since 1993. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Diversified Income Fund at October 31, 1997, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the fiscal
periods since 1993, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 16, 1997
19
<PAGE> 132
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------
Investments, at value
(Cost: $822,674) $ 836,527
- ------------------------------------------------------------------------------
Cash 7,569
- ------------------------------------------------------------------------------
Receivable for:
Investments sold 28,529
- ------------------------------------------------------------------------------
Interest 16,695
- ------------------------------------------------------------------------------
Fund shares sold 1,832
- ------------------------------------------------------------------------------
TOTAL ASSETS 891,152
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------------
Payable for:
Investments purchased 27,172
- ------------------------------------------------------------------------------
Fund shares redeemed 1,297
- ------------------------------------------------------------------------------
Management fee 408
- ------------------------------------------------------------------------------
Distribution services fee 197
- ------------------------------------------------------------------------------
Administrative services fee 169
- ------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 279
- ------------------------------------------------------------------------------
Trustees' fees and other 87
- ------------------------------------------------------------------------------
Total liabilities 29,609
- ------------------------------------------------------------------------------
NET ASSETS $ 861,543
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------------
Paid-in capital $ 972,609
- ------------------------------------------------------------------------------
Accumulated net realized loss on sales of investments and
foreign currency transactions (127,130)
- ------------------------------------------------------------------------------
Net unrealized appreciation on investments and assets and
liabilities in foreign currencies 13,252
- ------------------------------------------------------------------------------
Undistributed net investment income 2,812
- ------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 861,543
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($549,133,000 / 92,013,000 shares outstanding) $5.96
- ------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $6.24
- ------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($297,074,000 / 49,842,000 shares outstanding) $5.96
- ------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($15,328,000 / 2,557,000 shares outstanding) $5.99
- ------------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($8,000 / 1,400 shares outstanding) $5.88
- ------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 133
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended October 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------
NET INVESTMENT INCOME
- ------------------------------------------------------------------------------
Interest income $ 72,725
- ------------------------------------------------------------------------------
Expenses:
Management fee 4,664
- ------------------------------------------------------------------------------
Distribution services fee 2,231
- ------------------------------------------------------------------------------
Administrative services fee 1,864
- ------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 2,403
- ------------------------------------------------------------------------------
Professional fees 72
- ------------------------------------------------------------------------------
Reports to shareholders 157
- ------------------------------------------------------------------------------
Trustees' fees and other 32
- ------------------------------------------------------------------------------
Total expenses 11,423
- ------------------------------------------------------------------------------
NET INVESTMENT INCOME 61,302
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ------------------------------------------------------------------------------
Net realized gain on sales of investments and foreign
currency transactions 14,708
- ------------------------------------------------------------------------------
Net realized loss from futures transactions (7,606)
- ------------------------------------------------------------------------------
Net realized gain 7,102
- ------------------------------------------------------------------------------
Change in net unrealized appreciation on investments and
assets and liabilities in foreign currencies (5,336)
- ------------------------------------------------------------------------------
Net gain on investments 1,766
- ------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 63,068
- ------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------
Net investment income $ 61,302 56,476
- --------------------------------------------------------------------------------------------
Net realized gain 7,102 8,190
- --------------------------------------------------------------------------------------------
Change in net unrealized appreciation (5,336) 7,415
- --------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 63,068 72,081
- --------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (66,506) (70,190)
- --------------------------------------------------------------------------------------------
Net increase from capital share transactions 86,229 22,639
- --------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 82,791 24,530
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------
Beginning of year 778,752 754,222
- --------------------------------------------------------------------------------------------
END OF YEAR (including undistributed
net investment income of
$2,812 and $6,346, respectively) $ 861,543 778,752
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
21
<PAGE> 134
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Diversified Income Fund is an open-end
management investment company organized as a
business trust under the laws of Massachusetts. The
Fund offers four classes of shares. Class A shares
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 and a contingent deferred sales charge
payable upon certain redemptions within one year of
purchase. Class C shares do not convert into
another class. Class I shares are offered to a
limited group of investors, are not subject to
initial or contingent deferred sales charges and
have lower ongoing expenses than other classes.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Portfolio securities that are
traded on a domestic securities exchange are valued
at the last sale price on the exchange where
primarily traded or, if there is no recent sale, at
the last current bid quotation. Portfolio
securities that are primarily traded on foreign
securities exchanges are generally valued at the
preceding closing values of such securities on
their respective exchanges where primarily traded.
Securities not so traded are valued at the last
current bid quotation if market quotations are
available. Financial futures and options are valued
at the settlement price established each day by the
board of trade or exchange on which they are
traded. Forward foreign currency contracts are
valued at the forward rates prevailing on the day
of valuation. Over-the-counter traded options are
valued based upon prices provided by market makers.
Other securities and assets are valued at fair
value as determined in good faith by the Board of
Trustees.
CURRENCY TRANSLATION. The books and records of the
Fund are maintained in U.S. dollars. All assets and
liabilities initially expressed in foreign currency
values are converted into U.S. dollar values at the
mean between the bid and offered quotations of such
currencies against U.S. dollars as last quoted by a
recognized dealer. If such quotations are not
readily available, the rate of exchange is
determined in good faith by the Board of Trustees.
Income and expenses and purchases and sales of
investments are translated into U.S. dollars at the
rates of exchange prevailing on the respective
dates of such transactions. The Fund includes that
portion of the results of operations resulting from
changes in foreign exchange rates with net realized
and unrealized gain (loss) on investments, as
appropriate.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date (date the order to buy or sell is
executed). Dividend income is recorded on the
ex-dividend date and interest income is recorded on
the accrual basis. Interest income includes
discount amortization on all fixed income
securities and premium amortization on
mortgage-backed securities. Realized gains and
losses from investment transactions are reported on
an identified cost basis.
The Fund may purchase securities with delivery or
payments to occur at a later date. At the time the
Fund enters into a commitment to purchase a
security, the transaction is recorded and the value
of the security is reflected in the net asset
value. The value of the security may vary with
market fluctuations. No interest accrues to the
Fund until payment takes place. At the time the
Fund enters into
22
<PAGE> 135
NOTES TO FINANCIAL STATEMENTS
this type of transaction it is required to
segregate cash or other liquid assets equal to the
value of the securities purchased. At October 31,
1997 the Fund had $12,834,000 in purchase
commitments outstanding (1.5% of net assets), with
a corresponding amount of assets segregated.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies and therefore no
federal income tax provision is required. The
accumulated net realized loss on sales of
investments for federal income tax purposes at
October 31, 1997, amounting to approximately
$126,968,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 1998 through 2003.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
from generally accepted accounting principles.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI), and pays a management fee at an annual rate
of .58% of the first $250 million of average daily
net assets declining to .42% of average daily net
assets in excess of $12.5 billion. Zurich
Investment Management Limited, an affiliate of ZKI,
serves as sub-advisor with respect to foreign
securities investments in the Fund, and is paid by
ZKI for its services. The Fund incurred a
management fee of $4,664,000 for the year ended
October 31, 1997.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The Fund has an underwriting and
distribution services agreement with Zurich Kemper
Distributors, Inc. (ZKDI). Underwriting commissions
paid in connection with the distribution of Class A
shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY ZKDI BY ZKDI TO FIRMS
---------------- -------------------
<S> <C> <C>
Year ended October 31, 1997 $178,000 1,166,000
</TABLE>
For services under the distribution services
agreement, the Fund pays ZKDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, ZKDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, ZKDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B and Class C shares and CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY ZKDI PAID BY ZKDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Year ended October 31, 1997 $2,655,000 3,017,000
</TABLE>
23
<PAGE> 136
NOTES TO FINANCIAL STATEMENTS
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with ZKDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays ZKDI a fee at an annual rate of up to
.25% of average daily net assets of each class.
ZKDI in turn has various agreements with financial
services firms that provide these services and pays
these firms based on assets of Fund accounts the
firms service. Administrative services fees (ASF)
paid are as follows:
<TABLE>
<CAPTION>
ASF PAID BY ZKDI
ASF PAID BY ----------------------------
THE FUND TO ZKDI TO ALL FIRMS TO AFFILIATES
---------------- ------------ -------------
<S> <C> <C> <C>
Year ended October 31, 1997 $1,864,000 1,930,000 9,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) is the
shareholder service agent of the Fund. Under the
agreement, ZKSvC received shareholder services fees
of $1,681,000 for the year ended October 31, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended October 31, 1997, the Fund
made no payments to its officers and incurred
trustees' fees of $27,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended October 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (dollars in thousands):
Purchases $2,965,413
Proceeds from sales 3,012,229
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996
---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 21,099 $125,985 13,566 $ 80,537
-------------------------------------------------------------------------------
Class B 19,403 116,147 11,847 70,188
-------------------------------------------------------------------------------
Class C 1,933 11,608 1,092 6,475
-------------------------------------------------------------------------------
Class I 1 8 5 29
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 4,612 27,529 4,911 29,059
-------------------------------------------------------------------------------
Class B 2,401 14,136 2,405 14,237
-------------------------------------------------------------------------------
Class C 92 564 49 294
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHARES REDEEMED
Class A (23,040) (137,971) (19,272) (114,353)
-------------------------------------------------------------------------------
Class B (11,474) (68,173) (10,233) (60,748)
-------------------------------------------------------------------------------
Class C (597) (3,595) (514) (3,060)
-------------------------------------------------------------------------------
Class I (2) (9) (3) (19)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 4,260 25,490 2,536 15,078
-------------------------------------------------------------------------------
Class B (4,266) (25,490) (2,537) (15,078)
-------------------------------------------------------------------------------
NET INCREASE
FROM CAPITAL
SHARE TRANSACTIONS $ 86,229 $ 22,639
-------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 137
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts in order to help protect itself
from anticipated market conditions and, as such,
bears the risk that arises from entering into these
contracts
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and its broker as the market value
of the futures contract fluctuates. At October 31,
1997, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $73,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures positions
open at October 31, 1997:
<TABLE>
<CAPTION>
FACE EXPIRATION LOSS AT
TYPE AMOUNT MONTH 10/31/97
------------------------------------------------------------------------
<S> <C> <C> <C>
Eurodollar $ 3,752,000 December '97 (19,000)
------------------------------------------------------------------------
Eurodollar 11,031,000 March '98 (43,000)
------------------------------------------------------------------------
Eurodollar 1,404,000 June '98 (9,000)
------------------------------------------------------------------------
TOTAL $(71,000)
------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
7 FORWARD FOREIGN
CURRENCY CONTRACTS In order to help protect itself against a decline
in the value of particular foreign currencies
against the U.S. Dollar, the Fund has entered into
forward contracts to deliver foreign currencies in
exchange for U.S. Dollars. The Fund bears the
market risk that arises from changes in foreign
exchange rates, and accordingly, the net unrealized
gain (loss) on these contracts is reflected in the
accompanying financial statements. The Fund also
bears the credit risk if the counterparty fails to
perform under the contract. At October 31, 1997,
the Fund had entered into forward contracts for the
foreign currencies corresponding to the foreign
government bonds in its portfolio. The settlement
dates on the contracts occur throughout November,
1997, and the aggregate unrealized loss on the
contracts amounted to $601,000 at October 31, 1997.
25
<PAGE> 138
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------
Class A
----------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------------
Net asset value, beginning of year $5.99 5.98 5.77 6.23 5.65
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .46 .55 .52 .59
- ----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency .01 .12 .16 (.45) .58
- ----------------------------------------------------------------------------------------
Total from investment operations .47 .58 .71 .07 1.17
- ----------------------------------------------------------------------------------------
Less distribution from net investment
income .50 .57 .50 .53 .59
- ----------------------------------------------------------------------------------------
Net asset value, end of year $5.96 5.99 5.98 5.77 6.23
- ----------------------------------------------------------------------------------------
TOTAL RETURN 8.13% 10.27 12.90 1.02 21.60
- ----------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------
Expenses 1.03% 1.03 1.09 1.12 1.10
- ----------------------------------------------------------------------------------------
Net investment income 7.68 7.72 9.43 8.81 9.74
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------
Class B
--------------------------------------
YEAR ENDED MAY 31 TO
OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------
Net asset value, beginning of period $5.99 5.98 5.77 5.94
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .40 .41 .49 .19
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency .01 .12 .16 (.17)
- --------------------------------------------------------------------------------------
Total from investment operations .41 .53 .65 .02
- --------------------------------------------------------------------------------------
Less distribution from net investment income .44 .52 .44 .19
- --------------------------------------------------------------------------------------
Net asset value, end of period $5.96 5.99 5.98 5.77
- --------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.13% 9.23 11.87 .35
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------
Expenses 1.98% 1.96 2.04 1.97
- --------------------------------------------------------------------------------------
Net investment income 6.73 6.79 8.48 8.01
- --------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 139
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
---------------------------------- ---------------------------------------
CLASS C CLASS I
---------------------------------- ---------------------------------------
YEAR ENDED MAY 31 TO YEAR ENDED NOVEMBER 22, 1995 TO
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1996 1995 1994 1997 1996
- --------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------- --------------------------------------
Net asset value, beginning of period $6.01 6.00 5.79 5.95 6.00 5.98
- --------------------------------------------------------------------------------- --------------------------------------
Income from investment operations:
Net investment income .42 .41 .50 .20 .36 .45
- --------------------------------------------------------------------------------- --------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency .01 .12 .16 (.17) .01 .12
- --------------------------------------------------------------------------------- --------------------------------------
Total from investment operations .43 .53 .66 .03 .37 .57
- --------------------------------------------------------------------------------- --------------------------------------
Less distribution from net investment income .45 .52 .45 .19 .49 .55
- --------------------------------------------------------------------------------- --------------------------------------
Net asset value, end of period $5.99 6.01 6.00 5.79 5.88 6.00
- --------------------------------------------------------------------------------- --------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 7.37% 9.33 11.95 .55 6.33 10.01
- --------------------------------------------------------------------------------- --------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------- --------------------------------------
Expenses 1.85% 1.86 1.86 1.96 2.64 1.27
- --------------------------------------------------------------------------------- --------------------------------------
Net investment income 6.86 6.89 8.68 8.02 6.07 7.48
- --------------------------------------------------------------------------------- --------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $861,543 778,752 754,222 738,014 328,512
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 347% 310 286 179 80
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
27
<PAGE> 140
KEMPER DIVERSIFIED INCOME FUND
PART C.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(i) Financial statements included in Part A of the Registration
Statement: Financial Highlights.
(ii) Financial statements included in Part B of the Registration
Statement:
Statement of assets and liabilities--October 31, 1997.
Statement of operations for the year ended October 31, 1997.
Statement of changes in net assets for each of the two years in
the period ended October 31, 1997.
Portfolio of investments--October 31, 1997.
Notes to financial statements.
Schedules II, III, IV and V are omitted as the required information is
not present.
Schedule I has been omitted as the required information is presented in
the portfolio of investments at October 31, 1997.
(b) Exhibits
<TABLE>
<S> <C>
99.B1. Amended and Restated Agreement and Declaration of Trust*
99.B2. By-Laws*
99.B3. Inapplicable
99.B4(a) Text of Share Certificate*
99.B4(b) Amended and Restated Written Instrument Establishing and
Designating Separate Classes of Shares***
99.B5(a) Investment Management Agreement***
99.B5(b) Sub-Advisory Agreement***
99.B6(a) Form of Underwriting and Distribution Services Agreement
99.B6(b) Selling Group Agreement
99.B7 Inapplicable
99.B8(a) Custody Agreement (Form 1)*
99.B8(b) Custody Agreement (Form 2)*
99.B9(a) Agency Agreement*
99.B9(b) Supplement to Agency Agreement
99.B9(c) Administrative Services Agreement
99.B10 Inapplicable
99.B11 Report and Consent of Independent Auditors
99.B12 Inapplicable
99.B13 Inapplicable
99.B14(a) Kemper Retirement Plan Prototype*
99.B14(b) Model Individual Retirement Account*
99.B15 Form of Amended and Restated 12b-1 Plan (Class B and Class C
shares)
99.B16 Performance Calculations**
99.B18 Multi-Distribution System Plan***
99.B24 Powers of Attorney***
99.485(b) Representation of Counsel (Rule 485(b))
27A Financial Data Schedule
27B Financial Data Schedule
27C Financial Data Schedule
27I Financial Data Schedule
</TABLE>
- ---------------
* Incorporated herein by reference to the Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A filed on November 30, 1995.
** Incorporated herein by reference to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed on January 18, 1990.
*** Incorporated herein by reference to Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A filed on December 20, 1996.
C-1
<PAGE> 141
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Inapplicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of December 15, 1997, there were holders of record of the sole series of
shares of Registrant as follows: 39,295 Class A, 25,813 Class B, 1,449 Class C
and 22 Class I.
ITEM 27. 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 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 will become the
majority stockholder in Scudder with an approximately 70% interest, and ZKI will
become a wholly-owned subsidiary of, or be 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 each
Fund 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.
C-2
<PAGE> 142
ITEM 28(a) BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information pertaining to business and other connections of the
Registrant's investment advisers is hereby incorporated by reference to the
section of the Prospectus captioned "Investment Manager and Underwriter"
and to the section of the Statement of Additional Information captioned
"Investment Manager and Underwriter".
Zurich Kemper Investments, Inc., investment adviser of the Registrant, is
investment adviser of:
Kemper Mutual Funds:
Kemper Technology Fund
Kemper Total Return Fund
Kemper Growth Fund
Kemper Small Capitalization Equity Fund
Kemper Income and Capital Preservation Fund
Kemper National Tax-Free Income Series
Kemper Diversified Income Fund
Kemper High Yield Series
Cash Equivalent Fund
Kemper U.S. Government Securities Fund
Kemper International Fund
Kemper Portfolios
Kemper State Tax-Free Income Series
Tax-Exempt California Money Market Fund
Kemper Adjustable Rate U.S. Government Fund
Kemper Blue Chip Fund
Kemper Global Income Fund
Kemper Target Equity Fund
Cash Account Trust
Investors Cash Trust
Investors Municipal Cash Fund
Kemper Value Plus Growth Fund
Kemper Quantitative Equity Fund
Kemper Horizon Fund
Kemper Europe Fund
Kemper Asian Growth Fund
Kemper Aggressive Growth Fund
Kemper Closed-End Funds:
Kemper High Income Trust
Kemper Intermediate Government Trust
Kemper Municipal Income Trust
Kemper Multi-Market Income Trust
Kemper Strategic Municipal Income Trust
The Growth Fund of Spain, Inc.
Kemper Strategic Income Fund
Zurich Money Funds
Zurich YieldWise Money Fund
Zurich Kemper Investments, Inc. also furnishes investment advice to and
manages investment portfolios for other clients including Investors Fund Series
and Kemper International Bond Fund.
<PAGE> 143
Item 28(b)(i) Business and Other Connections of Officers
and Directors of Zurich Kemper Investments, Inc.,
the Investment Adviser
TIMBERS, STEPHEN B.
Director, President, Chief Executive Officer and Chief Investment
Officer, Zurich Kemper Investments, Inc.
Director, Kemper Distributors, Inc.
Director, Zurich Investment Management, Inc.
Director, Chairman, Kemper Service Company
Director, Zurich Kemper Value Advisors, Inc.
Director, ZKI Agency, Inc.
Director, President, Kemper International Management, Inc.
Trustee and President, Kemper Funds
Director, The LTV Corporation
Governor, Investment Company Institute
NEAL, JOHN E.
Director, Zurich Kemper Investments, Inc.
President, Kemper Funds Group, a unit of Zurich Kemper
Investments, Inc.
Director, President, Kemper Service Company
Director, Kemper Distributors, Inc.
Director, Zurich Investment Management, Inc.
Director, Zurich Kemper Value Advisors, Inc.
Director, ZKI Agency, Inc.
Director, Community Investment Corporation
Director, Continental Community Development Corporation
Director, K-P Greenway, Inc.
Director, K-P Plaza Dallas, Inc.
Director, Kemper/Prime Acquisition Fund, Inc.
Director, RespiteCare
Director, Urban Shopping Centers, Inc.
Vice President, Kemper Funds
<PAGE> 144
CHAPMAN, II, WILLIAM E.
President, Kemper Retirement Plans Group, a unit of Zurich Kemper
Investments, Inc.
Director, Executive Vice President, Kemper Distributors, Inc.
Executive Vice President, Kemper Service Company
VOGEL, VICTOR E.
Senior Executive Vice President, Zurich Kemper Investments, Inc.
Trustee, Zurich Kemper Investments, Inc. Profit Sharing Plan & Money
Purchase Pension Plan
Executive Vice President, Kemper Service Company
BEIMFORD, JR., JOSEPH P.
Executive Vice President, Zurich Kemper Investments, Inc.
Vice President, Cash Account Trust
Vice President, Cash Equivalent Fund
Vice President, Galaxy Offshore, Inc.
Vice President, Investors Cash Trust
Vice President, Kemper Adjustable Rate U.S. Government Fund
Vice President, Kemper Diversified Income Fund
Vice President, Kemper Global Income Fund
Vice President, Kemper High Income Trust
Vice President, Kemper High Yield Series
Vice President, Kemper Income and Capital Preservation Fund
Vice President, Kemper Intermediate Government Trust
Vice President, Kemper International Bond Fund
Vice President, Investors Fund Series
Vice President, Zurich Money Funds
Vice President, Kemper Multi-Market Income Trust
Vice President, Kemper Municipal Income Trust
Vice President, Kemper National Tax-Free Income Series
Vice President, Kemper Portfolios
Vice President, Kemper State Tax-Free Income Series
Vice President, Kemper Strategic Income Fund
Vice President, Kemper Strategic Municipal Income Trust
Vice President, Kemper U.S. Government Securities Fund
Vice President, Tax-Exempt California Money Market Fund
Vice President, Investors Municipal Cash Fund
<PAGE> 145
Managing Director, Zurich Investment Management, Inc.
DUDASIK, PATRICK H.
Executive Vice President and Chief Financial Officer, Zurich Kemper
Investments, Inc.
Executive Vice President, Chief Financial Officer and Treasurer,
Zurich Kemper Value Advisors, Inc.
Chief Financial Officer and Treasurer, Zurich Investment Management, Inc.
Treasurer and Chief Financial Officer, Kemper Distributors, Inc.
Treasurer and Chief Financial Officer, Kemper Service Company
Treasurer, ZKI Agency, Inc.
FROEHLICH, PH.D, ROBERT J.
Executive Vice President, Chief Investment Strategist, Zurich Kemper
Investments, Inc.
GREENAWALT, JAMES L.
Executive Vice President, Zurich Kemper Investments, Inc.
Director, President, Kemper Distributors, Inc.
Director, President, ZKI Agency, Inc.
LANGBAUM, GARY A.
Executive Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Total Return Fund
Vice President, Investors Fund Series
MANZONI, JR., CHARLES R.
Executive Vice President, Secretary & General Counsel, Zurich Kemper
Investments, Inc.
Vice President, Kemper Funds
Secretary, ZKI Agency, Inc.
Secretary, Kemper Service Company
Secretary, Kemper Distributors, Inc.
Secretary, ZKI Holding Corporation
Secretary, Zurich Investment Management, Inc.
Secretary, Zurich Kemper Value Advisors, Inc.
MURRIHY, MAURA J.
Executive Vice President, Zurich Kemper Investments, Inc.
PECK, JR., ROBERT C.
Executive Vice President, Chief
Investment Officer-Fixed Income, Zurich Kemper Investments, Inc.
Vice President, Zurich Money Funds
Vice President, Kemper Income & Capital Preservation Fund
Vice President, Kemper National Tax-Free Income Series
Vice President, Kemper Diversified Income Fund
Vice President, Kemper High Yield Series
Vice President, Cash Equivalent Fund
Vice President, Kemper U.S. Government Securities Fund
Vice President, Kemper State Tax-Free Income Series
Vice President, Kemper Portfolios
Vice President, Tax-Exempt California Money Market Fund
Vice President, Kemper Adjustable Rate U.S. Government Fund
Vice President, Kemper Global Income Fund
Vice President, Cash Account Trust
Vice President, Investors Cash Trust
Vice President, Investors Municipal Cash Fund
Vice President, Zurich YieldWise Money Fund
Vice President, Investors Fund Series
Vice President, Kemper High Income Trust
Vice President, Kemper Intermediate Government Trust
Vice President, Kemper Municipal Income Trust
Vice President, Kemper Multi-Market Income Trust
Vice President, Kemper Strategic Municipal Income Trust
Vice President, Kemper Strategic Income Fund
Vice President, Kemper International Bond Fund
REYNOLDS, STEVEN H.
Executive Vice President, Chief Investment Officer - Equities, Zurich
Kemper Investments, Inc.
Vice President, Kemper Technology Fund
Vice President, Kemper Total Return Fund
Vice President, Kemper Growth Fund
Vice President, Kemper Small Capitalization Equity Fund
Vice President, Kemper International Fund
Vice President, Kemper Blue Chip Fund
Vice President, Kemper Value Plus Growth Fund
Vice President, Kemper Quantitative Equity Fund
Vice President, Kemper Target Equity Fund
Vice President, Kemper Horizon Fund
Vice President, Investors Fund Series
Vice President, The Growth Fund of Spain, Inc.
Vice President, Kemper Europe Fund
<PAGE> 146
ROBERTS, SCOTT A.
Executive Vice President, Zurich Kemper Investments, Inc.
Director, Senior Managing Director, Zurich Investment Management, Inc.
SILIGMUELLER, DALE S.
Executive Vice President, Zurich Kemper Investments, Inc.
Director, Executive Vice President, Kemper Service Company
SWANSON, DAVID
Executive Vice President Zurich Kemper Investments, Inc.
WEISS, ROBERT D.
Executive Vice President, Zurich Kemper Investments, Inc.
Director, Senior Managing Director, Zurich Investment Management, Inc.
BERCHER, LINDA A.
Senior Vice President, Zurich Kemper Investments, Inc.
BRUNS, THOMAS V.
Senior Vice President, Zurich Kemper Investments, Inc.
BUKOWSKI, DANIEL J.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Quantitative Equity Fund
Vice President, Kemper Value Plus Growth Fund
Vice President, Investors Fund Series
BUTLER, DAVID H.
Senior Vice President, Zurich Kemper Investments, Inc.
CERVONE, DAVID M.
Senior Vice President, Zurich Kemper Investments, Inc.
CESSINE, ROBERT S.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Income and Capital Preservation Fund
Vice President, Kemper Diversified Income Fund
Vice President, Kemper Multi-Market Income Trust
Vice President, Investors Fund Series
CHESTER, TRACY McCORMICK
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Blue Chip Fund
Vice President, Kemper Target Equity Fund
CHIEN, CHRISTINE
Senior Vice President, Zurich Kemper Investments, Inc.
CIARLELLI, ROBERT W.
Senior Vice President, Zurich Kemper Investments, Inc.
Executive Vice President, Kemper Service Company
COLLORA, PHILIP J.
Senior Vice President and Assistant Secretary, Zurich Kemper
Investments, Inc.
Vice President and Secretary, Kemper Funds
<PAGE> 147
Assistant Secretary, Kemper International Management, Inc.
Assistant Secretary, Zurich Investment Management, Inc.
Assistant Secretary, Zurich Kemper Value Advisors, Inc.
Assistant Secretary, ZKI Agency, Inc.
DUFFY, JEROME L.
Senior Vice President, Zurich Kemper Investments, Inc.
Treasurer, Kemper Funds
FENGER, JAMES E.
Senior Vice President, Zurich Kemper Investments, Inc.
FINK, THOMAS M.
Senior Vice President, Zurich Kemper Investments, Inc.
Managing Director, Zurich Investment Management, Inc.
GALLAGHER, MICHAEL L.
Senior Vice President, Zurich Kemper Investments, Inc.
Senior Vice President, Kemper Service Company
GOERS, RICHARD A.
Senior Vice President, Zurich Kemper Investments, Inc.
GREENWALD, MARSHALL L.
Senior Vice President, Zurich Kemper Investments, Inc.
Managing Director, Zurich Investment Management, Inc.
HARRINGTON, MICHAEL E.
Senior Vice President, Zurich Kemper Investments, Inc.
Executive Vice President, Kemper Distributors, Inc.
KEITH, GEORGE
Senior Vice President, Zurich Kemper Investments, Inc.
KLEIN, GEORGE
Senior Vice President, Zurich Kemper Investments, Inc.
Director, Managing Director, Zurich Investment Management, Inc.
KLEIN, MARTIN
Senior Vice President, Zurich Kemper Investments, Inc.
Managing Director, Zurich Investment Management, Inc.
KOCHER, GARY
Senior Vice President, Zurich Kemper Investments, Inc.
KORTH, FRANK D.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Technology Fund
McNAMARA, MICHAEL A.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Diversified Income Fund
Vice President, Kemper High Income Trust
Vice President, Kemper High Yield Series
<PAGE> 148
Vice President, Investors Fund Series
Vice President, Kemper Multi-Market Income Trust
Vice President, Kemper Strategic Income Fund
MOELLER, JAMES V.
Senior Vice President, Zurich Kemper Investments, Inc.
Managing Director, Zurich Investment Management, Inc.
MOORE, C. PERRY
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, ZKI Agency, Inc.
MIER, CHRISTOPHER J.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper National Tax-Free Income Series
Vice President, Kemper Municipal Income Trust
Vice President, Kemper State Tax-Free Income Series
Vice President, Kemper Strategic Municipal Income Trust
RABIEGA, CRAIG F.
Senior Vice President, Zurich Kemper Investments, Inc.
First Vice President, Kemper Service Company
RACHWALSKI, JR. FRANK J.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Cash Account Trust
Vice President, Cash Equivalent Fund
Vice President, Investors Cash Trust
Vice President, Investors Fund Series
Vice President, Zurich Money Funds
Vice President, Kemper Portfolios
Vice President, Tax-Exempt California Money Market Fund
Vice President, Investors Municipal Cash Fund
RESIS, JR., HARRY E.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Diversified Income Fund
Vice President, Kemper High Income Trust
Vice President, Kemper High Yield Series
Vice President, Investors Fund Series
Vice President, Kemper Multi-Market Income Trust
Vice President, Kemper Strategic Income Fund
ROBISON, JR., JOHN H.
Senior Vice President, Zurich Kemper Investments, Inc.
SCHULTHESZ, HENRY J.
Senior Vice President, Zurich Kemper Investments, Inc.
SILVIA, JOHN E.
Senior Vice President, Zurich Kemper Investments, Inc.
SMITH, JR., EDWARD BYRON
Senior Vice President, Zurich Kemper Investments, Inc.
STALZER, KURT
Senior Vice President, Zurich Kemper Investments, Inc.
URBASZEWSKI, KENNETH T.
Senior Vice President, Zurich Kemper Investments, Inc.
<PAGE> 149
VANDENBERG, RICHARD
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Diversified Income Fund
Vice President, Kemper U.S. Government Securities Fund
Vice President, Kemper Portfolios
Vice President, Kemper Adjustable Rate U.S. Government Fund
VINCENT, CHRISTOPHER T.
Senior Vice President, Zurich Kemper Investments, Inc.
Managing Director, Zurich Investment Management, Inc.
WONNACOTT, LARRY R.
Senior Vice President, Zurich Kemper Investments, Inc.
Managing Director, Zurich Investment Management, Inc.
BAZAN, KENNETH M.
First Vice President, Zurich Kemper Investments, Inc.
Director, K-P Greenway, Inc.
Director, K-P Plaza Dallas, Inc.
Director, Kemper/Prime Acquisition Fund, Inc.
BODEM, RICHARD A.
First Vice President, Zurich Kemper Investments, Inc.
First Vice President, Kemper Service Company
BOEHM, JONATHAN J.
First Vice President, Zurich Kemper Investments, Inc.
Senior Vice President, Kemper Service Company
BURROW, DALE R.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Strategic Municipal Income Trust
BURSHTAN, DAVID H.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Investors Fund Series
BYRNES, ELIZABETH A.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Adjustable Rate U.S. Government Fund
Vice President, Kemper Intermediate Government Trust
CARNEY, ANNE T.
First Vice President, Zurich Kemper Investments, Inc.
CHRISTIANSEN, HERBERT A.
First Vice President, Zurich Kemper Investments, Inc.
First Vice President, Kemper Service Company
COHEN, JERRI I.
First Vice President, Zurich Kemper Investments, Inc.
DeMAIO, CHRIS C.
First Vice President, Zurich Kemper Investments, Inc.
Vice President and Chief Accounting Officer, Kemper Service
Company
<PAGE> 150
DEXTER, STEPHEN P.
First Vice President, Zurich Kemper Investments, Inc.
DOYLE, DANIEL J.
First Vice President, Zurich Kemper Investments, Inc.
HAUSKEN, PHILIP D.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Distributors, Inc.
Assistant Secretary, Zurich Investment Management, Inc.
HORTON, ROBERT J.
First Vice President, Zurich Kemper Investments, Inc.
INNES, BRUCE D.
First Vice President, Zurich Kemper Investments, Inc.
Co-President, International Association of Corporate and
Professional Recruiters
JACOBS, PETER M.
First Vice President, Zurich Kemper Investments, Inc.
KIEL, CAROL L.
First Vice President, Zurich Kemper Investments, Inc.
KNAPP, WILLIAM M.
First Vice President, Zurich Kemper Investments, Inc.
KOCH, DEBORAH L.
First Vice President, Zurich Kemper Investments, Inc.
LASKA, ROBERTA E.
First Vice President, Zurich Kemper Investments, Inc.
LENTZ, MAUREEN P.
First Vice President, Zurich Kemper Investments, Inc.
McCRINDLE-PETRARCA, SUSAN
First Vice President, Zurich Kemper Investments, Inc.
McGOVERN, KAREN
First Vice President, Zurich Kemper Investments, Inc.
MICHAEL, DIANNE
First Vice President, Zurich Kemper Investments, Inc.
MINER, EDWARD
First Vice President, Zurich Kemper Investments, Inc.
MURRAY, SCOTT S.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Service Company
NORRIS, JOHNSTON A.
First Vice President, Zurich Kemper Investments, Inc.
<PAGE> 151
PANOZZO, ROBERTA L.
First Vice President, Zurich Kemper Investments, Inc.
PECARD, ANN M.
First Vice President, Zurich Kemper Investments, Inc.
PONTECORE, SUSAN E.
First Vice President, Zurich Kemper Investments, Inc.
RADIS, STEVE A.
First Vice President, Zurich Kemper Investments, Inc.
RATEKIN, DIANE E.
First Vice President, Assistant General Counsel and Assistant
Secretary, Zurich Kemper Investments, Inc.
Assistant Secretary, Kemper Distributors, Inc.
SMITH, ROBERT G.
First Vice President, Zurich Kemper Investments, Inc.
STUEBE, JOHN W.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Cash Account Trust
Vice President, Cash Equivalent Fund
TEPPER, SHARYN A.
First Vice President, Zurich Kemper Investments, Inc.
Assistant Secretary, Zurich Investment Management, Inc.
TOOLE, W. TIMOTHY
First Vice President, Zurich Kemper Investments, Inc.
TRUTTER, JONATHAN W.
First Vice President, Zurich Kemper Investments, Inc.
Managing Director, Zurich Investment Management, Inc.
Vice President, Kemper Diversified Income Fund
Vice President, Kemper Multi-Market Income Trust
Vice President, Kemper Strategic Income Fund
WETHERALD, ROBERT F.
First Vice President, Zurich Kemper Investments, Inc.
WITTNEBEL, MARK E.
First Vice President, Zurich Kemper Investments, Inc.
ALLEN, PATRICIA L.
Vice President, Zurich Kemper Investments, Inc.
ANTONAK, GEORGE A.
Vice President, Zurich Kemper Investments, Inc.
BALASUBRAMANIAM, KALAMADI
Vice President, Zurich Kemper Investments, Inc.
BARRY, JOANN M.
Vice President, Zurich Kemper Investments, Inc.
BARSANTI, WILLIAM
Vice President, Zurich Kemper Investments, Inc.
<PAGE> 152
BIEBERLY, CHRISTINE A.
Vice President, Zurich Kemper Investments, Inc.
BRENNAN, ELEANOR R.
Vice President, Zurich Kemper Investments, Inc.
BUCHANAN, PAMELA S.
Vice President, Zurich Kemper Investments, Inc.
BURKE, MARY PAT
Vice President, Zurich Kemper Investments, Inc.
CACCIOLA, RONALD
Vice President, Zurich Kemper Investments, Inc.
Managing Director, Zurich Investment Management, Inc.
CARTER, PAUL J.
Vice President and Compliance Manager, Zurich Kemper Investments, Inc.
CECOLA, MARY
Vice President, Zurich Kemper Investments, Inc.
CRAWSHAW, SUSAN
Vice President, Zurich Kemper Investments, Inc.
ESOLA, CHARLES J.
Vice President, Zurich Kemper Investments, Inc.
Vice President, Zurich Kemper Service Company
FERRY, JOHN A.
Vice President, Zurich Kemper Investments, Inc.
FRIHART, THORA A.
Vice President, Zurich Kemper Investments, Inc.
GERACI, AUGUST L.
Vice President, Zurich Kemper Investments, Inc.
GOLAN, JAMES S.
Vice President, Zurich Kemper Investments, Inc.
GRAY, PATRICK
Vice President, Zurich Kemper Investments, Inc.
GROOTENDORST, TONYA
Vice President, Zurich Kemper Investments, Inc.
HAMMAN, JR., JAMES S.
Vice President, Zurich Kemper Investments, Inc.
HECHT, MARC L.
Vice President, Zurich Kemper Investments, Inc.
Assistant Secretary, Kemper Distributors, Inc.
Assistant Secretary, Kemper Service Company
Assistant Secretary, ZKI Holding Corporation
Assistant Secretary, ZKI Agency, Inc.
Assistant Secretary, Zurich Investment Management, Inc.
Assistant Secretary, Zurich Kemper Value Advisors, Inc.
<PAGE> 153
HUOT, LISA L.
Vice President, Zurich Kemper Investments, Inc.
JASINSKI, R. ANTHONY
Vice President, Zurich Kemper Investments, Inc.
KARWOWSKI, KENNETH F.
Vice President, Zurich Kemper Investments, Inc.
KENNEDY, PATRICK J.
Vice President, Zurich Kemper Investments, Inc.
KOURY, KATHRYN E.
Vice President, Zurich Kemper Investments, Inc.
KOWALCZYK, MARK A.
Vice President, Zurich Kemper Investments, Inc.
Vice President, ZKI Agency, Inc.
KRANZ, KATHY J.
Vice President, Zurich Kemper Investments, Inc.
KRUEGER, PAMELA D.
Vice President, Zurich Kemper Investments, Inc.
KYCE, JOYCE
Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Service Company
LAUTZ, STEPHEN
Vice President, Zurich Kemper Investments, Inc.
LITTLE, BRUCE A.
Vice President, Zurich Kemper Investments, Inc.
MARKLEY, DAVID
Vice President, Zurich Kemper Investments, Inc.
MATZA, LINDA
Vice President, Zurich Kemper Investments, Inc.
McGINN, MARTHA R.
Vice President, Zurich Kemper Investments, Inc.
MEROLD, CARLENE D.
Vice President, Zurich Kemper Investments, Inc.
MILLER, GARY L.
Vice President, Zurich Kemper Investments, Inc.
MILLIGAN, BRIAN J.
Vice President, Zurich Kemper Investments, Inc.
<PAGE> 154
MULLEN, TERRENCE
Vice President, Zurich Kemper Investments, Inc.
MURPHY, THOMAS W.
Vice President, Zurich Kemper Investments, Inc.
NEVILLE, BRIAN P.
Vice President, Zurich Kemper Investments, Inc.
NORMAN, JR., DONALD L.
Vice President, Zurich Kemper Investments, Inc.
NOWAK, GREGORY J.
Vice President, Zurich Kemper Investments, Inc.
PANOZZO, ALBERT R.
Vice President, Zurich Kemper Investments, Inc.
PAXTON, THOMAS
Vice President, Zurich Kemper Investments, Inc.
QUADRINI, LISA L.
Vice President, Zurich Kemper Investments, Inc.
RANDALL, JR., WALTER R.
Vice President, Zurich Kemper Investments, Inc.
ROBINSON, DEBRA A.
Vice President, Zurich Kemper Investments, Inc.
RODGERS, JOHN B.
Vice President, Zurich Kemper Investments, Inc.
ROSE, KATIE M.
Vice President, Zurich Kemper Investments, Inc.
RUDIN, MICHELLE I.
Vice President, Zurich Kemper Investments, Inc.
SAENGER, MARYELLEN
Vice President, Zurich Kemper Investments, Inc.
SCHUERINGS, ROBERT F.
Vice President, Zurich Kemper Investments, Inc.
SCHULDT, STUART N.
Vice President, Zurich Kemper Investments, Inc.
SCHWARZ, LOUIS E.
Vice President, Zurich Kemper Investments, Inc.
SOPHER, EDWARD O.
Vice President, Zurich Kemper Investments, Inc.
<PAGE> 155
SPILLER, KATHLEEN A.
Vice President, Zurich Kemper Investments, Inc.
SPURLING, CHRIS
Vice President, Zurich Kemper Investments, Inc.
STROMM, LAWRENCE D.
Vice President, Zurich Kemper Investments, Inc.
STURM, EILEEN A.
Vice President, Zurich Kemper Investments, Inc.
SUGAR, TAMARA B.
Vice President, Zurich Kemper Investments, Inc.
THOMAS, JILL
Vice President, Zurich Kemper Investments, Inc.
TRUNSKY, JUDITH C.
Vice President, Zurich Kemper Investments, Inc.
WALKER, ANGELA
Vice President, Zurich Kemper Investments, Inc.
WATKINS, JAMES K.
Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Service Company
WERTH, ELIZABETH C.
Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Distributors, Inc.
Assistant Secretary, Kemper Open-End Funds
WILNER, MITCHELL
Vice President, Zurich Kemper Investments, Inc.
WIZER, BARBARA K.
Vice President, Zurich Kemper Investments, Inc.
ZURAWSKI, CATHERINE N.
Vice President, Zurich Kemper Investments, Inc.
<PAGE> 156
Item 28(b)(ii) Business and Other Connections of Officers and Directors of
Zurich Investment Management Limited, the Investment Sub-Advisor
JOHNS, GORDON K.
Director, Managing Director, Zurich Investment Management Limited
Director, Thames Heritage Parade Limited
FERRO, DENNIS H.
Director, Chief Executive Officer and Managing Director-Equities,
Zurich Investment Management Limited
CHENG, LAURENCE W.
Director, Member of Corporate Executive Board and Chief Investment Officer
for Investments and International Asset Management, Zurich Insurance Company
HAAS, RICHARD D.W.
Director, Finance Director, Compliance Officer and Joint Secretary, Zurich
Investment Management Limited
<PAGE> 157
DUDASIK, PATRICK H.
Director and Treasurer, Zurich Investment Management Limited
Senior Vice President, Zurich Kemper Investments, Inc.
Executive Vice President, Chief Financial Officer and Treasurer,
Zurich Kemper Value Advisors, Inc.
Vice President and Treasurer, Zurich Investment Management, Inc.
Treasurer and Chief Financial Officer, Kemper Distributors, Inc.
Treasurer and Chief Financial Officer, Kemper Service Company
Treasurer, ZKI Agency, Inc.
THOUIN-LEERKAMP, EDITH A.
Director-European Equities, Zurich Investment Management Limited
PRIDEAUX, TERENCE C.
Director, Zurich Investment Management Limited
KOMAROMY, LESLIE J.S.
Director, Zurich Investment Management Limited
WALLIS, STEPHEN P.
Director, Zurich Investment Management Limited
MASON, ANDREW
Director-Asian Equities, Zurich Investment Management Limited
SHANKAR, RAVI
Director-Fixed Income Strategy, Zurich Investment Management
Limited
SLENDEBROEK, MARC J.
Associate Director, Zurich Investment Management Limited
GRAHAM, ANDREW
Associate Director, Zurich Investment Management Limited
BOORMAN, JONATHAN J.
Associate Director, Zurich Investment Management Limited
<PAGE> 158
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Kemper Distributors, Inc. acts as principal underwriter of the
Registrant's shares and acts as principal underwriter of the Kemper Funds,
Investors Fund Series and Kemper International Bond Fund.
(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>
POSITIONS AND
POSITIONS AND OFFICES OFFICES WITH
NAME WITH UNDERWRITER REGISTRANT
---- ---------------- ----------
<S> <C> <C>
James L. Greenawalt Director, President None
William E. Chapman, II Director, Executive Vice President None
John E. Neal Director Vice President
Stephen B. Timbers Director President/Trustee
Patrick H. Dudasik Financial Principal, Treasurer
and Chief Financial Officer None
Michael E. Harrington Executive Vice President None
Philip D. Hausken Vice President None
Elizabeth C. Werth Vice President Assistant Secretary
Charles R. Manzoni, Jr. Secretary Vice President
Marc L. Hecht Assistant Secretary None
Diane E. Ratekin Assistant Secretary None
</TABLE>
(c) Not applicable.
<PAGE> 159
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All such accounts, books and other documents are maintained at the offices
of the Registrant, the offices of Registrant's investment adviser, Zurich Kemper
Investment, Inc. and Registrant's principal underwriter, Kemper Distributors,
Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, at the offices of the
custodian and transfer agent, Investors Fiduciary Trust Company, 801
Pennsylvania Avenue, Kansas City, Missouri 64105 or at the offices of the
Shareholder Service Agent, Kemper Service Company, 811 Main Street, Kansas City,
Missouri 64105.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Not applicable.
C-20
<PAGE> 160
S I G N A T U R E S
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(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of
Chicago and State of Illinois, on the 29th day of December,
1997.
KEMPER DIVERSIFIED INCOME FUND
By /s/ Stephen B. Timbers
------------------------------
Stephen B. Timbers, President
Pursuant to the requirements of the Securities Act of
1933, this Registration Statement has been signed below on
December 29, 1997 on behalf of the following persons in the
capacities indicated.
Signature Title
--------- -----
/s/ Stephen B. Timbers President
----------------------------- (Principal
Stephen B. Timbers Executive Officer)
and Trustee
/s/David W. Belin* Trustee
-----------------------------
/s/Lewis A. Burnham* Trustee
-----------------------------
/s/Donald L. Dunaway* Trustee
-----------------------------
/s/Robert B. Hoffman* Trustee
-----------------------------
/s/Donald R. Jones* Trustee
-----------------------------
/s/Shirley D. Peterson* Trustee
-----------------------------
/s/William P. Sommers* Trustee
-----------------------------
/s/ Jerome L. Duffy
----------------------------- Treasurer
Jerome L. Duffy (Principal
Financial and
Accounting Officer)
*Philip J. Collora signs this document pursuant to powers of
attorney filed with Post-Effective Amendment No. 30 to the
Registration Statement on Form N-1A filed on December 20, 1996.
/s/ Philip J. Collora
-------------------------
Philip J. Collora
<PAGE> 161
KEMPER DIVERSIFIED INCOME FUND
INDEX TO EXHIBITS
<TABLE>
<S> <C>
99.B1. Amended and Restated Agreement and Declaration of Trust*
99.B2. By-Laws*
99.B3. Inapplicable
99.B4(a) Text of Share Certificate*
99.B4(b) Amended and Restated Written Instrument Establishing and
Designating Separate Classes of Shares***
99.B5(a) Investment Management Agreement***
99.B5(b) Sub-Advisory Agreement***
99.B6(a) Form of Underwriting and Distribution Services Agreement
99.B6(b) Selling Group Agreement
99.B7 Inapplicable
99.B8(a) Custody Agreement (Form 1)*
99.B8(b) Custody Agreement (Form 2)*
99.B9(a) Agency Agreement*
99.B9(b) Supplement to Agency Agreement
99.B9(c) Administrative Services Agreement
99.B10 Inapplicable
99.B11 Report and Consent of Independent Auditors
99.B12 Inapplicable
99.B13 Inapplicable
99.B14(a) Kemper Retirement Plan Prototype*
99.B14(b) Model Individual Retirement Account*
99.B15 Form of Amended and Restated 12b-1 Plan (Class B and Class C
shares)
99.B16 Performance Calculations**
99.B18 Multi-Distribution System Plan***
99.B24 Powers of Attorney***
99.485(b) Representation of Counsel (Rule 485(b))
27A Financial Data Schedule
27B Financial Data Schedule
27C Financial Data Schedule
27I Financial Data Schedule
</TABLE>
- ---------------
* Incorporated herein by reference to the Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A filed on November 30, 1995.
** Incorporated herein by reference to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed on January 18, 1990.
*** Incorporated herein by reference to Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A filed on December 20, 1996.
<PAGE> 1
EXHIBIT 99.B6(a)
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT
AGREEMENT made this ______ day of ____________, 199_, between [NAME OF
FUND], a [Massachusetts business trust] [Maryland corporation] (the "Fund"),
and ZURICH KEMPER DISTRIBUTORS, INC., a Delaware corporation ("ZKDI").
In consideration of the mutual covenants hereinafter contained, it is
hereby agreed by and between the parties hereto as follows:
1. The Fund hereby appoints ZKDI to act as agent for the distribution of
shares[of beneficial interest (hereinafter called "shares")] of the Fund in
jurisdictions wherein shares of the Fund may legally be offered for sale;
provided, however, that the Fund in its absolute discretion may (a) issue or
sell shares directly to holders of shares of the Fund upon such terms and
conditions and for such consideration, if any, as it may determine, whether in
connection with the distribution of subscription or purchase rights, the
payment or reinvestment of dividends or distributions, or otherwise; or (b)
issue or sell shares at net asset value to the shareholders of any other
investment company, for which ZKDI shall act as exclusive distributor, who wish
to exchange all or a portion of their investment in shares of such other
investment company for shares of the Fund. ZKDI shall appoint various
financial service firms ("Firms") to provide distribution services to
investors. The Firms shall provide such office space and equipment, telephone
facilities, personnel, literature distribution, advertising and promotion as is
necessary or beneficial for providing information and distribution services to
existing and potential clients of the Firms. ZKDI may also provide some of the
above services for the Fund.
ZKDI accepts such appointment as distributor and principal underwriter and
agrees to render such services and to assume the obligations herein set forth
for the compensation herein provided. ZKDI shall for all purposes herein
provided be deemed to be an independent contractor and, unless expressly
provided herein or otherwise authorized, shall have no authority to act for or
represent the Fund in any way. ZKDI, by separate agreement with the Fund, may
also serve the Fund in other capacities. The services of ZKDI to the Fund
under this Agreement are not to be deemed exclusive, and ZKDI shall be free to
render similar services or other services to others so long as its services
hereunder are not impaired thereby.
In carrying out its duties and responsibilities hereunder, ZKDI will,
pursuant to separate written contracts, appoint various Firms to provide
advertising, promotion and other distribution services contemplated hereunder
directly to or for the benefit of existing and potential shareholders who may
be clients of such Firms. Such Firms shall at all times be deemed to be
independent contractors retained by ZKDI and not the Fund.
ZKDI shall use its best efforts with reasonable promptness to sell such
part of the authorized shares of the Fund remaining unissued as from time to
time shall be effectively registered under the Securities Act of 1933
("Securities Act"), at prices determined as hereinafter provided and on terms
<PAGE> 2
hereinafter set forth, all subject to applicable federal and state laws and
regulations and to the Fund's organizational documents.
2. ZKDI shall sell shares of the Fund to or through qualified Firms in
such manner, not inconsistent with the provisions hereof and the then effective
registration statement (and related prospectus) of the Fund under the
Securities Act, as ZKDI may determine from time to time, provided that no Firm
or other person shall be appointed or authorized to act as agent of the Fund
without the prior consent of the Fund. In addition to sales made by it as
agent of the Fund, ZKDI may, in its discretion, also sell shares of the Fund as
principal to persons with whom it does not have selling group agreements.
Shares of any class of any series of the Fund offered for sale or sold by
ZKDI shall be so offered or sold at a price per share determined in accordance
with the then current prospectus. The price the Fund shall receive for all
shares purchased from it shall be the net asset value used in determining the
public offering price applicable to the sale of such shares. Any excess of the
sales price over the net asset value of the shares of the Fund sold by ZKDI as
agent shall be retained by ZKDI as a commission for its services hereunder.
ZKDI may compensate Firms for sales of shares at the commission levels provided
in the Fund's prospectus from time to time. ZKDI may pay other commissions,
fees or concessions to Firms, any may pay them to others in its discretion, in
such amounts as ZKDI shall determine from time to time. ZKDI shall be entitled
to receive and retain any applicable contingent deferred sales charge as
described in the Fund's prospectus. ZKDI shall also receive any distribution
services fee payable by the Fund as provided in the Fund's Amended and Restated
12b-1 Plan, as amended from time to time (the "Plan").
ZKDI will require each Firm to conform to the provisions hereof and the
Registration Statement (and related prospectus) at the time in effect under the
Securities Act with respect to the public offering price or net asset value, as
applicable, of the Fund's shares, and neither ZKDI nor any such Firms shall
withhold the placing of purchase orders so as to make a profit thereby.
3. The Fund will use its best efforts to keep effectively registered
under the Securities Act for sale as herein contemplated such shares as ZKDI
shall reasonably request and as the Securities and Exchange Commission shall
permit to be so registered. Notwithstanding any other provision hereof, the
Fund may terminate, suspend or withdraw the offering of shares whenever, in its
sole discretion, it deems such action to be desirable.
4. The Fund will execute any and all documents and furnish any and all
information that may be reasonably necessary in connection with the
qualification of its shares for sale (including the qualification of the Fund
as a dealer where necessary or advisable) in such states as ZKDI may reasonably
request (it being understood that the Fund shall not be required without its
consent to comply with any requirement which in its opinion is unduly
burdensome). The Fund will furnish to ZKDI from time to time such information
with respect to the Fund and its shares as ZKDI may reasonably request for use
in connection with the sale of shares of the Fund.
<PAGE> 3
5. ZKDI shall issue and deliver or shall arrange for various Firms to
issue and deliver on behalf of the Fund such confirmations of sales made by it
pursuant to this Agreement as may be required. At or prior to the time of
issuance of shares, ZKDI will pay or cause to be paid to the Fund the amount
due the Fund for the sale of such shares. Certificates shall be issued or
shares registered on the transfer books of the Fund in such names and
denominations as ZKDI may specify.
6. ZKDI shall order shares of the Fund from the Fund only to the extent
that it shall have received purchase orders therefor. ZKDI will not make, or
authorize Firms or others to make (a) any short sales of shares of the Fund; or
(b) any sales of such shares to any Board member or officer of the Fund or to
any officer or Board member of ZKDI or of any corporation or association
furnishing investment advisory, managerial or supervisory services to the Fund,
or to any corporation or association, unless such sales are made in accordance
with the then current prospectus relating to the sale of such shares. ZKDI, as
agent of and for the account of the Fund, may repurchase the shares of the Fund
at such prices and upon such terms and conditions as shall be specified in the
current prospectus of the Fund. In selling or reacquiring shares of the Fund
for the account of the Fund, ZKDI will in all respects conform to the
requirements of all state and federal laws and the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., relating to such sale or
reacquisition, as the case may be, and will indemnify and save harmless the
Fund from any damage or expense on account of any wrongful act by ZKDI or any
employee, representative or agent of ZKDI. ZKDI will observe and be bound by
all the provisions of the Fund's organizational documents (and of any
fundamental policies adopted by the Fund pursuant to the Investment Company Act
of 1940 (the "Investment Company Act"), notice of which shall have been given
to ZKDI) which at the time in any way require, limit, restrict, prohibit or
otherwise regulate any action on the part of ZKDI hereunder.
7. The Fund shall assume and pay all charges and expenses of its
operations not specifically assumed or otherwise to be provided by ZKDI under
this Agreement or the Plan. The Fund will pay or cause to be paid expenses
(including the fees and disbursements of its own counsel) of any registration
of the Fund and its shares under the United States securities laws and expenses
incident to the issuance of shares of beneficial interest, such as the cost of
share certificates, issue taxes, and fees of the transfer agent. ZKDI will pay
all expenses (other than expenses which one or more Firms may bear pursuant to
any agreement with ZKDI) incident to the sale and distribution of the shares
issued or sold hereunder, including, without limiting the generality of the
foregoing, all (a) expenses of printing and distributing any prospectus and of
preparing, printing and distributing or disseminating any other literature,
advertising and selling aids in connection with the offering of the shares for
sale (except that such expenses need not include expenses incurred by the Fund
in connection with the preparation, typesetting, printing and distribution of
any registration statement or prospectus, report or other communication to
shareholders in their capacity as such), (b) expenses of advertising in
connection with such offering and (c) expenses (other than the Fund's auditing
expenses) of qualifying or continuing the qualification of the shares for sale
and, in connection therewith, of qualifying or continuing the qualification of
the Fund as a dealer or broker under the laws of such states as may be
designated by ZKDI under the conditions herein specified. No transfer taxes,
if any, which may be payable in connection with the issue or delivery of shares
<PAGE> 4
sold as herein contemplated or of the certificates for such shares shall be
borne by the Fund, and ZKDI will indemnify and hold harmless the Fund against
liability for all such transfer taxes.
8. This Agreement shall become effective on the date hereof and shall
continue until _______________; and shall continue from year to year thereafter
only so long as such continuance is approved in the manner required by the
Investment Company Act.
This Agreement shall automatically terminate in the event of its
assignment and may be terminated at any time without the payment of any penalty
by the Fund or by ZKDI on sixty (60) days' written notice to the other party.
The Fund may effect termination with respect to any class of any series of the
Fund by a vote of (i) a majority of the Board members who are not interested
persons of the Fund and who have no direct or indirect financial interest in
the operation of the Plan, this Agreement, or in any other agreement related to
the Plan, or (ii) a majority of the outstanding voting securities of such
series or class. Without prejudice to any other remedies of the Fund, the Fund
may terminate this Agreement at any time immediately upon ZKDI's failure to
fulfill any of its obligations hereunder.
All material amendments to this Agreement must be approved by a vote of a
majority of the Board, and of the Board members who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
operation of the Plan, this Agreement or in any agreement related to the Plan,
cast in person at a meeting called for such purpose.
The terms "assignment," "interested person" and "vote of a majority of the
outstanding voting securities" shall have the meanings set forth in the
Investment Company Act and the rules and regulations thereunder.
ZKDI shall receive such compensation for its distribution services as set
forth in the Plan. Termination of this Agreement shall not affect the right of
ZKDI to receive payments on any unpaid balance of the compensation earned prior
to such termination, as set forth in the Plan.
9. ZKDI will not use or distribute, or authorize the use, distribution or
dissemination by Firms or others in connection with the sale of Fund shares any
statements other than those contained in the Fund's current prospectus, except
such supplemental literature or advertising as shall be lawful under federal
and state securities laws and regulations. ZKDI will furnish the Fund with
copies of all such material.
10. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder shall not be thereby
affected.
11. Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as
such other party may designate for the receipt of such notice.
<PAGE> 5
12. [All parties hereto are expressly put on notice of the Fund's
Agreement and Declaration of Trust, and all amendments thereto, all of which
are on file with the Secretary of The Commonwealth of Massachusetts, and the
limitation of shareholder and trustee liability contained therein. This
Agreement has been executed by and on behalf of the Fund by its representatives
as such representatives and not individually, and the obligations of the Fund
hereunder are not binding upon any of the Trustees, officers or shareholders of
the Fund individually but are binding upon only the assets and property of the
Fund. With respect to any claim by ZKDI for recovery of any liability of the
Fund arising hereunder allocated to a particular series or class, whether in
accordance with the express terms hereof or otherwise, ZKDI shall have recourse
solely against the assets of that series or class to satisfy such claim and
shall have no recourse against the assets of any other series or class for such
purpose.]
13. This Agreement shall be construed in accordance with applicable
federal law and with the laws of The Commonwealth of Massachusetts.
14. This Agreement is the entire contract between the parties relating to
the subject matter hereof and supersedes all prior agreements between the
parties relating to the subject matter hereof.
[SIGNATURES APPEAR ON NEXT PAGE]
<PAGE> 6
IN WITNESS WHEREOF, the Fund and ZKDI have caused this Agreement to be
executed as of the day and year first above written.
[NAME OF FUND]
By: ______________________________
Title: ___________________________
ATTEST:
______________________________
Title: _______________________
ZURICH KEMPER DISTRIBUTORS, INC.
By: ______________________________
Title: ___________________________
ATTEST:
______________________________
Title: _______________________
<PAGE> 1
EXHIBIT 99.B6(b)
SELLING GROUP AGREEMENT KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza, Chicago, Illinois 60606
Dear Financial Services Firm:
As principal underwriter and distributor, we invite you to
join a Selling Group for the distribution of shares of the Kemper
Funds (herein called "Funds"), but only in those states in which
the shares of the respective Funds may legally be offered for
sale. As exclusive agent of each of the Funds, we offer to sell
to you shares of the Funds on the following terms:
1. In all sales of these shares to the public you shall act
as dealer for your own account, and in no transaction shall you
have any authority to act as agent for the issuer, for us, or for
any other member of the Selling Group.
2. Orders received from you will be accepted by us only at
the public offering price applicable to each order, as
established by the Prospectus of each Fund, subject to the
discount, commission or other concession, if any, as provided in
such Prospectus. Upon receipt from you of any order to purchase
shares of a Fund, we shall confirm to you in writing or by wire
to be followed by a confirmation in writing. Additional
instructions may be forwarded to you from time to time. All
orders are subject to acceptance or rejection by us in our sole
discretion.
3. You may offer and sell shares to your customers only at
the public offering price determined in the manner described in
the applicable Prospectus. The public offering price is the net
asset value per share as provided in the applicable Prospectus
plus, with respect to certain Funds, a sales charge from which
you shall receive a discount equal to a percentage of the
applicable offering price as provided in the applicable
Prospectus. You shall receive a sales commission, with respect
to certain Funds, equal to a percentage of the amount invested as
provided in the applicable Prospectus. You shall receive a
distribution service fee, for certain Funds for which such fees
are available, as provided in the applicable Prospectus which fee
shall be payable with respect to such assets, for such periods
and at such intervals as are from time to time specified by us.
The discounts or other concessions to which you may be entitled
in connection with sales to your customers pursuant to any
special features of a Fund (such as cumulative discounts, letters
of intent, etc., the terms of which shall be as described in the
applicable Prospectus and related forms) shall be in accordance
with the terms of such features. You may receive an
administrative service fee, with respect to certain Funds for
which such fees are available, as provided in the applicable
Prospectus, which fee shall be payable with respect to such
assets, for such periods and at such intervals as are from time
<PAGE> 2
to time specified by us. Our liability to you with respect to
the payment of any service fee is limited to the proceeds
received by us from the Funds for your services, and you waive
any right you may have to payment of any service fee until we are
in receipt of the proceeds from the Funds that are attributable
to your services.
4. By accepting this agreement, you agree:
(a) To purchase shares only from us or from your
customers.
(b) That you will purchase shares from us only to cover
purchase orders already received from your customers, or for your
own bona fide investments.
(c) That you will not purchase shares from your
customers at a price lower than the bid price then quoted by or
for the Fund involved. You may, however, sell shares for the
account of your customer to the Fund, or to us as agent for the
Fund, at the bid price currently quoted by or for the Fund and
charge your customer a fair commission for handling the
transaction.
(d) That you will not withhold placing with us orders
received from your customers so as to profit yourself as a result
of such withholding.
5. We will not accept from you any conditional orders for
shares.
6. If any shares confirmed to you under the terms of this
agreement are repurchased by the issuing Fund or by us as agent
for the Fund, or are tendered for repurchase, within seven
business days after the date of our confirmation of the original
purchase order, you shall forthwith refund to us the full
discount, commission, finder's fee or other concession, if any,
allowed or paid to you on such shares.
7. Payment for shares ordered from us shall be in New York
clearing house funds and must be received by the appropriate
Fund's shareholder service agent within seven days after our
acceptance of your order (or such shorter time period as may be
required by applicable regulations). If such payment is not
received, we reserve the right, without notice, forthwith to
cancel the sale or, at our option, to sell the shares ordered
back to the Fund, in which case we may hold you responsible for
any loss, including loss of profit suffered by us as a result of
your failure to make such payment.
8. Shares sold to you hereunder shall be available in
negotiable form for delivery at the appropriate Fund's
shareholder services agent, against payment, unless other
instructions have been given.
9. All sales will be made subject to our receipt of shares
from the Fund. We reserve the right, in our discretion, without
notice, to suspend sales or withdraw the offering of shares
entirely. We reserve the right to modify, cancel or change the
terms of this agreement, upon 15 days prior written notice to
you. Also, the sales charges, discounts, commissions or other
concessions, service fees of any kind provided for hereunder are
subject to change at any time by the Funds and us.
<PAGE> 3
10. All communications to us should be sent to the address
in the heading above. Any notice to you shall be duly given if
mailed or telegraphed to you at the address specified by you
below.
11. This agreement shall be construed in accordance with
the laws of Illinois. This agreement is subject to the
Prospectuses of the Funds from time to time in effect, and, in
the event of a conflict, the terms of the Prospectuses shall
control. References herein to the "Prospectus" of a Fund shall
mean the prospectus and statement of additional information of
such Fund as from time to time in effect. Any changes,
modifications or additions reflected in any such Prospectus shall
be effective on the date of such Prospectus (or supplement
thereto) unless specified otherwise.
12. This agreement is subject to the Additional
Stipulations and Conditions on the reverse side hereof, all of
which are a part of this agreement.
Kemper Distributors, Inc.
By
----------------------------
Authorized Signature
Title
-------------------------
We have read the foregoing agreement and accept and agree to the
terms and conditions thereof.
Firm
-------------------------
Witness
------------------------ By
----------------------------
Authorized Representative
Dated Title
------------------------- -------------------------
<PAGE> 4
ADDITIONAL STIPULATIONS AND CONDITIONS
13. No person is authorized to make any representations
concerning shares of any Fund except those contained in the
Prospectus of such Fund and in printed information subsequently
issued by the Fund or by us as information supplemental to such
Prospectus. If you wish to use your own advertising with respect
to a Fund, all such advertising must be approved by us or by the
Fund prior to use. You shall be responsible for any required
filing of such advertising.
14. Your acceptance of this agreement constitutes a
representation (i) that you are a registered security dealer and
a member in good standing of the National Association of
Securities Dealers, Inc. and that you agree to comply with all
state and federal laws, rules and regulations applicable to
transactions hereunder and to the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., or (ii) if you
are offering and selling shares of the Funds only in
jurisdictions outside of the several states, territories and
possessions of the United States and are not otherwise required
to be a member of the National Association of Securities Dealers,
Inc., that you nevertheless agree to conduct your business in
accordance with the spirit of the Rules of Fair Practice of the
National Association of Securities Dealers, Inc., and to observe
the laws and regulations of the applicable jurisdiction. You
likewise agree that you will not offer to sell shares of any Fund
in any state or other jurisdiction in which they may not lawfully
be offered for sale.
15. You shall make available an investment management
account for your customers through the Funds and shall provide
such office space and equipment, telephone facilities, personnel
and literature distribution as is necessary or appropriate for
providing information and services to your customer. Such
services and assistance may include, but not be limited to,
establishment and maintenance of shareholder accounts and
records, processing purchase and redemption transactions,
answering routine inquiries regarding the Funds, and such other
services as may be agreed upon from time to time and as may be
permitted by applicable statute, rule, or regulation. You agree
to release, indemnify and hold harmless the Funds, us and our
respective representatives and agents from any and all direct or
indirect liabilities or losses resulting from requests,
directions, actions or inactions of or by you, your officers,
employees or agents regarding the purchase, redemption or
transfer of registration of shares of the Funds for accounts of
you, your customers and other shareholders or from any
unauthorized or improper use of any on-line computer facilities.
You shall prepare such periodic reports for us as shall
reasonably be requested by us. You shall immediately inform the
Funds or us of all written complaints received by you from Fund
shareholders relating to the maintenance of their accounts and
shall promptly answer all such complaints and other similar
correspondence. You shall provide the Funds and us on a timely
<PAGE> 5
basis with such information as may be required to complete
various regulatory forms.
16. As a result of the necessity to compute the amount of
any contingent deferred sales charge due with respect to the
redemption of shares, you may not hold shares of a Fund imposing
such a charge in an account registered in your name or in the
name of your nominee for the benefit of certain of your customers
except with our prior written consent. Except as otherwise
permitted by us, shares of such a Fund owned by a shareholder
must be in a separate identifiable account for such shareholder.
17. Shares of certain Funds have been divided into separate
classes: Class A Shares, Class B Shares and Class C Shares.
Class A Shares are offered at net asset value plus an initial
sales charge. Class B Shares are offered at net asset value
without an initial sales charge but are subject to a contingent
deferred sales charge and a Rule 12b-1 fee and have a conversion
feature. Class C Shares are offered at net asset value without
an initial sales charge but are subject to a contingent deferred
sales charge and a Rule 12b-1 fee, and have no conversion
feature. Please see the appropriate Prospectuses for a more
complete description of the distinctions between the classes of
shares.
It is important to investors not only to choose Funds
appropriate for their investment objectives, but also to choose
the appropriate distribution arrangement, based on the amount
invested and the expected duration of the investment. To assist
investors in these decisions, we have instituted the following
policies with respect to orders for shares of the Funds. The
following policies and procedures with respect to sales of
classes of shares of the Funds apply to each broker/dealer that
distributes shares of the Funds.
1. All purchase orders for $500,000 or more (not including
street name or omnibus accounts) should be for Class A Shares.
2. Any purchase order of less than $500,000 may be for
either Class A, Class B or Class C Shares in light of the
relevant facts and circumstances, including:
a. the specific purchase order dollar amount;
b. the length of time the investor expects to hold the
shares; and
c. any other relevant circumstances such as the
availability of purchases under a Letter of Intent, Combined
Purchases or Cumulative Discount Privilege.
There are instances when one pricing structure may be more
appropriate than another. For example, investors who would
qualify for a reduced sales charge on Class A Shares may
determine that payment of a reduced front-end sales charge is
preferable to payment of an ongoing Rule 12b-1 fee. On the other
hand, investors whose orders would not qualify for such a
discount and who plan to hold their investment for more than six
years may wish to defer the sales charge and would consider Class
B Shares. Investors who prefer not to pay an initial sales
charge and who plan to redeem their shares within six years might
consider Class C Shares.
<PAGE> 6
Appropriate supervisory personnel within your organization
must ensure that all employees receiving investor inquiries about
the purchase of shares of the Funds advise the investor of the
available pricing structures offered by the Funds and the impact
of choosing one method over another, including breakpoints and
the availability of Letters of Intent, Combined Purchases and
Cumulative Discounts. In some instances it may be appropriate
for a supervisory person to discuss a purchase with the investor.
18. This agreement shall be in substitution of any prior
selling group agreement between you and us regarding these
shares. This agreement shall not be applicable to the provision
of services for Cash Equivalent Fund, Tax-Exempt California Money
Market Fund, Tax-Exempt New York Money Market Fund, Investors
Cash Trust and similar wholesale money market funds. The payment
of related distribution and services fees, shall be subject to
separate services agreements.
<PAGE> 1
EXHIBIT 99.B9(b)
SUPPLEMENT TO AGENCY AGREEMENT
Supplement to Agency Agreement ("Supplement") made as of
June 1, 1997 and between the registered investment company
executing this document (the "Fund") and Investors Fiduciary
Trust Company ("Agent").
WHEREAS, the Fund and Agent are parties to an Agency
Agreement ("Agency Agreement"), as supplemented from time to
time;
WHEREAS, Section 5.A. of the Agency Agreement provides that
the fees payable by the Fund to Agent thereunder shall be as set
forth in a separate schedule to be agreed to by the Fund and
Agent; and
WHEREAS, the parties desire to reflect in this Supplement
the revised fee schedule for the Agency Agreement as in effect as
of the date hereof;
NOW THEREFORE, in consideration of the premises and the
mutual covenants herein provided, the parties agree as follows:
1. The revised fee schedule for services provided by Agent
to the Fund under the Agency Agreement as in effect as of the
date hereof is set forth in Exhibit A attached hereto.
2. This Supplement shall become a part of the Agency
Agreement and subject to its terms and shall supersede all
previous fee schedules under such agreement as of the date
hereof.
IN WITNESS WHEREOF, the Fund and Agent have duly executed
this Supplement as of the day and year first set forth above.
KEMPER DIVERSIFIED INCOME GOVERNMENT FUND
By: /s/ Philip J. Collora
---------------------------------------
Title: Vice President
-----------------------------------
INVESTORS FIDUCIARY TRUST COMPANY
By: /s/ Stephen R. Hilliard
---------------------------------------
Title: EVP/CFO
------------------------------------
<PAGE> 2
EXHIBIT A
FEE SCHEDULE (MULTIPLE CLASSES OF SHARES)
<TABLE>
<CAPTION>
TRANSFER AGENCY FUNCTION FEE PAYABLE BY FUND
CLASS A, C AND I CLASS B
<S> <C> <C>
1. Annual open shareholder
account fee (per year per
account).
a. Non-daily dividend series. $6.00 $6.00
b. Daily dividend series. $8.00 $8.00
2. Annual closed shareholder account
fee (per year per account). $6.00 $6.00
3. Contingent deferred sales charge Not
account fee (per year per open Applicable $2.25
account).
4. Establishment of new shareholder
account (per new account). $4.00 $4.00
5. Payment of dividend (per dividend
per account). $ .40 $ .40
6. Automated transaction (per
transaction).** $ .50 $ .50
7. Non-monetary transactions fee (per
year per open account). $2.00 $2.00
8. All other shareholder inquiry,
correspondence and research trans-
actions (per transaction). $1.25 $1.25
</TABLE>
The out-of-pocket expenses of IFTC will be reimbursed by Fund in
accordance with the provisions of Section 5 of the Agency
Agreement. All fees will be subject to offset by earnings
allowances under the Custody Agreement between Fund and IFTC.
The attached Transfer Agency Fee Schedule Supplement is a part of
this Exhibit A.
-----------------
* The new shareholder account fee is not applicable to Class A
Share accounts established in connection with a conversion
from Class B Shares.
** Automated transaction includes, without limitation, money
market series purchases and redemptions, ACH purchases,
systematic exchanges and conversions from Class B Shares to
Class A Shares.
<PAGE> 3
TRANSFER AGENCY FEE SCHEDULE SUPPLEMENT
Transfer agency fees and expenses (as a percentage of average
daily net assets) for any fiscal year will be limited as follows:
SERIES NAME CLASS B SHARES CLASS C SHARES
Initial Portfolio No Limit .25%
<PAGE> 1
EXHIBIT 99.B9(c)
ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT dated this 1st day of April, 1997, by and between
KEMPER DIVERSIFIED INCOME FUND, a Massachusetts business trust
(the "Fund"), and KEMPER DISTRIBUTORS, INC., a Delaware corporation
("KDI").
In consideration of the mutual covenants hereinafter contained,
it is hereby agreed by and between the parties hereto as follows:
1. The Fund hereby appoints KDI to provide information and
administrative services for the benefit of the Fund and its
shareholders. In this regard, KDI shall appoint various broker-
dealer firms and other service or administrative firms ("Firms")
to provide related services and facilities for persons who are
investors in the Fund ("investors"). The Firms shall provide
such office space and equipment, telephone facilities, personnel
or other services as may be necessary or beneficial for providing
information and services to investors in the Fund. 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 and its special features, assistance to investors in
changing dividend and investment options, account designations
and addresses, and such other administrative services as the Fund
or KDI may reasonably request. Firms may include affiliates of
KDI. KDI may also provide some of the above services for the
Fund directly.
KDI accepts such appointment and agrees during such period to
render such services and to assume the obligations herein set
forth for the compensation herein provided. KDI shall for all
purposes herein provided be deemed to be an independent
contractor and, unless otherwise expressly provided or
authorized, shall have no authority to act for or represent the
Fund in any way or otherwise be deemed an agent of the Fund.
KDI, by separate agreement with the Fund, may also serve the Fund
in other capacities. In carrying out its duties and
responsibilities hereunder, KDI will appoint various Firms to
provide administrative and other services described herein
directly to or for the benefit of investors in the Fund. Such
Firms shall at all times be deemed to be independent contractors
retained by KDI and not the Fund. KDI and not the Fund will be
responsible for the payment of compensation to such Firms for
such services.
2. For the administrative services and facilities described in
Section 1, the Fund will pay to KDI at the end of each calendar
month an administrative service fee computed at an annual rate of
<PAGE> 2
up to 0.25 of 1% of the average daily net assets of the Fund
(except assets attributable to Class I Shares). The current fee
schedule is set forth as Appendix I hereto. The administrative
service fee will be calculated separately for each class of each
series of the Fund as an expense of each such class; provided,
however, no administrative service fee shall be payable with
respect to Class I Shares. For the month and year in which this
Agreement becomes effective or terminates, there shall be an
appropriate proration on the basis of the number of days that the
Agreement is in effect during such month and year, respectively.
The services of KDI to the Fund under this Agreement are not to
be deemed exclusive, and KDI shall be free to render similar
services or other services to others.
The net asset value for each share of the Fund shall be
calculated in accordance with the provisions of the Fund's
current prospectus. On each day when net asset value is not
calculated, the net asset value of a share of the Fund shall be
deemed to be the net asset value of such a share as of the close
of business on the last day on which such calculation was made
for the purpose of the foregoing computations.
3. The Fund shall assume and pay all charges and expenses of
its operations not specifically assumed or otherwise to be
provided by KDI under this Agreement.
4. This Agreement may be terminated at any time without the
payment of any penalty by the Fund or by KDI on sixty (60) days
written notice to the other party. Termination of this Agreement
shall not affect the right of KDI to receive payments on any
unpaid balance of the compensation described in Section 2 hereof
earned prior to such termination. This Agreement may not be
amended for any class of any series of the Fund to increase the
amount to be paid to KDI for services hereunder above .25 of 1%
of the average daily net assets of such class without the vote of
a majority of the outstanding voting securities of such class.
All material amendments to this Agreement must in any event be
approved by vote of the Board of the Fund.
5. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the
remainder shall not be thereby affected.
6. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other
party at such address as such other party may designate for the
receipt of such notice.
7. All parties hereto are expressly put on notice of the Fund's
Agreement and Declaration of Trust and all amendments thereto,
all of which are on file with the Secretary of The Commonwealth
of Massachusetts, and the limitation of shareholder and trustee
2
<PAGE> 3
liability contained therein. This Agreement has been executed by
and on behalf of the Fund by its representatives as such
representatives and not individually, and the obligations of the
Fund hereunder are not binding upon any of the trustees, officers
or shareholders of the Fund individually but are binding upon
only the assets and property of the Fund.
8. This Agreement shall be construed in accordance with
applicable federal law and (except as to Section 7 hereof which
shall be construed in accordance with the laws of The
Commonwealth of Massachusetts) the laws of the State of Illinois.
IN WITNESS WHEREOF, the Fund and KDI have caused this Agreement
to be executed as of the day and year first above written.
KEMPER DIVERSIFIED INCOME KEMPER DISTRIBUTORS, INC.
FUND
By: /s/ John E. Neal By: /s/ James L. Greenawalt
----------------------------- ---------------------------
Title: Vice President Title: President
-------------------------- ------------------------
3
<PAGE> 4
APPENDIX I
KEMPER DIVERSIFIED INCOME FUND
FEE SCHEDULE FOR ADMINISTRATIVE
SERVICES AGREEMENT
Pursuant to Section 2 of the Administrative Services Agreement to
which this Appendix is attached, the Fund and KDI agree that the
administrative service fee will be computed at an annual rate of
.25 of 1% (the "Fee Rate") based upon assets with respect to
which a Firm provides administrative services. Notwithstanding
the foregoing, the administrative service fee with respect to
Class A Shares shall be paid at an annual rate of (a) .15 of 1%
of net assets of those accounts in the Fund attributable to such
shares acquired prior to October 1, 1993, and (b) .25 of 1% of
net assets of those accounts in the Fund attributable to such
shares acquired on or after October 1, 1993.
Dated: April 1, 1997
KEMPER DIVERSIFIED INCOME KEMPER DISTRIBUTORS, INC.
FUND
By: /s/ John E. Neal By: /s/ James L. Greenawalt
---------------------------- --------------------------
Title: Vice President Title: President
------------------------- -----------------------
<PAGE> 1
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Kemper Diversified Income Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Kemper Diversified Income Fund as of October
31, 1997, the related statements of operations for the year then ended and
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the fiscal periods since 1988. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of October 31, 1997, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Kemper Diversified Income Fund at October 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each
of the fiscal periods since 1988, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
December 16, 1997
<PAGE> 2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors and Reports to Shareholders" and to the
use of our report dated December 16, 1997 in the Registration Statement (Form
N-1A) of Kemper Diversified Income Fund, and its incorporation by reference in
the related prospectus and statement of additional information of Kemper Income
Funds, filed with the Securities and Exchange Commission in this Post-Effective
Amendment No. 31 to the Registration Statement under the Securities Act of 1933
(File No. 2-58921) and in this Amendment No. 31 to the Registration Statement
under the Investment Company Act of 1940 (File No. 811-2743).
ERNST & YOUNG LLP
Chicago, Illinois
December 23, 1997
<PAGE> 1
Exhibit 99.B15
FUND: ______________________________ (THE "FUND")
SERIES: ______________________________ (THE "SERIES")
CLASS: ______________________________ (THE "CLASS")
AMENDED AND RESTATED 12B-1 PLAN
Pursuant to the provisions of Rule 12b-1 under the Investment Company Act
of 1940 (the "Act"), this Amended and Restated 12b-1 Plan (the "Plan") has been
adopted for the Fund, on behalf of the Series, for the Class (all as noted and
defined above) by a majority of the members of the Fund's Board (the "Board"),
including a majority of the Board members who are not "interested persons" of
the Fund and who have no direct or indirect financial interest in the operation
of the Plan or in any agreements related to the Plan (the "Qualified Board
Members") at a meeting called for the purpose of voting on this Plan.
1. Compensation. The Fund will pay to Zurich Kemper Distributors, Inc.
("ZKDI") at the end of each calendar month a distribution services fee computed
at the annual rate of .75% of average daily net assets attributable to the
Class shares. ZKDI may compensate various financial service firms appointed by
ZKDI ("Firms") in accordance with the provisions of the Fund's Underwriting and
Distribution Agreement (the "Distribution Agreement") for sales of shares at
the commission levels provided in the Fund's prospectus from time to time.
ZKDI may pay other commissions, fees or concessions to Firms, and may pay them
to others in its discretion, in such amounts as ZKDI shall determine from time
to time. The distribution services fee for the Class shall be based upon
average daily net assets of the Series attributable to the Class and such fee
shall be charged only to the Class. For the month and year in which this Plan
becomes effective or terminates, there shall be an appropriate proration of the
distribution services fee set forth in Paragraph 1 hereof on the basis of the
number of days that the Plan and any agreements related to the Plan are in
effect during the month and year, respectively. The distribution services fee
shall be in addition to and shall not be reduced or offset by the amount of any
contingent deferred sales charge received by ZKDI.
2. Periodic Reporting. ZKDI shall prepare reports for the Board on a
quarterly basis for the Class showing amounts paid to the various Firms and
such other information as from time to time shall be reasonably requested by
the Board.
3. Continuance. This Plan shall continue in effect indefinitely,
provided that such continuance is approved at least annually by a vote
of a majority of the Board, and of the Qualified Board Members, cast in person
at a meeting called for such purpose or by vote of at least a majority of the
outstanding voting securities of the Class.
4. Termination. This Plan may be terminated at any time without penalty
with respect to the Class by vote of a majority of the Qualified Board Members
or by vote of the majority of the outstanding voting securities of the Class.
<PAGE> 2
5. Amendment. This Plan may not be amended to increase materially the
amount to be paid to ZKDI by the Fund for distribution services with
respect to the Class without the vote of a majority of the outstanding voting
securities of the Class. All material amendments to this Plan must in any
event be approved by a vote of a majority of the Board, and of the Qualified
Board Members, cast in person at a meeting called for such purpose.
6. Selection of Non-Interested Board Members. So long as this Plan is in
effect, the selection and nomination of those Board members who are not
interested persons of the Fund will be committed to the discretion of Board
members who are not themselves interested persons.
7. Recordkeeping. The Fund will preserve copies of this Plan, the
Distribution Agreement, and all reports made pursuant to Paragraph 2 above for
a period of not less than six (6) years from the date of this Plan, the
Distribution Agreement, or any such report, as the case may be, the first two
(2) years in an easily accessible place.
8. Limitation of Liability. Any obligation of the Fund hereunder shall
be binding only upon the assets of the Class and shall not be binding on any
Board member, officer, employee, agent, or shareholder of the Fund. Neither the
authorization of any action by the Board members or shareholders of the Fund
nor the adoption of the Plan on behalf of the Fund shall impose any liability
upon any Board member or upon any shareholder.
9. Definitions. The terms "interested person" and "vote of a majority of
the outstanding voting securities" shall have the meanings set forth in the Act
and the rules and regulations thereunder.
10. Severability; Separate Action. If any provision of this Plan shall be
held or made invalid by a court decision, rule or otherwise, the remainder of
this Plan shall not be affected thereby. Action shall be taken separately for
the Series or Class as the Act or the rules thereunder so require.
Adopted ____________ (Amended and restated ________________)
<PAGE> 1
EXHIBIT 99.485(b)
[VEDDER PRICE LETTERHEAD]
December 22, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Kemper Diversified Income Fund
To The Commission:
We are counsel to the above-referenced investment company (the "Fund")
and as such have participated in the preparation and review of Post-Effective
Amendment No. 31 to the Fund's registration statement being filed pursuant to
Rule 485(b) under the Securities Act of 1933. In accordance with paragraph
(b)(4) of Rule 485, we hereby represent that such amendment does not contain
disclosures which would render it ineligible to become effective pursuant to
paragraph (b) thereof.
Very truly yours,
/s/ VEDDER, PRICE, KAUFMAN & KAMMHOLZ
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
COK/DAS/dme
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER
INFORMATION IS COMBINED FOR ALL CLASSES. THIS SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FROM THE 1997 ANNUAL REPORT TO SHAREHOLDERS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000216314
<NAME> KEMPER DIVERSIFIED INCOME FUND
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 822,674
<INVESTMENTS-AT-VALUE> 836,527
<RECEIVABLES> 47,056
<ASSETS-OTHER> 7,569
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 891,152
<PAYABLE-FOR-SECURITIES> 27,172
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,437
<TOTAL-LIABILITIES> 29,609
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 972,609
<SHARES-COMMON-STOCK> 92,013
<SHARES-COMMON-PRIOR> 85,082
<ACCUMULATED-NII-CURRENT> 2,812
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (127,130)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,252
<NET-ASSETS> 861,543
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 72,725
<OTHER-INCOME> 0
<EXPENSES-NET> (11,423)
<NET-INVESTMENT-INCOME> 61,302
<REALIZED-GAINS-CURRENT> 7,102
<APPREC-INCREASE-CURRENT> (5,336)
<NET-CHANGE-FROM-OPS> 63,069
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (44,573)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 25,359
<NUMBER-OF-SHARES-REDEEMED> (23,040)
<SHARES-REINVESTED> 4,612
<NET-CHANGE-IN-ASSETS> 82,791
<ACCUMULATED-NII-PRIOR> 6,346
<ACCUMULATED-GAINS-PRIOR> (161,894)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,664
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,423
<AVERAGE-NET-ASSETS> 830,496
<PER-SHARE-NAV-BEGIN> 5.99
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> (050)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.96
<EXPENSE-RATIO> 1.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER
INFORMATION IS COMBINED FOR ALL CLASSES. THIS SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FROM THE 1997 ANNUAL REPORT TO SHAREHOLDERS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000216314
<NAME> KEMPER DIVERSIFIED INCOME FUND
<SERIES>
<NUMBER> 002
<NAME> CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 822,674
<INVESTMENTS-AT-VALUE> 836,527
<RECEIVABLES> 47,056
<ASSETS-OTHER> 7,569
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 891,152
<PAYABLE-FOR-SECURITIES> 27,172
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,437
<TOTAL-LIABILITIES> 29,609
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 972,609
<SHARES-COMMON-STOCK> 49,842
<SHARES-COMMON-PRIOR> 43,778
<ACCUMULATED-NII-CURRENT> 2,812
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (127,130)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,252
<NET-ASSETS> 861,543
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 72,725
<OTHER-INCOME> 0
<EXPENSES-NET> (11,423)
<NET-INVESTMENT-INCOME> 61,302
<REALIZED-GAINS-CURRENT> 7,102
<APPREC-INCREASE-CURRENT> (5,336)
<NET-CHANGE-FROM-OPS> 63,068
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (21,102)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19,403
<NUMBER-OF-SHARES-REDEEMED> (15,740)
<SHARES-REINVESTED> 2,401
<NET-CHANGE-IN-ASSETS> 82,791
<ACCUMULATED-NII-PRIOR> 6,346
<ACCUMULATED-GAINS-PRIOR> (161,894)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,664
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,423
<AVERAGE-NET-ASSETS> 830,496
<PER-SHARE-NAV-BEGIN> 5.99
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> (0.44)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.96
<EXPENSE-RATIO> 1.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER
INFORMATION IS COMBINED FOR ALL CLASSES. THIS SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FROM THE 997 ANNUAL REPORT TO SHAREHOLDERS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000216314
<NAME> KEMPER DIVERSIFIED INCOME FUND
<SERIES>
<NUMBER> 003
<NAME> CLASS C
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 822,674
<INVESTMENTS-AT-VALUE> 836,527
<RECEIVABLES> 47,056
<ASSETS-OTHER> 7,569
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 891152
<PAYABLE-FOR-SECURITIES> 27,172
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,437
<TOTAL-LIABILITIES> 29,609
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 972,609
<SHARES-COMMON-STOCK> 2,557
<SHARES-COMMON-PRIOR> 1,128
<ACCUMULATED-NII-CURRENT> 2,812
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (127,130)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,252
<NET-ASSETS> 861,543
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 72,725
<OTHER-INCOME> 0
<EXPENSES-NET> (11,423)
<NET-INVESTMENT-INCOME> 61,302
<REALIZED-GAINS-CURRENT> 7,102
<APPREC-INCREASE-CURRENT> (5,336)
<NET-CHANGE-FROM-OPS> 63,068
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (830)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,933
<NUMBER-OF-SHARES-REDEEMED> (597)
<SHARES-REINVESTED> 92
<NET-CHANGE-IN-ASSETS> 82,791
<ACCUMULATED-NII-PRIOR> 6,346
<ACCUMULATED-GAINS-PRIOR> (161,894)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,664
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,423
<AVERAGE-NET-ASSETS> 830,496
<PER-SHARE-NAV-BEGIN> 6.01
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> (0.45)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.99
<EXPENSE-RATIO> 1.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER
INFORMATION IS COMBINED FOR ALL CLASSES. THIS SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FROM THE 1997 ANNUAL REPORT TO SHAREHOLDERS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000216314
<NAME> KEMPER DIVERSIFIED INCOME FUND
<SERIES>
<NUMBER> 004
<NAME> CLASS I
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 822,674
<INVESTMENTS-AT-VALUE> 836,527
<RECEIVABLES> 47,056
<ASSETS-OTHER> 7,569
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 891,152
<PAYABLE-FOR-SECURITIES> 27,172
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,437
<TOTAL-LIABILITIES> 29,609
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 972,609
<SHARES-COMMON-STOCK> 1
<SHARES-COMMON-PRIOR> 2
<ACCUMULATED-NII-CURRENT> 2,812
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (127,130)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,252
<NET-ASSETS> 861,543
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 72,725
<OTHER-INCOME> 0
<EXPENSES-NET> (11,423)
<NET-INVESTMENT-INCOME> 61,302
<REALIZED-GAINS-CURRENT> 7,102
<APPREC-INCREASE-CURRENT> (5,336)
<NET-CHANGE-FROM-OPS> 63,068
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> (2)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 82,791
<ACCUMULATED-NII-PRIOR> 6,346
<ACCUMULATED-GAINS-PRIOR> (161,894)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,664
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,423
<AVERAGE-NET-ASSETS> 830,496
<PER-SHARE-NAV-BEGIN> 6.00
<PER-SHARE-NII> 0.36
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> (0.49)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 5.88
<EXPENSE-RATIO> 2.64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
