<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998.
1933 ACT REGISTRATION NO. 2-60330
1940 ACT REGISTRATION NO. 811-2786
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. _ [ ]
Post-Effective Amendment No. 34 [X]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 34 [X]
(Check appropriate box or boxes)
------------------
KEMPER HIGH YIELD SERIES
(Exact name of Registrant as Specified in Charter)
222 South Riverside Plaza, Chicago, Illinois 60606
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (312) 537-7000
Philip J. Collora, Vice President and Secretary With a copy to:
Kemper High Yield Series 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
It is proposed that this filing will become effective (check appropriate
box)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) 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 HIGH YIELD SERIES
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; Supplement to
Prospectus
4. General Description of Registrant........ Summary; Investment Objective, Policies and Risk
Factors; Appendices
5. Management of the Fund................... Summary; Investment Manager and Underwriter;
Supplement to Prospectus
5A. Management's Discussion of Fund
Performance.............................. Performance
6. Capital Stock and Other Securities....... Summary; Dividends and Taxes; Purchase of Shares;
Capital Structure; Supplement to Prospectus
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 HIGH YIELD OPPORTUNITY FUND
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 30, 1997
FINANCIAL HIGHLIGHTS
The table below shows financial information for the Kemper High Yield
Opportunity Fund expressed in terms of one share outstanding throughout the
period. The unaudited financial statements contained in the Fund's Semiannual
Report to Shareholders for the period from October 1, 1997 to March 31, 1998 are
incorporated herein by reference and may be obtained by writing or calling the
Fund.
<TABLE>
<CAPTION>
OCTOBER 1, 1997 TO MARCH 31, 1998
--------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.50 9.50 9.50
- ------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .36 .32 .32
- ------------------------------------------------------------------------------------------------------------
Net realized and unrealized (gain) .46 .46 .46
- ------------------------------------------------------------------------------------------------------------
Total from investment operations .82 .78 .78
- ------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .29 .25 .25
- ------------------------------------------------------------------------------------------------------------
Distribution from net realized gains .03 .03 .03
- ------------------------------------------------------------------------------------------------------------
Total dividends .32 .28 .28
- ------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.00 $10.00 $10.00
- ------------------------------------------------------------------------------------------------------------
Total Return (not annualized) 8.74% 8.34 8.35
- ------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.44% 2.28 2.25
- ------------------------------------------------------------------------------------------------------------
Net investment income 7.99% 7.15 7.18
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ALL CLASSES
-----------
<S> <C>
SUPPLEMENTAL DATA:
Net assets at end of period (in thousands) $ 16,188
- ---------------------------------------------------------------------------
Portfolio turnover rate (annualized) 309%
- ---------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
April 30, 1998
KHYOF-1A 4/98
KDI 804053 (LOGO)PRINTED ON RECYCLED PAPER
<PAGE> 4
<TABLE>
<S> <C>
KEMPER EQUITY FUNDS/GROWTH STYLE KEMPER INCOME FUNDS
Kemper Aggressive Growth Fund Kemper Adjustable Rate U.S. Government Fund
Kemper Blue Chip Fund Kemper Diversified Income Fund
Kemper Growth Fund Kemper U.S. Government Securities Fund
Kemper Quantitative Equity Fund Kemper High Yield Series
Kemper Small Capitalization Equity Fund comprised of the following two series:
Kemper Technology Fund Kemper High Yield Fund
Kemper Total Return Fund Kemper High Yield Opportunity Fund
Kemper Value Plus Growth Fund Kemper Income and Capital Preservation Fund
SUPPLEMENT TO PROSPECTUS Kemper Portfolios including the following series:
DATED DECEMBER 31, 1996 Kemper U.S. Mortgage Fund
------------------------- Kemper Short-Intermediate Government Fund
KEMPER GLOBAL INCOME FUND SUPPLEMENT TO PROSPECTUS
KEMPER INTERNATIONAL FUND DATED DECEMBER 30, 1997
SUPPLEMENT TO PROSPECTUS -------------------------
DATED MARCH 1, 1997 KEMPER CASH RESERVES FUND
------------------------- (A SERIES OF KEMPER PORTFOLIOS)
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 30, 1997
-------------------------
KEMPER ASIAN GROWTH FUND
SUPPLEMENT TO PROSPECTUS
DATED APRIL 1, 1997
-------------------------
</TABLE>
KEMPER TAX-FREE INCOME FUNDS
Kemper National Tax-Free Income Series
comprised of the following two series:
Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper State Tax-Free Income Series
comprised of the following eight series:
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper Michigan Tax-Free Income Fund
Kemper New Jersey Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund
Kemper Pennsylvania Tax-Free Income Fund
Kemper Texas Tax-Free Income Fund
SUPPLEMENT TO PROSPECTUS
DATED NOVEMBER 26, 1997
INVESTMENT MANAGER AND UNDERWRITER
Pursuant to the terms of an agreement, Zurich Insurance Company ("Zurich"), the
parent of the Funds' investment adviser, Zurich Kemper Investments, Inc. ("ZKI")
and Scudder, Stevens & Clark, Inc. ("Scudder") have formed a new global
investment organization by combining Scudder's business with that of ZKI, and
Scudder has changed its name to Scudder Kemper Investments, Inc. ("Scudder
Kemper"). As a result of the transaction, Zurich owns approximately 70% of
Scudder Kemper, with the balance owned by Scudder Kemper's officers and
employees. Scudder Kemper, 280 Park Avenue, 40th floor, New York, New York
10017, now manages in excess of $200 billion.
Because the transaction between Scudder and Zurich resulted in the assignment of
each Fund's investment management agreement between ZKI and each respective
Fund, each of those agreements was deemed to be automatically terminated upon
consummation of the transaction. In anticipation of the transaction, however,
new investment management agreements between each Fund and Scudder Kemper were
approved
<PAGE> 5
by each respective Fund's Board of Trustees. A special meeting of shareholders
(the "Special Meeting") of each Fund was held in December, 1997, at which time
the shareholders also approved the new investment management agreements. The new
investment management agreements (each an "Investment Management Agreement" and,
collectively, the "Investment Management Agreements") are all effective as of
December 31, 1997 and will be in effect for an initial term ending on the same
date as would the corresponding previous investment management agreement.
Each Fund's Investment Management Agreement is substantially similar to the
corresponding investment management agreement terminated by the transaction,
except that Scudder Kemper is the new investment adviser to each Fund, the
management fee (except with respect to Kemper Small Capitalization Equity Fund
and Kemper Aggressive Growth Fund) is calculated monthly at 1/12 of the
applicable annual rate based upon the average daily net assets for such month,
and, for each Fund except Kemper Municipal Bond Fund, Kemper U.S. Government
Securities Fund and Kemper California Tax-Free Income Fund, the expense
limitation has been deleted because there are no longer any state expense
limitations in effect. In addition, for Funds investing in foreign securities,
except for Kemper International Fund, Kemper Global Income Fund, and Kemper
Asian Growth Fund, each Fund's respective sub-advisory agreement with Zurich
Investment Management Limited ("ZIML") has been terminated and Scudder Kemper
has assumed the duties previously performed by ZIML under each such Fund's
respective sub-advisory agreement. For Kemper Value Plus Growth Fund, the Fund's
sub-advisory agreement with Zurich Kemper Value Advisors, Inc. ("ZKVA") has been
terminated and Scudder Kemper has assumed the duties previously performed by
ZKVA under the Fund's sub-advisory agreement.
In addition, under a separate agreement between each Fund and Scudder Fund
Accounting Corporation ("SFAC"), a subsidiary of Scudder Kemper, SFAC, rather
than each Fund's investment manager, will compute the net asset value for each
Fund. SFAC does not charge the Funds for this service; however, subject to Board
approval, at some time in the future, SFAC may seek payment for its services
under this agreement.
CAPITAL STRUCTURE
Pending shareholder approval, except for Kemper Technology Fund, Kemper U.S.
Government Securities Fund, Kemper High Yield Opportunity Fund, Kemper Municipal
Bond Fund, Kemper California Tax-Free Income Fund, Kemper Florida Tax-Free
Income Fund, Kemper Michigan Tax-Free Income Fund, Kemper New Jersey Tax-Free
Income Fund, Kemper New York Tax-Free Income Fund, Kemper Ohio Tax-Free Income
Fund, and Kemper Pennsylvania Tax-Free Income Fund, which have obtained
shareholder approval, rather than invest in securities directly, each of the
Funds may in the future seek to achieve its investment objective by pooling its
assets with assets of other mutual funds for investment in another investment
company having the same investment objective and substantially the same
investment policies and restrictions as such Fund. The purpose of such an
arrangement is to achieve greater operational efficiencies and to reduce costs.
It is expected that any such investment company will be managed by Scudder
Kemper in substantially the same manner as the corresponding Fund. Shareholders
of each Fund will be given at least 30 days' prior notice of any such
investment, although they will not be entitled to vote on the action. Such
investment would be made only if the Trustees determine it to be in the best
interests of the respective Fund and its shareholders.
<PAGE> 6
SUMMARY OF EXPENSES
The "Example" in the prospectus for Class B Shares and Class C Shares of certain
of the Funds is amended in part as follows:
CLASS B SHARES
<TABLE>
<CAPTION>
EXAMPLE(1) FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------- ---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
You would pay the following Aggressive Growth $64 $103 $145 $224
expenses on a $1,000 Blue Chip 61 95 132 201
investment, assuming Growth 61 94 130 189
(1) 5% annual return and Quantitative Equity 63 101 141 222
(2) redemption at the end of Small Capitalization Equity 62 97 135 196
each time period: Technology 59 89 121 170
Total Return 60 92 127 185
Value Plus Growth 65 106 150 237
Global Income 62 97 135 215
International 66 109 155 245
Asian Growth 67 113 162 259
Municipal Bond 56 79 104 139
Intermediate Municipal Bond 58 85 115 167
California Tax-Free Income 56 81 108 150
Florida Tax-Free Income 57 82 110 153
Michigan Tax-Free Income 58 85 115 167
New Jersey Tax-Free Income 58 85 115 167
New York Tax-Free Income 57 83 111 155
Ohio Tax-Free Income 52 84 112 160
Pennsylvania Tax-Free Income 58 84 114 166
Texas Tax-Free Income 58 84 114 163
You would pay the following Aggressive Growth $43 $ 73 $125 $224
expenses on the same Blue Chip 21 65 112 201
investment, assuming no Growth 21 64 110 189
redemption: Quantitative Equity 23 71 121 222
Small Capitalization Equity 22 67 115 196
Technology 19 59 101 170
Total Return 20 62 107 185
Value Plus Growth 25 76 130 237
Global Income 22 67 115 215
International 26 79 135 245
Asian Growth 27 83 142 259
Municipal Bond 16 49 84 139
Intermediate Municipal Bond 18 55 95 167
California Tax-Free Income 16 51 88 150
Florida Tax-Free Income 17 52 90 153
Michigan Tax-Free Income 18 55 95 168
New Jersey Tax-Free Income 18 55 95 168
New York Tax-Free Income 17 53 91 155
Ohio Tax-Free Income 17 54 92 160
Pennsylvania Tax-Free Income 18 54 94 166
Texas Tax-Free Income 18 54 94 163
</TABLE>
(1) 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" in the
prospectus for more information regarding the calculation of the contingent
deferred sales charge.
<PAGE> 7
CLASS C SHARES
<TABLE>
<CAPTION>
EXAMPLE(2) FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------- ---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
You would pay the following Aggressive Growth $33 $72 $123 $264
expenses on a $1,000 Blue Chip 31 64 110 238
investment, assuming (1) 5% Growth 30 61 105 227
annual return and Quantitative Equity 33 70 119 256
(2) redemption at the end of Small Capitalization Equity 32 67 115 248
each time period: Technology 28 57 99 214
Total Return 29 59 102 221
Value Plus Growth 34 73 126 269
Global Income 31 65 111 239
International 35 78 133 284
Asian Growth 37 82 140 297
Municipal Bond 26 48 83 182
Intermediate Municipal Bond 28 54 94 204
California Tax-Free Income 26 50 87 190
Florida Tax-Free Income 27 52 89 194
Michigan Tax-Free Income 28 54 94 204
New Jersey Tax-Free Income 28 54 94 204
New York Tax-Free Income 27 52 90 195
Ohio Tax-Free Income 27 53 91 199
Pennsylvania Tax-Free Income 27 54 93 202
Texas Tax-Free Income 27 54 93 202
You would pay the following Aggressive Growth $23 $72 $123 $264
expenses on the same Blue Chip 21 64 110 238
investment, assuming no Growth 20 61 105 227
redemption: Quantitative Equity 23 70 119 256
Small Capitalization Equity 22 67 115 248
Technology 18 57 99 214
Total Return 19 59 102 221
Value Plus Growth 24 73 126 269
Global Income 21 65 111 239
International 25 78 133 284
Asian Growth 27 82 140 297
Municipal Bond 16 48 83 182
Intermediate Municipal Bond 18 54 94 204
California Tax-Free Income 16 50 87 190
Florida Tax-Free Income 17 52 89 194
Michigan Tax-Free Income 18 54 94 204
New Jersey Tax-Free Income 18 54 94 204
New York Tax-Free Income 17 52 90 195
Ohio Tax-Free Income 17 53 91 199
Pennsylvania Tax-Free Income 17 54 93 202
Texas Tax-Free Income 17 54 93 202
</TABLE>
(2) 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 -- Shares" in the prospectus.
December 31, 1997
KMF-1Q (LOGO)PRINTED ON RECYCLED PAPER
<PAGE> 8
<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> 9
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> 10
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> 11
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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
banker or other mortgagee and represent an interest in one or a pool of
mortgages insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. GNMA guarantees the timely payment of monthly
installments of principal and interest on modified pass-through Certificates at
the time such payments are due, whether or not such amounts are collected by the
issuer of these Certificates on the underlying mortgages.
The National Housing Act provides that the full faith and credit of the United
States is pledged to the timely payment of principal and interest by GNMA of
amounts due on these GNMA Certificates, and an assistant attorney general of the
United States has rendered an opinion that this guarantee by GNMA is a general
obligation of the United States backed by its full faith and credit.
Mortgages included in single family residential mortgage pools backing an issue
of GNMA Certificates have a maximum maturity of 30 years. Scheduled payments of
principal and interest are made to the registered holders of GNMA Certificates
(such as the Fund) each month. Unscheduled prepayments of mortgages included in
these pools occur as a result of the prepayment or refinancing of such mortgages
by homeowners or as a result of the foreclosure of such mortgages. Such
prepayments are passed through to the registered holders of GNMA Certificates
with the regular monthly payments of principal and interest, which has the
effect of reducing future payments on such Certificates. That portion of monthly
payments received by the Fund which represents interest and discount will be
included in the Fund's net investment income. See "Dividends and Taxes."
Principal payments on a GNMA Certificate will be reinvested by the Fund.
The balance of the Fund's assets, other than those invested in GNMA Certificates
and options and financial futures contracts as discussed below, will be invested
in obligations issued or guaranteed by the United States or by its agencies.
There are two broad categories of U.S. Government-related debt instruments: (a)
direct obligations of the U.S. Treasury, and (b) securities issued or guaranteed
by U.S. Government agencies. Examples of direct obligations of the U.S. Treasury
are Treasury Bills, Notes, Bonds and other debt securities issued by the U.S.
Treasury. These instruments are backed by the "full faith and credit" of the
United States. They differ primarily in interest rates, the length of maturities
and the dates of issuance. Some obligations issued or guaranteed by agencies of
the U.S. Government are backed by the full faith and credit of the United States
(such as Maritime Administration Title XI Ship Financing Bonds and Agency for
International Development Housing Guarantee Program Bonds) and others are backed
only by the rights of the issuer to borrow from the U.S. Treasury (such as
Federal Home Loan Bank Bonds and Federal National Mortgage Association Bonds).
With respect to securities supported only by the credit of the issuing agency or
by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies and such
securities may involve risk of loss of principal and interest. U.S. Government
Securities may include "zero coupon" securities that have been stripped by the
U.S. Government of their unmatured interest coupons (see "Investment Policies
and Techniques--Zero Coupon Government Securities" in the Statement of
Additional Information for a discussion of their features and risks) and
collateralized obligations issued or guaranteed by a U.S. Government agency or
instrumentality (see "Collateralized Obligations" below).
U.S. Government Securities of the type in which the Fund may invest have
historically involved little risk of loss of principal if held to maturity. The
government guarantee of the U.S. Government Securities in the Fund's portfolio,
however, does not guarantee the net asset value of the shares of the Fund. There
are market risks inherent in all investments in securities and the value of an
investment in the Fund will fluctuate over time. Normally, the value of the
Fund's investments varies inversely with changes in interest rates. For example,
as interest rates rise the value of the Fund's investments will tend to decline,
and as interest rates fall the value of the Fund's investments will tend to
increase. In addition, the potential for appreciation in the event of a decline
in interest rates may be limited or negated by increased principal prepayments
in respect to certain Mortgage-Backed Securities, such as GNMA Certificates.
Prepayments of high interest rate Mortgage-Backed Securities during times of
declining interest rates will tend to lower the return of the Fund and may even
result in losses to the Fund if some securities were acquired at a premium.
Moreover, during periods of rising interest rates, prepayments of
Mortgage-Backed Securities may decline, resulting in the extension of the Fund's
average portfolio maturity. As a result, the Fund's portfolio may experience
greater volatility during periods of rising interest rates than under normal
market
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<PAGE> 26
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> 27
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> 28
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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<PAGE> 29
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> 30
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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<PAGE> 31
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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<PAGE> 32
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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<PAGE> 33
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."
32
<PAGE> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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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<PAGE> 56
10% of the total value of plan assets invested in a Fund), (c) redemptions in
connection with distributions qualifying under the hardship provisions of the
Internal Revenue Code and (d) redemptions representing returns of excess
contributions to such plans.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features--Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
and (g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and whose dealer of record has waived
the advance of the first year administrative service and distribution fees
applicable to such shares and agrees to receive such fees quarterly.
CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of a Fund's Class B shares and that 16 months
later the value of the shares has grown by $1,000 through reinvested dividends
and by an additional $1,000 in appreciation to a total of $12,000. If the
investor were then to redeem the entire $12,000 in share value, the contingent
deferred sales charge would be payable only with respect to $10,000 because
neither the $1,000 of reinvested dividends nor the $1,000 of share appreciation
is subject to the charge. The charge would be at the rate of 3% ($300) because
it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 1997 will be eligible for the second year's charge if redeemed on or
after December 1, 1998. In the event no specific order is requested, the
redemption will be made first from shares representing reinvested dividends and
then from the earliest purchase of shares. KDI receives any contingent deferred
sales charge directly.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of a Fund
or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
a Fund or of the other listed Kemper Mutual Funds. A shareholder of a Fund or
other Kemper Mutual Fund who redeems Class A shares purchased under the Large
Order NAV Purchase Privilege (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares") or Class B shares or Class C shares and incurs a
contingent deferred sales charge may reinvest up to the full amount redeemed at
net asset value at the time of the reinvestment in Class A shares, Class B
shares or Class C shares, as the case may be, of a Fund or of other Kemper
Mutual Funds. The amount of any contingent deferred sales charge also will be
reinvested. These reinvested shares will retain their original cost and purchase
date for purposes of the contingent deferred sales charge. Also, a holder of
Class B shares who has redeemed shares may reinvest up to the full amount
redeemed, less any applicable contingent deferred sales charge that may have
been imposed upon the redemption of such shares, at net asset value in Class A
shares of a Fund or of the other Kemper Mutual Funds listed under "Special
Features--Class A Shares--Combined Purchases." Purchases through
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<PAGE> 57
the reinvestment privilege are subject to the minimum investment requirements
applicable to the shares being purchased and may only be made for Kemper Mutual
Funds available for sale in the shareholder's state of residence as listed under
"Special Features--Exchange Privilege." The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the redemption. If a loss is realized on the redemption of a Funds'
shares, the reinvestment in the same Fund may be subject to the "wash sale"
rules if made within 30 days of the redemption, resulting in a postponement of
the recognition of such loss for federal income tax purposes. The reinvestment
privilege may be terminated or modified at any time.
SPECIAL FEATURES
CLASS A SHARES -- COMBINED PURCHASES. Each Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Diversified Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Adjustable Rate
U.S. Government Fund, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper
Target Equity Fund (series are subject to a limited offering period), Kemper
Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund, Kemper U.S.
Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper Value Fund,
Inc., Kemper Value+Growth Fund, Kemper Quantitative Equity Fund, Kemper Horizon
Fund, Kemper Europe Fund, Kemper Asian Growth Fund and Kemper Aggressive Growth
Fund ("Kemper Mutual Funds"). Except as noted below, there is no combined
purchase credit for direct purchases of shares of Zurich Money Funds, Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"),
which are not considered "Kemper Mutual Funds" for purposes hereof. For purposes
of the Combined Purchases feature described above as well as for the Letter of
Intent and Cumulative Discount features described below, employer sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent may include: (a) Money Market Funds as
"Kemper Mutual Funds," (b) all classes of shares of any Kemper Mutual Fund, and
(c) the value of any other plan investments, such as guaranteed investment
contracts and employer stock, maintained on such subaccount record keeping
system.
CLASS A SHARES -- LETTER OF INTENT. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation credit" toward the completion of the Letter, but
no price adjustment will be made on such shares. Only investments in Class A
shares of a Fund are included for this privilege.
CLASS A SHARES -- CUMULATIVE DISCOUNT. Class A shares of a Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a Fund being purchased, the value of all Class A shares of
the above mentioned Kemper Mutual Funds (computed at the maximum offering price
at the time of the purchase for which the discount is applicable) already owned
by the investor.
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<PAGE> 58
CLASS A SHARES -- AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.
CLASS A SHARES. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI.
Class A shares of a Fund purchased under the Large Order NAV Purchase Privilege
may be exchanged for Class A shares of another Kemper Mutual Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of the contingent deferred sales charge.
CLASS B SHARES. Class B shares of a Fund and Class B shares of any other Kemper
Mutual Fund listed under "Special Features --Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class B
shares may be exchanged without any contingent deferred sales charge being
imposed at the time of exchange. For purposes of the contingent deferred sales
charge that may be imposed upon the redemption of the Class B shares received on
exchange, amounts exchanged retain their original cost and purchase date.
CLASS C SHARES. Class C shares of a Fund and Class C shares of any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class C
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For determining whether there is a contingent deferred
sales charge that may be imposed upon the redemption of the Class C shares
received by exchange, they retain the cost and purchase date of the shares that
were originally purchased and exchanged.
GENERAL. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15 Day Hold Policy"). For purposes of
determining whether the 15 Day Hold Policy applies to a particular exchange, the
value of the shares to be exchanged shall be computed by aggregating the value
of shares being exchanged for all accounts under common control, direction, or
advice, including without limitation, accounts administered by a financial
services firm offering market timing, asset allocation or similar services. The
total value of shares being exchanged must at least equal the minimum investment
requirement of the Kemper Fund into which they are being exchanged. Exchanges
are made based on relative dollar values of the shares involved in the exchange.
There is no service fee for an exchange; however, dealers or other firms may
charge for their services in effecting exchange transactions. Exchanges will be
effected by redemption of shares of the fund held and purchase of shares of the
other fund. For federal income tax purposes, any such exchange constitutes a
sale upon which a gain or loss may be realized, depending upon whether the value
of the shares being exchanged is more or less than the shareholder's adjusted
cost basis of such shares. Shareholders interested in exercising the exchange
privilege may obtain prospectuses of the other funds from dealers, other firms
or KDI. Exchanges may be accomplished by a written request to KSvC, Attention:
Exchange Department, P.O. Box 419557, Kansas City, Missouri 64141-6557, or by
telephone if the
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<PAGE> 59
shareholder has given authorization. Once the authorization is on file, the
Shareholder Service Agent will honor requests by telephone at 1-800-621-1048,
subject to the limitations on liability under "Redemption or Repurchase of
Shares -- General." Any share certificates must be deposited prior to any
exchange of such shares. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the telephone
exchange privilege. The exchange privilege is not a right and may be suspended,
terminated or modified at any time. Except as otherwise permitted by applicable
regulations, 60 days' prior written notice of any termination or material change
will be provided. Exchanges may only be made for funds that are available for
sale in the shareholder's state of residence. Currently, Tax-Exempt California
Money Market Fund is available for sale only in California and the portfolios of
Investors Municipal Cash Fund are available for sale only in certain states.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the other
Kemper Fund. Exchanges are subject to the terms and conditions described above
under "Exchange Privilege" except that the $1,000 minimum investment requirement
for the Kemper Fund acquired on exchange is not applicable. This privilege may
not be used for the exchange of shares held in certificated form.
EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in a Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from ANY PERSON to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling
Shareholder Services toll free at 1-800-621-1048 Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to KSvC, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination will become effective as soon as the Shareholder Service
Agent has had a reasonable time to act upon the request. EXPRESS-Transfer cannot
be used with passbook savings accounts or for tax-deferred plans such as
Individual Retirement Accounts ("IRAs").
BANK DIRECT DEPOSIT. A shareholder may purchase additional shares of a Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, investments are made automatically (minimum $50 maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder
authorizes the Fund and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to KSvC, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination by a shareholder will become effective within thirty
days after the Shareholder Service Agent has received the request. A Fund may
immediately terminate a shareholder's Plan in the event that any item is unpaid
by the shareholder's financial institution. The Funds may terminate or modify
this privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in a Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in a Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) A Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
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<PAGE> 60
SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of a Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount up to $50,000 to be paid to the owner or
a designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to Individual Retirement Accounts. The
minimum periodic payment is $100. The maximum annual rate at which Class B
shares may be redeemed (and Class A shares purchased under the Large Order NAV
Purchase Privilege and Class C shares in their first year following the
purchase) under a systematic withdrawal plan is 10% of the net asset value of
the account. Shares are redeemed so that the payee will receive payment
approximately the first of the month. Any income and capital gain dividends will
be automatically reinvested at net asset value. A sufficient number of full and
fractional shares will be redeemed to make the designated payment. Depending
upon the size of the payments requested and fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, a Fund will not knowingly permit additional investments of less
than $2,000 if the investor is at the same time making systematic withdrawals.
KDI will waive the contingent deferred sales charge on redemptions of Class A
shares purchased under the Large Order NAV Purchase Privilege, Class B shares
and Class C shares made pursuant to a systematic withdrawal plan. The right is
reserved to amend the systematic withdrawal plan on 30 days' notice. The plan
may be terminated at any time by the investor or the Funds.
TAX-SHELTERED RETIREMENT PLANS. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
- - Individual Retirement Accounts ("IRAs") with IFTC as custodian. This includes
Savings Incentive Match Plan for Employees of Small Employers ("SIMPLE"), IRA
accounts and Simplified Employee Pension Plan ("SEP") IRA accounts and
prototype documents.
- - 403(b)(7) Custodial Accounts also with IFTC as custodian. This type of plan is
available to employees of most non-profit organizations.
- - Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. The brochures for plans with IFTC as custodian describe the current
fees payable to IFTC for its services as custodian. Investors should consult
with their own tax advisers before establishing a retirement plan.
PERFORMANCE
A Fund may advertise several types of performance information for a class of
shares, including "yield" and "average annual total return" and "total return."
Performance information will be computed separately for Class A, Class B and
Class C shares. Each of these figures is based upon historical results and is
not representative of the future performance of any class of a Fund. A Fund with
fees or expenses being waived or absorbed by ZKI may also advertise performance
information before and after the effect of the fee waiver or expense absorption.
A Fund's yield is a measure of the net investment income per share earned over a
specific one month or 30-day period expressed as a percentage of the maximum
offering price of the Fund's shares at the end of the period. Yield is an
annualized figure, which means that it is assumed that a Fund generates the same
level of net
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<PAGE> 61
investment income over a one year period. Net investment income is assumed to be
compounded semiannually when it is annualized.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in a Fund
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter (or
if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Fund for performance purposes). Average annual
total return figures represent the average annual percentage change over the
period in question. Total return figures represent the aggregate percentage or
dollar value change over the period in question.
A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged bond indexes including, but not limited to, the Salomon
Brothers High Grade Corporate Bond Index, the Lehman Brothers Adjustable Rate
Index, the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Government/
Corporate Bond Index, the Salomon Brothers Long-Term High Yield Index, the
Salomon Brothers 30 Year GNMA Index and the Merrill Lynch Market Weighted Index
and may also be compared to the performance of other mutual funds or mutual fund
indexes with similar objectives and policies as reported by independent mutual
fund reporting services such as Lipper Analytical Services, Inc. ("Lipper").
Lipper performance calculations are based upon changes in net asset value with
all dividends reinvested and do not include the effect of any sales charges.
Information may be quoted from publications such as MORNINGSTAR, INC., THE WALL
STREET JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE,
USA TODAY, INSTITUTIONAL INVESTOR and REGISTERED REPRESENTATIVE. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit and other bank products, money market
funds and U.S. Treasury obligations. Bank product performance may be based upon,
among other things, the BANK RATE MONITOR National Index(TM) or various
certificate of deposit indexes. Money market fund performance may be based upon,
among other things, the IBC/Donoghue's Money Fund Report(R) or Money Market
Insight(R), reporting services on money market funds. Performance of U.S.
Treasury obligations may be based upon, among other things, various U.S.
Treasury bill indexes. Certain of these alternative investments may offer fixed
rates of return and guaranteed principal and may be insured. Economic indicators
may include, without limitation, indicators of market rate trends and cost of
funds, such as Federal Home Loan Bank Board 11th District Cost of Funds Index
("COFI").
A Fund may depict the historical performance of the securities in which the Fund
may invest over periods reflecting a variety of market or economic conditions
either alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A Fund may also describe its
portfolio holdings and depict its size or relative size compared to other mutual
funds, the number and make-up of its shareholder base and other descriptive
factors concerning the Fund.
The yield or price volatility of a Fund (particularly the Adjustable Rate Fund)
may be compared to various securities, such as U.S. Government Securities, or
indexes, such as the COFI referred to above or the Constant Maturity Treasury
Index ("CMT") published by the Federal Reserve Board. A Fund may include in its
sales literature and shareholder reports a quotation of the current
"distribution rate" for the Fund. Distribution rate is simply a measure of the
level of dividends distributed for a specified period. It differs from yield,
which is a measure of the income actually earned by the Fund's investments, and
from total return, which is a measure of the income actually earned by, plus the
effect of any realized and unrealized appreciation or depreciation of, such
investments during the period. Distribution rate is, therefore, not intended to
be a complete measure of performance. Distribution rate may sometimes be greater
than yield since, for instance, it may include gains from the sale of options or
other short-term and possibly long-term gains (which may be non-recurring) and
may not
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<PAGE> 62
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> 63
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> 64
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> 65
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> 66
KEMPER HIGH YIELD SERIES
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 Restrictions; Investment Policies and
Techniques; Supplement to Statement of Additional
Information
14. Management of the Fund................... Investment Manager and Underwriter;
Officers and Trustees; Supplement to Statement of
Additional Information
15. Control Persons and Principal Holders of
Securities............................... Officers and Trustees; Supplement to Statement of
Additional Information
16. Investment Advisory and Other Services... Investment Manager and Underwriter;
Officers and Trustees; Supplement to Statement of
Additional Information
17. Brokerage Allocation and Other
Practices................................ Portfolio Transactions; Supplement to Statement of
Additional Information
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. Calculation of Performance Data.......... Performance
23. Financial Statements..................... Financial Statements; Supplement to Statement of
Additional Information
</TABLE>
<PAGE> 67
KEMPER HIGH YIELD
OPPORTUNITY FUND
("KHYOF")
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED DECEMBER 30, 1997
FINANCIAL STATEMENTS
The financial statements (unaudited) appearing in KHYOF's Semiannual Report to
Shareholders for the period ended March 31, 1998 are incorporated into the
Statement of Additional Information by reference. KHYOF's Semiannual Report
accompanies the Statement of Additional Information. All adjustments necessary
for a fair statement of the results of operations for the period covered by such
report are included. All such adjustments are of a normal recurring nature.
April 30, 1998
KHYOF-13A 4/98 (LOGO)PRINTED ON RECYCLED PAPER
<PAGE> 68
<TABLE>
<S> <C>
KEMPER EQUITY FUNDS/GROWTH STYLE KEMPER INCOME FUNDS
Kemper Aggressive Growth Fund ("KAGGF") Kemper Adjustable Rate U.S. Government Fund ("KARGF")
Kemper Blue Chip Fund ("KBCF") Kemper Diversified Income Fund ("KDIF")
Kemper Growth Fund ("KGF") Kemper U.S. Government Securities Fund ("KGSF")
Kemper Quantitative Equity Fund ("KQEF") Kemper High Yield Series ("KHYS")
Kemper Small Capitalization Equity Fund ("KSCF") comprised of the following two series:
Kemper Technology Fund ("KTEC") Kemper High Yield Fund ("KHYF")
Kemper Total Return Fund ("KTRF") Kemper High Yield Opportunity Fund ("KHYOF")
Kemper Value+Growth Fund ("KVGF") Kemper Income and Capital Preservation Fund ("KICPF")
SUPPLEMENT TO STATEMENT OF Kemper Portfolios ("KP") including the following
ADDITIONAL INFORMATION series:
DATED DECEMBER 31, 1996 Kemper U.S. Mortgage Fund ("KUSMF")
Kemper Short-Intermediate Government Fund ("KSIGF")
------------------------- SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED DECEMBER 30, 1997
KEMPER GLOBAL INCOME FUND ("KGIF") -------------------------
KEMPER INTERNATIONAL FUND ("KIF") KEMPER CASH RESERVES FUND ("KCRF")
SUPPLEMENT TO STATEMENT OF (A SERIES OF KEMPER PORTFOLIOS)
ADDITIONAL INFORMATION SUPPLEMENT TO STATEMENT OF
DATED MARCH 1, 1997 ADDITIONAL INFORMATION
------------------------- DATED DECEMBER 30, 1997
-------------------------
KEMPER ASIAN GROWTH FUND ("KAGF")
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED APRIL 1, 1997
-------------------------
</TABLE>
KEMPER TAX-FREE INCOME FUNDS
Kemper National Tax-Free Income Series ("KNTIS")
comprised of the following two series:
Kemper Municipal Bond Fund ("KMBF")
Kemper Intermediate Municipal Bond Fund ("KIMBF")
Kemper State Tax-Free Income Series ("KSTIS")
comprised of the following eight series:
Kemper California Tax-Free Income Fund ("KCATF")
Kemper Florida Tax-Free Income Fund ("KFLTF")
Kemper Michigan Tax-Free Income Fund ("KMITF")
Kemper New Jersey Tax-Free Income Fund ("KNJTF")
Kemper New York Tax-Free Income Fund ("KNYTF")
Kemper Ohio Tax-Free Income Fund ("KOHTF")
Kemper Pennsylvania Tax-Free Income Fund ("KPATF")
Kemper Texas Tax-Free Income Fund ("KTXTF")
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED NOVEMBER 26, 1997
INVESTMENT RESTRICTIONS--MASTER/FEEDER FUND STRUCTURE
Certain Series, Portfolios or Funds have amended their fundamental policies to
permit a master/feeder fund structure. Following is a list of each Series',
Portfolio's or Fund's fundamental policies that were so
<PAGE> 69
amended. Where necessary, the number identifying each Fund's policies that were
amended is indicated in brackets following each Series', Portfolio's or Fund's
name, as applicable. As a matter of fundamental policy, each Series, Portfolio
or Fund will not:
KTEC[(1)], KGSF[(2)], KMBF[(3)]:
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, except that all or substantially all of the assets of the Fund
may be invested in another registered investment company having the same
investment objective and substantially similar investment policies as the Fund.
KSTIS (EXCEPT KCATF AND KTXTF):
(11) 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 total value of the Fund's assets would be invested
in securities of that issuer, except that, with respect to 50% of the Fund's
total assets, the Fund may invest up to 25% of its total assets in securities of
any one issuer, and except that all or substantially all of the assets of the
Fund may be invested in another registered investment company having the same
investment objective and substantially similar investment policies as the Fund.
KCATF:
(3) 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 total value of the Fund's assets would be invested
in securities of that issuer, except that, with respect to 50% of the Fund's
total assets, the Fund may invest up to 25% of its total assets in securities of
any one issuer, and except that all or substantially all of the assets of the
Fund may be invested in another registered investment company having the same
investment objective and substantially similar investment policies as the Fund.
KHYOF:
(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, except that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the same investment
objective and substantially similar investment policies as the Fund.
KTEC:
(2) Purchase more than 10% of any class of securities of any issuer, except that
all or substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund. All debt securities and
all preferred stocks are each considered as one class.
KSTIS (EXCEPT KCATF AND KTXTF):
(2) Purchase securities (other than securities of the United States Government,
its agencies or instrumentalities, or of a state or its political subdivisions)
if as a result of such purchase 25% or more of its total assets would be
invested in any industry, except that all or substantially all of the assets of
the Fund may be
<PAGE> 70
invested in another registered investment company having the same investment
objective and substantially similar investment policies as the Fund.
KTEC:
(7) Invest 25% of more of its total assets in any one industry, except that all
or substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund. Water, communications,
electric and gas utilities shall each be considered a separate industry.
KHYOF:
(7) Concentrate more than 25% of the value of its assets in any one industry,
except that all or substantially all of the assets of the Fund may be invested
in another registered investment company having the same investment objective
and substantially similar investment policies as the Fund. Water,
communications, electric and gas utilities shall each be considered a separate
industry.
KMBF:
(2) With respect to temporary investments, purchase securities (other than
securities of the United States Government, its agencies or instrumentalities)
if as a result of such purchase more than 25% of the Fund's total assets would
be invested in any industry, except that all or substantially all of the assets
of the Fund may be invested in another registered investment company having the
same investment objective and substantially similar investment policies as the
Fund.
KCATF:
(2) Purchase securities (other than securities of the United States Government,
its agencies or instrumentalities, or the State of California or its political
subdivisions) if as a result of such purchase more than 25% of the Fund's total
assets would be invested in any one industry, except that all or substantially
all of the assets of the Fund may be invested in another registered investment
company having the same investment objective and substantially similar
investment policies as the Fund.
KGSF:
(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, and except that all or substantially all of the assets of
the Fund may be invested in another registered investment company having the
same investment objective and substantially similar investment policies as the
Fund.
KTEC[(9)], KHYOF[(9)], KMBF[(10)], KSTIS (EXCEPT KTXTF)[(7)], KCATF [(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, and except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund.
KGSF:
(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, and except that all or substantially all of the assets
<PAGE> 71
of the Fund may be invested in another registered investment company having the
same investment objective and substantially similar investment policies as the
Fund.
KCATF:
(1) Purchase securities or make investments other than in accordance with its
investment objective and policies, except that all or substantially all of the
assets of the Fund may be invested in another registered investment company
having the same investment objective and substantially similar investment
policies as the Fund.
KMBF, KSTIS (EXCEPT KCATF AND KTXTF):
(1) Make investments other than in accordance with its investment objective and
policies, except that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the same investment
objective and substantially similar investment policies as the Fund.
In addition, with respect to Kemper Equity Funds/Growth Style, the following
non-fundamental investment restrictions are deleted:
INVESTMENT RESTRICTIONS--DELETIONS
(with respect to all Kemper Equity Funds/Growth Style except KAGGF and KSCF)
Each Fund may not:
Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and
together own more than 5% of the securities of such issuer.
(with respect to all Kemper Equity Funds/Growth Style except KAGGF) Each Fund
may not:
(i) 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.
(ii) Invest in oil, gas and other mineral leases.
(with respect to all Kemper Equity Funds/Growth Style except KAGGF and KBCF)
Each Fund may not:
(i) Invest more than 5% of the Fund's total assets in securities of issuers
which with their predecessors have a record of less than three years
continuous operation and equity securities of issuers which are not readily
marketable.
(ii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of
the Fund's net assets, may be warrants not listed on the New York or
American Stock Exchanges. Warrants acquired in units or attached to
securities may be deemed to be without value for such purposes.
(iii) Invest more than 5% of its total assets in restricted securities,
excluding restricted securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 that have been determined to be liquid
pursuant to procedures adopted by the Board of Trustees, provided that the
total amounts of Fund assets invested in restricted securities and
securities of issuers which with their predecessors have a record of less
than three years continuous operation will not exceed 15% of total assets.
(iv) Purchase or sell real property (including limited partnership
interests but excluding readily marketable interests in real estate
investment trusts and readily marketable securities of companies which
invest in real estate).
<PAGE> 72
(with respect to all Kemper Equity Funds/Growth Style except KAGGF and KTRF)
Each Fund may not:
Invest more than 10% of its total assets in securities of real estate
investment trusts. (The Quantitative Fund currently does not intend to
invest more than 5% of its net assets in securities of real estate
investment trusts).
(with respect to KBCF) The Fund may not:
Invest more than 5% of the Fund's total assets in securities of issuers
(other than obligations of, or guarantees by, the U.S. Government, its
agencies or instrumentalities) which with their predecessors have a record
of less than three years continuous operation and equity securities of
issuers which are not readily marketable.
(with respect to KSCF) The Fund may not:
Purchase or retain the securities of any issuer if any of the officers or
trustees of the Fund or its investment adviser owns beneficially more than
1/2 of 1% of the securities of such issuer and together own more than 5% of
the securities of such issuer.
(with respect to KTRF) The Fund may not:
Invest more than 10% of its total assets in securities of real estate
investment funds.
With respect to KGIF and KIF, the following non-fundamental investment
restrictions are deleted:
(with respect to KGIF and KIF) Each Fund may not:
(i) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and
together own more than 5% of the securities of such issuer.
(ii) Invest in oil, gas and other mineral leases.
(iii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of
the Fund's net assets, may be warrants not listed on the New York or
American Stock Exchanges. Warrants acquired in units or attached to
securities may be deemed to be without value for such purposes.
(iv) Invest more than 5% of its total assets in restricted securities,
excluding restricted securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 that have been determined to be liquid
pursuant to procedures adopted by the Board of Trustees, provided that the
total amount of Fund assets invested in restricted securities and
securities of issuers which with their predecessors have a record of less
than three years continuous operation will not exceed 15% of total assets.
(v) Invest more than 10% of its total assets in securities of real estate
investment trusts.
(with respect to KIF only) The Fund may not:
(i) 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.
(ii) Invest more than 5% of the Fund's total assets in securities of
issuers which with their predecessors have a record of less than three
years continuous operation and equity securities of issuers which are not
readily marketable.
(iii) Purchase or sell real property (including limited partnership
interests but excluding readily marketable interests in real estate
investment trusts and readily marketable securities of companies which
invest in real estate).
<PAGE> 73
(with respect to KGIF only) The Fund may not:
(i) Invest in interests in oil or gas exploration or development programs,
although it may invest in the securities of issuers which invest in or
sponsor such programs.
(ii) 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 and equity securities
of issuers which are not readily marketable.
With respect to Kemper Income Funds and KCRF, the following non-fundamental
investment restrictions are deleted:
(with respect to KARGF, KDIF, KHYF, KICPF, KSIGF) Each Fund may not:
Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund, or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and
together own more than 5% of the securities of such issuer.
(with respect to KARGF, KDIF, KICPF, KHYF, KSIGF) Each Fund may not:
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.
(with respect to KCRF, KUSMF, KSIGF) Each Fund may not:
Invest in oil, gas or other mineral exploration or development programs.
(with respect to KARGF, KDIF, KHYF, and KICPF) Each Fund may not:
Invest in oil, gas and other mineral leases.
(with respect to KARGF and KSIGF) Each Fund may not:
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 including collateralized obligations thereof)
which with their predecessors have a record of less than three years
continuous operations.
(with respect to KDIF, KICPF and KHYF) Each Fund may not:
Invest more than 5% of the Fund's total assets in securities of issuers
which with their predecessors have a record of less than three years
continuous operation and equity securities of issuers which are not readily
marketable.
(with respect to KARGF, KCRF, KUSMF, KSIGF, KDIF, KHYF, KICPF) Each Fund may
not:
Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of
the Fund's net assets, may be warrants not listed on the New York or
American Stock Exchanges. Warrants acquired in units or attached to
securities may be deemed to be without value for such purposes.
(with respect to KARGF and KSIGF) Each Fund may not:
Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount
of Fund assets invested in restricted securities and securities of issuers
which with their predecessor have a record of less than three years
continuous operation will not exceed 15% of total assets.
<PAGE> 74
(with respect to KARGF, KDIF, KHYF and KICPF) Each Fund may not:
Purchase or sell real property (including limited partnership interests but
excluding readily marketable interests in real estate investment trusts and
readily marketable securities of companies which invest in real estate).
(with respect to KCRF, KUSMF, KSIGF) Each Fund may not:
Invest in limited partnership interests in real estate.
(with respect to KARGF, KHYF and KSIGF) Each Fund may not:
Invest more than 10% of its total assets in securities of real estate
investment trusts.
(with respect to KDIF and KICPF) Each Fund may not:
Invest more than 10% of its total assets in securities of real estate
investment trusts.
OFFICERS AND TRUSTEES
Mr. Morax and Mr. Timbers are no longer trustees of the Funds for which they
served as trustees. The following are new trustees:
DANIEL PIERCE (03/18/34), Trustee*, (63), 345 Park Avenue, New York, Managing
Director, Scudder Kemper. New York; Director, Fiduciary Trust Company; Director,
Fiduciary Company Incorporated.
EDMOND D. VILLANI (03/04/47), Trustee*, (50), 345 Park Avenue, New York, New
York; Chief Executive Officer, Scudder Kemper.
PORTFOLIO TRANSACTIONS
To the maximum extent feasible, it is expected that Scudder Kemper will place
orders for portfolio transactions through Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110 ("SIS"), a corporation
registered as a broker-dealer and a subsidiary of Scudder. SIS will place orders
on behalf of the Funds with issuers, underwriters or other brokers and dealers.
SIS will not receive any commission, fee or other remuneration from the Funds
for this service.
December 31, 1997
KMF-IQQ
<PAGE> 75
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> 76
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> 77
(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> 78
(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> 79
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> 80
(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> 81
(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.
B-6
<PAGE> 82
(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
B-7
<PAGE> 83
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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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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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
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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
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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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
<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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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> 113
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> 114
- --------------------------------------------------------------------------------
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> 115
- --------------------------------------------------------------------------------
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> 116
- --------------------------------------------------------------------------------
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> 117
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> 118
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> 119
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> 120
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> 121
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> 122
<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> 123
<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> 124
<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> 125
<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> 126
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> 127
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> 128
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> 129
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> 130
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> 131
KEMPER HIGH YIELD FUND
Portfolio of Investments at March 31, 1998 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GOVERNMENT OBLIGATIONS--4.6% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
OBLIGATIONS--4.2%
U.S. Treasury bonds
11.75%, 2001 $ 60,000 $ 69,694
13.375%, 2001 45,000 55,575
U.S. Treasury note
9.125%, 1999 107,500 111,548
------------------------------------------------------------------------------
236,817
- ---------------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT
OBLIGATIONS--.4%
(PRINCIPAL AMOUNT IN
U.S. DOLLARS)
(a)Republic of Argentina,
9.50%, 2002 8,900 8,927
Federal Republic of Brazil,
9.375%, 2008 4,240 4,229
United Mexican States,
8.625%, 2008 8,580 8,532
-------------------------------------------------------------------------------------------------------------------
21,688
------------------------------------------------------------------------------
TOTAL GOVERNMENT OBLIGATIONS
(Cost: $261,595) 258,505
------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--89.3%
AEROSPACE--.2%
L-3 Communication Corp., 10.375%, 2007 7,220 7,996
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
BROADCASTING, CABLESYSTEMS
AND PUBLISHING--14.5%
Affinity Group, Inc., 11.50%, 2003 23,411 24,873
(b)American Lawyer, 12.25%, 2008 2,940 1,874
American Radio Systems, 9.00%, 2006 18,490 19,645
Australis Holdings, with warrants
14.00%, 2000 4,779 3,370
(b) 15.00%, 2002 49,213 14,764
Big Flower Press, Inc., 8.875%, 2007 33,580 34,420
Busse Broadcasting, 11.625%, 2000 10,860 11,702
CCA Holdings, 13.00%, 1999 17,500 26,031
CSC Holdings Inc.
9.25%, 2005 8,560 9,095
7.875%, 2007 4,100 4,213
8.125%, 2009 13,516 14,226
Cablevision Systems Corp., 10.50%, 2016 27,375 32,165
Capstar Broadcasting
9.25%, 2007 13,890 14,585
(b) 12.75%, 2009 9,540 7,179
Century Communications Corp.
8.375%, 2007 8,100 8,222
9.50%, 2005 3,630 3,911
(b)Charter Communications, 14.00%, 2007 30,410 24,480
(b)Comcast Cellular Holdings, Inc.,
13.125%, 2003 30,800 23,870
Comcast Corp., 9.125%, 2006 34,485 36,554
(b)Comcast UK Cable Partners, Ltd., 11.20%,
2007 45,225 37,197
(b)Diamond Cable Communications, PLC
13.25%, 2004 29,130 26,872
11.75%, 2005 7,740 6,153
10.75%, 2007 8,900 6,297
(b)DIVA Systems Corp., 12.625%, 2008 21,020 11,613
EZ Communications, 9.75%, 2005 8,760 9,636
</TABLE>
9
PORTFOLIO OF Investments
<PAGE> 132
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Foxkids Worldwide
9.25%, 2007 $ 18,600 $ 18,693
(b) 10.25%, 2007 8,820 5,645
Frontiervision
11.00%, 2006 19,050 21,241
(b) 11.875%, 2007 21,439 16,641
Granite Broadcasting Corp., 10.375%, 2005 8,080 8,584
Intermedia Capital Partners, 11.25%, 2006 20,880 23,593
(b)International Cabletel, Inc., 12.75%,
2005 48,940 42,333
Mediacom LLC, 8.50%, 2008 8,720 8,731
American Banknote Corp., 11.25%, 2007 16,850 17,018
Newsquest Capital, PLC, 11.00%, 2006 13,794 15,450
NTL, 10.00%, 2007 7,761 8,362
(b)PX Escrow Corp., 9.625%, 2006 19,230 13,677
Rogers Communications, 8.875%, 2007 8,120 8,201
Salem Communications Corp., 9.50%, 2007 12,490 13,114
SFX Entertainment, Inc., 9.125%, 2008 24,140 23,899
Sinclair Broadcasting Group, Inc., 8.75%,
2007 12,970 13,327
Star Choice, 13.00%, 2005 10,100 10,504
Sullivan Broadcasting
10.25%, 2005 6,190 6,701
13.25%, 2006 12,850 18,761
TeleWest Communications, PLC
9.625%, 2006 22,005 23,380
(b) 11.00%, 2007 41,443 33,362
(b)21st Century Telecom Group, Inc.,
12.25%, 2008 14,900 8,791
(b)Transwestern Holdings, 11.875%, 2008 5,885 4,046
Transwestern Publishing, 9.625%, 2007 13,220 13,947
(b)UIH Australia Pacific, Inc., 14.00%,
with warrants, 2006 14,150 9,799
(b)United International Holdings, 10.75%,
2008 32,500 20,312
------------------------------------------------------------------------------
821,059
- ---------------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES--2.1%
Allied Waste Industries
10.25%, 2006 12,970 14,380
(b) 11.30%, 2007 26,805 19,601
Corporate Express, Inc., 9.125%, 2004 18,760 18,948
Intertek Finance, 10.25%, 2006 13,190 14,113
Outdoor Systems, Inc.
9.375%, 2006 23,880 25,611
8.875%, 2007 23,910 25,165
------------------------------------------------------------------------------
117,818
- ---------------------------------------------------------------------------------------------------------------------------
CHEMICALS AND
AGRICULTURE--3.5%
Agriculture, Mining and Chemicals, Inc.,
10.75%, 2003 19,230 20,528
Atlantis Group, Inc., 11.00%, 2003 25,355 26,116
Hines Horticulture, 11.75%, 2005 14,450 15,895
Huntsman Package, 11.75%, 2004 31,845 35,189
NL Industries, Inc.
11.75%, 2003 27,770 30,893
(b) 13.00%, 2005 21,370 21,691
Terra Industries, Inc., 10.50%, 2005 12,200 13,237
Texas Petrochemicals, 11.125%, 2006 19,410 21,254
UCC Investors Holdings, Inc., 10.50%, 2002 10,480 11,842
------------------------------------------------------------------------------
196,645
</TABLE>
10
Portfolio of INVESTMENTS
<PAGE> 133
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--13.0% ATC Group Services, 12.00%, 2008 $ 9,240 $ 9,286
American Mobil Satellite, 12.25%, 2008 8,190 8,497
(b)Call-Net Enterprises, Inc.
13.25%, 2004 7,240 6,797
9.27%, 2007 10,990 7,775
Communication and Power Industry, Inc.,
12.00%, 2005 7,975 8,972
(b)Crown Castle International Corp.,
10.625%, 2007 33,550 22,646
Dobson Communication Corp., 11.75%, 2007 24,500 27,072
Econophone, Inc., 13.50%, with warrants,
2007 34,545 40,919
Esprit Telecom, 11.50%, 2007 15,380 16,841
FaciliCom International, Inc., 10.50%, 2008 8,140 8,506
(b)Focal Communications Corp., 12.125%,
2008 14,760 8,635
GCI General Communication, 9.75%, 2007 22,570 24,037
(b)ICG Holdings, 13.50%, 2005 44,105 37,599
(b)ICG Services, Inc., 10.00%, 2008 16,430 10,474
Interamerica Communications, 14.00%, 2006 3,930 4,068
(b)Intermedia Communications, 12.25%, 2006 19,310 15,738
Intermedia Communications of Florida, Inc.,
8.875%, 2007 with warrants 8,115 11,246
(b) 11.25%, 2007 27,170 20,174
(b)KMC Telecom Holdings, Inc., 12.50%, 2008 23,900 14,340
MGC Communications, 13.00%, with warrants,
2001 18,116 19,384
(b)McLeod, Inc.
9.25%, 2007 13,435 14,342
(b) 10.50%, 2007 35,190 27,008
Metronet Communications, with warrants,
2007 331
(b) 10.75%, 2007 8,460 5,626
12.00%, 2007 8,280 9,563
(b)Millicom International Cellular, S.A.,
13.50%, 2006 35,740 28,056
Netia Holdings
10.25%, 2007 3,220 3,300
(b) 11.25%, 2007 8,355 5,723
(b)Nextel Communications
9.75%, 2004 19,300 18,552
9.75%, 2007 9,980 6,487
Nextlink Communications
12.50%, 2006 12,160 14,045
9.00%, 2008 15,590 16,058
zero coupon, 2008 8,260 5,224
Orbital Imaging, 11.625%, 2005 5,720 6,263
(b)PTC International Finance, B.V., 10.75%,
2007 21,080 14,703
Primus Telecommunications Group, 11.75%,
with warrants, 2004 13,050 15,008
RCN Corp.
10.00%, 2007 10,390 11,065
(b) 9.80%, 2008 20,000 12,500
Rogers Cantel, 9.75%, 2016 27,745 30,103
(b)SBA Communication, 12.00%, 2008 32,000 18,880
Satelites Mexicanos, S.A. de C.V., 10.125%,
2004 8,150 8,394
Telex Communication, 10.50%, 2007 5,165 4,648
Teligent, Inc.
11.50%, 2007 12,100 12,705
(b) 11.50%, 2008 14,650 8,442
USA Mobile Communications, Inc. II, 14.00%,
2004 9,650 10,687
</TABLE>
11
<PAGE> 134
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard Cellular Systems, 9.375%, 2006 $ 20,790 $ 21,933
Western Wireless
10.50%, 2006 7,425 8,065
10.50%, 2007 17,016 18,547
Winstar Communication
15.00%, 2007 14,180 18,789
11.00%, 2008 8,200 8,436
Winstar Equipment
12.50%, 2004 20,840 23,862
10.00%, 2008 5,900 5,989
------------------------------------------------------------------------------
736,340
- -------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION American Standard, Inc., 9.25%, 2016 15,517 15,983
MATERIALS--3.9% Airxcel, 11.00%, 2007 15,590 16,603
Brand Scaffold Services, Inc., 10.25%, 2008 6,670 6,870
(b)Building Materials Corporation of
America, 11.75%, 2004 51,930 50,112
Desa International, 9.875%, 2007 16,490 16,985
Falcon Building Products, Inc., 9.50%, 2007 17,410 17,845
Kevco, 10.375%, 2007 14,730 15,393
Nortek, Inc.
9.875%, 2004 14,255 14,771
9.125%, 2007 15,600 16,165
Terex Corp., 8.875%, 2008 5,600 5,600
Triangle Pacific Corp., 10.50%, 2003 26,565 27,893
Waxman Industries, Inc.
(b) 12.75%, 2004 6,510 5,957
800,453 warrants expiring 2004 1,881
Werner Holdings, 10.00%, 2007 10,630 11,228
------------------------------------------------------------------------------
223,286
- -------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AND AMF Bowling World
SERVICES--10.4% 10.875%, 2006 47,547 52,361
(b) 12.25%, 2006 14,691 11,900
Avondale Mills, 10.25%, 2006 24,151 26,083
Cinemark USA, Inc.
8.50%, 2008 13,550 13,618
9.625%, 2008 14,750 15,469
Coinmach Corp., 11.75%, 2005 51,656 57,725
Doskocil Manufacturing Co., 10.125%, 2007 12,830 13,728
Dyersburg Corp., 9.75%, 2007 18,155 18,813
Eagle Family Foods, 8.75%, 2008 12,485 12,485
Grupo Azucarero Mexico, S.A. de C.V.,
11.50%, 2005 12,290 12,198
Hedstrom Corp., 10.00%, 2007 11,280 11,590
Herff Jones, Inc., 11.00%, 2005 20,810 22,995
Hollywood Entertainment Corp., 10.625%,
2004 5,140 5,346
IMPAC Group, Inc., 10.125%, 2008 8,700 8,852
Imperial Home Decor Group Inc., 11.00%,
2008 11,900 12,197
Kinder-Care Learning Centers, 9.50%, 2009 41,550 42,485
Mastellone Hermonos, 11.75%, 2008 15,750 16,065
NBTY Inc., 8.625%, 2007 14,280 14,566
Nine West Group, 9.00%, 2007 8,300 7,802
Perkins Family Restaurants, L.P., 10.125%,
2007 8,130 8,536
Pillowtex Corp, 9.00%, 2007 6,450 6,708
(b)Pinnacle Holdings, 10.00%, 2008 24,700 15,376
Planet Hollywood, 12.00%, 2005 4,030 4,100
</TABLE>
12
<PAGE> 135
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premier Parks, Inc., 12.00%, 2003 $ 8,900 $ 9,857
Purina Mills, Inc., 9.00%, 2000 17,500 18,069
Riddell Sports, Inc., 10.50%, 2007 15,606 16,347
(b)Sealy Mattress, 10.875%, 2007 7,300 4,836
Six Flags Theme Park, 12.25%, 2005 54,395 60,378
Van De Kamps, Inc., 12.00%, 2005 13,945 15,618
West Point Stevens, Inc.
8.75%, 2005 10,000 10,425
9.375%, 2005 34,045 36,002
Windy Hill Pet Food Company, Inc., 9.75%,
2007 4,020 4,281
------------------------------------------------------------------------------
586,811
- -------------------------------------------------------------------------------------------------------------------------
DRUGS AND HEALTH CARE--3.5% CONMED Corp., 9.00%, 2008 4,000 4,070
Dade International Inc., 11.125%, 2006 27,400 30,414
Genesis Eldercare, 9.00%, 2007 25,565 26,268
Magellan Health Services, 9.00%, 2008 31,540 31,855
Paracelsus Healthcare, 10.00%, 2006 5,810 6,057
(b)Paragon Healthcare Networks, 10.50%,
2007 50,720 32,841
Tenet Healthcare
8.00%, 2005 9,920 10,193
10.125%, 2005 38,141 41,764
8.625%, 2007 14,230 14,728
------------------------------------------------------------------------------
198,190
- -------------------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED AEI Holdings, 10.00%, 2007 16,380 17,240
SERVICES--6.3% Bellweather Exploration Co., 10.875%, 2007 14,460 15,291
Benton Oil & Gas Co.
11.625%, 2003 23,865 25,804
9.375%, 2007 7,630 7,640
Clark Refining, 8.875%, 2007 9,050 9,163
Coda Energy, 10.50%, 2006 23,610 25,558
Dailey International, 9.50%, 2008 16,230 16,352
Denbury Management, 9.00%, 2008 13,570 13,638
Espirito Santo, 10.00%, 2007 21,810 21,319
Forcenergy Gas Exploration
9.50%, 2006 19,260 20,030
8.50%, 2007 14,085 13,838
Mariner Energy, 10.50%, 2006 3,840 4,003
Michael Petroleum Corp., 11.50%, 2005 8,190 8,088
National Energy Corp., 10.75%, 2006 5,870 5,694
Ocean Energy, 9.75%, 2006 7,370 8,033
Pacalta Resources, Ltd., 10.75%, 2004 27,855 28,551
Parker Drilling Corp., 9.75%, 2006 21,510 23,040
Plains Resources, 10.25%, 2006 15,590 16,759
Pool Energy Services, 8.625%, 2008 5,710 5,724
RAM Energy, 11.50%, 2008 8,250 8,209
Rutherford-Moran Oil Corp., 10.75%, 2004 9,120 9,713
Stone Energy Corp., 8.75%, 2007 18,880 19,258
United Meridian Corp., 10.375%, 2005 25,495 28,299
(b)Universal Compress, 9.875%, 2008 9,940 6,212
------------------------------------------------------------------------------
357,456
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES, Beazer Homes
HOME BUILDERS AND 9.00%, 2004 2,430 2,436
REAL ESTATE--3.3% 8.875%, 2008 15,470 15,509
Del Webb Corp., 9.75%, 2008 24,710 26,440
DVI, Inc., 9.875%, 2004 8,570 9,148
Emergent Group, 10.75%, 2004 8,250 7,899
</TABLE>
13
<PAGE> 136
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Engle Homes, Inc., 9.25%, 2008 $ 8,060 $ 8,241
Forecast Group, L.P., 11.375%, 2000 14,620 14,108
Fortress Group, 13.75%, 2003 14,080 15,910
Hovnanian Enterprises, 11.25%, 2002 30,257 31,354
New Millen Home Building, 12.00%, 2004 3,340 3,307
Presley Cos., 12.50%, 2001 14,455 13,877
UDC Homes, 12.50%, 2000 14,920 15,218
Williams Scotsman, Inc., 9.875%, 2007 24,100 25,184
------------------------------------------------------------------------------
188,631
- ---------------------------------------------------------------------------------------------------------------------------
HOTELS AND GAMING--2.1%
Eldorado Resorts, 10.50%, 2006 17,981 19,914
Empress River Casino, 10.75%, 2002 21,493 23,239
HMH Properties
9.50%, 2005 22,790 24,157
8.875%, 2007 10,230 10,741
Hard Rock Hotel, 9.25%, 2005 6,120 6,212
Harvey's Casino Resorts, 10.625%, 2006 14,770 16,469
Players International, 10.875%, 2005 9,765 10,644
Trump Atlantic City, 11.25%, 2006 8,300 8,466
------------------------------------------------------------------------------
119,842
- ---------------------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS
AND MINING--12.0%
Accuride, 9.25%, 2008 12,175 12,175
Aftermarket Technology, 12.00%, 2004 16,624 18,453
Alvey Systems, 11.375%, 2003 6,827 7,254
Bar Technologies, 13.50%, with warrants,
2001 16,335 18,565
Centaur Mining, 11.00%, 2007 10,600 10,998
Collins & Aikman Corp., 11.50%, 2006 15,030 16,909
Columbus Mckinnon, 8.50%, 2008 5,290 5,316
Day International Group, Inc.
11.125%, 2005 22,045 24,029
9.50%, 2008 5,730 5,816
Delco Remy International, 10.625%, 2006 26,115 28,661
Doe Run Co.
12.00%, 2003 4,100 4,202
11.25%, 2005 5,880 6,115
E-P Acquisition, Inc., 9.375%, 2008 3,200 3,248
Earle M. Jorgensen Co., 9.50%, 2005 6,500 6,516
Euramax International, PLC, 11.25%, 2006 23,595 25,954
Foamex, L.P.
13.50%, 2005 19,500 22,620
9.875%, 2007 2,900 3,074
GS Technologies
12.00%, 2004 5,875 6,448
12.25%, 2005 8,970 10,091
Hayes Wheels International, Inc.
11.00%, 2006 23,070 26,127
9.125%, 2007 17,875 18,925
JPS Automotive Products Corp., 11.125%,
2001 27,270 30,406
Key Plastics, 10.25%, 2007 8,375 8,919
Knoll, Inc., 10.875%, 2006 11,684 13,261
Koppers Industries, 9.875%, 2007 8,180 8,589
Metal USA, 8.625%, 2008 8,950 8,905
MMI Products, Inc., 11.25%, 2007 7,090 7,834
Morris Material Holdings, 9.50%, 2008 9,900 9,949
Motors and Gears, Inc., 10.75%, 2006 17,250 18,457
NSM Steel
12.00%, 2006 22,240 21,017
12.25%, 2008 23,540 22,716
</TABLE>
14
Portfolio of INVESTMENTS
<PAGE> 137
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Neenah Corp., 11.125%, 2007 $ 28,840 $ 31,940
Park-Ohio Industries, 9.25%, 2007 8,600 9,030
Prestolite Electric, 9.625%, 2008 5,680 5,808
Renco Metals, 11.50%, 2003 15,945 17,100
Renco Steel Holdings, 10.875%, 2005 11,300 11,695
Scovill Fasteners, 11.25%, 2007 11,020 11,516
Spinnaker Industries, 10.75%, 2006 23,070 23,877
Thermadyne Industries, Inc.
10.25%, 2002 12,226 12,700
10.75%, 2003 11,916 12,750
UCAR Global, 12.00%, 2005 22,110 24,431
Venture Holdings
9.75%, 2004 3,240 3,280
9.50%, 2005 26,320 27,175
WCI Steel, Inc., 10.00%, 2004 5,850 6,172
Wells Aluminum Corp., 10.125%, 2005 20,442 21,975
Wheeling Pitt Corp., 9.25%, 2007 28,300 28,724
------------------------------------------------------------------------------
679,722
- ---------------------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS
AND CONTAINERS--8.3%
AEP Industries Inc., 9.875%, 2007 7,180 7,530
BPC Holding Corp., 12.50%, 2006 12,240 13,464
Berry Plastics Corp., 12.25%, 2004 20,499 22,395
Doman Industry, 9.25%, 2007 12,950 13,047
Fonda Group, 9.50%, 2007 11,730 11,495
Gaylord Container Corp.
12.75%, 2005 32,850 35,190
9.75%, 2007 11,280 11,506
9.875%, 2008 33,100 32,935
Graham Packaging Co.
8.75%, 2008 7,420 7,457
9.25%, 2008 8,220 8,302
(b) 10.75%, 2009 7,840 4,978
Maxxam Group, Inc.
11.25%, 2003 24,325 25,845
(b) 12.25%, 2003 7,265 7,410
National Fiberstock Corp., 11.625%, 2002 12,960 13,867
Norampac, 9.50%, 2008 21,320 22,119
Pindo Deli Finance Mauritius, Ltd., 10.75%,
2007 810 656
Plainwell Inc., 11.00%, 2008 8,150 8,374
Printpack, Inc.
9.875%, 2004 8,440 8,989
10.625%, 2006 22,640 24,564
Riverwood International
10.25%, 2006 14,180 14,712
10.625%, 2007 18,331 19,385
10.875%, 2008 51,175 51,559
(b)SF Holdings Group, Inc., 12.75%, 2008 13,450 7,498
Specialty Paperboard, 9.375%, 2006 8,830 9,271
Stone Container Corp.
9.875%, 2001 28,440 29,009
12.25%, 2002 11,980 12,309
11.50%, 2006 12,130 13,040
Tjiwi Kimia Finance Mauritius, Ltd.,
10.00%, 2004 890 730
U.S. Can Corp., 10.125%, 2006 31,079 32,982
------------------------------------------------------------------------------
470,618
</TABLE>
15
PORTFOLIO OF Investments
<PAGE> 138
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
PRINCIPAL AMOUNT OR
NUMBER OF SHARES VALUE
<S> <C> <C> <C> <C> <C>
RETAILING--4.6%
Advantica Restaurant Company, 11.25%, 2008 $ 24,050 $ 25,793
AFC Enterprises, Inc., 10.25%, 2007 18,950 19,968
Ameriking, 10.75%, 2006 15,635 16,729
Cole National Group
9.875%, 2006 6,170 6,710
8.625%, 2007 18,890 19,339
(c)Color Tile, Inc., 10.75%, 2001 20,480 205
Finlay Fine Jewelry Corp., 10.625%, 2003 27,300 28,665
Galey & Lord, 9.125%, 2008 11,570 11,715
Guitar Center Management, 11.00%, 2006 15,050 16,706
J. Crew Group
10.375%, 2007 16,450 15,463
(b) 13.125%, 2008 17,480 8,740
Krystal Co., 10.25%, 2007 8,100 8,424
Pamida Holdings, 11.75%, 2003 12,995 13,417
Pathmark Stores, 9.625%, 2003 16,810 16,768
Petro Stopping Centers, 10.50%, 2007 29,670 32,044
TravelCenters of America, Inc., 10.25%,
2007 16,830 17,966
------------------------------------------------------------------------------
258,652
- ---------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--.6%
Axiohm Transaction Solutions, Inc.,
9.75%, 2007 8,650 8,801
Viasystems, Inc., 9.75%, 2007 24,670 25,780
------------------------------------------------------------------------------
34,581
- ---------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.0%
TFM, S.A. de C.V., 10.25%, 2007 23,470 24,291
Trans World Airlines, Inc., 11.375%, 2006 12,140 12,231
(b)Transtar Holdings, L.P., 13.375%, 2003 10,100 9,216
Valujet, Inc., 10.25%, 2001 8,240 7,910
------------------------------------------------------------------------------
53,648
------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $4,852,517) 5,051,295
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
COMMON AND PREFERRED
STOCKS--2.5%
21st Century Telecom Group, Inc., preferred 2,850shs. 3,192
Benedek Unit, PIK, preferred with warrants 90,000 13,545
(c)Capital Pacific Holdings 54,431 54
Clark USA, PIK, preferred 43,781 4,575
Com Cell, warrants 30,800 2,148
Crown American Realty Trust, preferred 272,650 14,638
Day International Exchange, PIK, preferred 4,880 5,014
Dobson Communication, PIK, preferred 6,170 6,787
(c)EchoStar Communications Corp. 108,723 2,392
E-P Acquisition, Inc., preferred 970 5,614
(c)Empire Gas Corp., warrants 31,795 159
(c)Foamex International, warrants 16,620 332
(c)Gaylord Container Corp. 1,805,934 13,432
(c)Gulf States Steel, warrants 29,670 148
(c)Intelcom Group, Inc. 67,617 1,082
Nextel, PIK, preferred 30,240 31,903
Nextlink Communication, convertible
preferred 34,300 1,646
SF Holdings, PIK, preferred 420 3,854
Sinclair Capital, preferred 210,400 23,249
(c)Sullivan Broadcasting 205,600 6,168
------------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCKS--2.5%
(Cost: $113,100) 139,932
------------------------------------------------------------------------------
</TABLE>
16
Portfolio of INVESTMENTS
<PAGE> 139
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
MONEY MARKET
INSTRUMENTS--2.1%
Yields--5.53% - 6.00%
Due--April, 1998
(Cost: $116,486) $ 116,800 $ 116,483
------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.5%
(Cost: $5,343,698) 5,566,215
------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.5% 87,089
------------------------------------------------------------------------------
NET ASSETS--100% $5,653,304
------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Variable rate security. Rate shown is effective rate on March 31, 1998 and
date shown represents the final maturity of the obligation.
(b) Deferred interest obligation; currently zero coupon under terms of the
initial offering.
(c) Non-income producing security. In the case of a bond, generally denotes that
issuer has defaulted on the payment of principal interest or has filed for
bankruptcy.
Based on the cost of investments of $5,343,698,000 for federal income tax
purposes at March 31, 1998, the gross unrealized appreciation was $271,545,000,
the gross unrealized depreciation was $49,028,000 and the net unrealized
appreciation on investments was $222,517,000.
See accompanying Notes to Financial Statements.
17
PORTFOLIO OF Investments
<PAGE> 140
KEMPER HIGH YIELD OPPORTUNITY FUND
Portfolio of Investments at March 31, 1998 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN GOVERNMENT OBLIGATIONS--1.8% PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
(PRINCIPAL AMOUNT IN
U.S. DOLLARS)
(a)Republic of Argentina,
9.50%, 2002 $ 100 $ 100
Federal Republic of Brazil,
9.375%, 2008 100 100
United Mexican States,
8.625%, 2008 100 99
-------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost: $299) 299
------------------------------------------------------------------------------
CORPORATE OBLIGATIONS--90.3%
BROADCASTING, CABLESYSTEMS
AND PUBLISHING--12.1%
American Banknote Corp., 11.25%, 2007 100 101
CSC Holding
7.875%, 2007 10 10
8.125%, 2009 34 36
Cablevision Systems Corp., 10.50%, 2016 60 71
Capstar Broadcasting, 9.25%, 2007 100 105
(b)Charter Communications, 14.00%, 2007 150 121
Comcast Corp., 9.125%, 2006 100 106
(b)DIVA Systems Corp., 12.625%, 2008 200 110
Foxkids Worldwide, 9.25%, 2007 100 101
Frontiervision
11.00%, 2006 100 112
(b) 11.875%, 2007 100 77
Mediacom LLC, 8.50%, 2008 100 100
NTL, 10.00%, 2007 104 112
(b)PX Escrow Corp., 9.625%, 2006 220 156
SFX Entertainment, Inc., 9.125%, 2008 100 99
Sinclair Broadcasting Group, Inc., 8.75%, 2007 100 103
Star Choice, 13.00%, 2005 50 52
(b)TeleWest Communications, PLC, 11.00%, 2007 125 101
(b)Transwestern Holdings, 11.875%, 2008 60 41
Transwestern Publishing, 9.625%, 2007 60 63
(b)21st Century Telecom Group, Inc., 12.25%,
2008 100 59
(b)United International Holdings, 10.75%, 2008 200 125
------------------------------------------------------------------------------
1,961
- ---------------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES--1.9%
ATC Group Services, 12.00%, 2008 100 101
Intertek Finance, 10.25%, 2006 100 107
Outdoor System, Inc.
9.375%, 2006 50 54
8.875%, 2007 50 52
------------------------------------------------------------------------------
314
- ---------------------------------------------------------------------------------------------------------------------------
CHEMICALS --.6%
Texas Petrochemicals, 11.125%, 2006 100 110
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--15.1%
American Mobil Satellite, 12.25%, 2008 100 105
(b)Crown Castle International Corp., 10.625%,
2007 175 118
Econophone, Inc., 13.50%, 2007 100 115
Esprit Telecom, 11.50%, 2007 100 109
FaciliCom International, Inc., 10.50%, 2008 100 105
(b)Focal Communications Corp., 12.125%, 2008 200 117
</TABLE>
18
Portfolio of INVESTMENTS
<PAGE> 141
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
GCI General Communication, 9.75%, 2007 $ 40 $ 42
(b)ICG Holdings, 13.50%, 2005 100 84
(b)ICG Services, Inc., 10.00%, 2008 130 83
Interamerica Communications, 14.00%, 2007 50 52
Intermedia Communication of Florida, Inc.,
8.875%, 2007 75 79
(b)KMC Telecom Holdings, Inc., 12.50%, 2008 160 96
McLeod, Inc., 9.25%, 2007 100 107
(b)Metronet Communications, 10.75%, 2007 150 100
Netia Holdings
10.25%, 2007 50 51
(b) 11.25%, 2007 75 51
(b)Nextel Communications
9.75%, 2004 15 14
9.75%, 2007 60 39
9.95%, 2008 25 16
Nextlink Communications
9.00%, 2008 100 102
zero coupon, 2008 30 19
Orbital Imaging, 11.625%, 2005 100 110
(b)PTC International Finance, B.V., 10.75%,
2007 120 84
RCN Corp., 10.00%, 2007 120 129
(b)SBA Communication, 12.00%, 2008 200 118
Satelites Mexicanos, S.A. de C.V., 10.125%,
2004 100 103
Teligent, Inc.
11.50%, 2007 50 52
(b) 11.50%, 2008 200 115
Winstar Communications
15.00%, 2007 20 26
11.00%, 2008 30 31
Winstar Equipment, 12.50% 2004 60 69
------------------------------------------------------------------------------
2,441
- ---------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS--5.2%
American Standard, Inc., 9.25%, 2016 110 113
Airxcel, 11.00%, 2007 100 107
Brand Scaffold Services, Inc., 10.25%, 2008 100 103
Desa International, 9.875%, 2007 100 103
Kevco, 10.375%, 2007 105 109
Nortek, Inc., 9.875%, 2004 100 104
Terex Corp., 8.875%, 2008 100 100
Werner Holdings, 10.00%, 2007 100 106
------------------------------------------------------------------------------
845
- ---------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AND
SERVICES--9.6%
AFC Enterprises, Inc., 10.25%, 2007 100 105
(b)AMF Bowling World, 12.25%, 2006 125 101
Avondale Mills, 10.25%, 2006 84 90
Cinemark USA, Inc., 8.50%, 2008 100 101
Dyersburg Corp., 9.75%, 2007 100 104
Grupo Azucarero Mexico, S.A. de C.V., 11.50%,
2005 100 99
IMPAC Group, Inc., 10.125%, 2008 100 102
The Imperial Home Decor Group Inc., 11.00%,
2007 175 103
Mastellone Hermonos, 11.75%, 2008 100 102
Perkins Finance, 10.125%, 2007 100 105
Pillowtex Corp, 9.00%, 2007 100 104
</TABLE>
19
PORTFOLIO OF Investments
<PAGE> 142
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
(b)Pinnacle Holdings, 10.00%, 2008 $ 200 $ 124
Purina Mills, Inc., 9.00%, 2010 100 103
(b)Sealy Mattress, 10.875%, 2007 150 99
Windy Hill Pet Food Company, Inc., 9.75%, 2007 100 107
------------------------------------------------------------------------------
1,549
- ---------------------------------------------------------------------------------------------------------------------------
DRUGS AND HEALTH CARE--3.0%
CONMED Corp., 9.00%, 2008 100 101
Genesis Eldercare, 9.00%, 2007 70 72
Magellan Health Services, 9.00%, 2008 100 101
Paracelsus Healthcare, 10.00%, 2006 100 103
(b)Paragon Healthcare Networks, 10.50%, 2007 160 104
------------------------------------------------------------------------------
481
- ---------------------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED
SERVICES--9.4%
AEI Holdings, 10.00%, 2007 100 105
Bellweather Exploration Co., 10.875%, 2007 100 105
Benton Oil & Gas Co., 9.375%, 2007 100 100
Dailey International, 9.50%, 2008 100 101
Denbury Management, 9.00%, 2008 100 101
Espirito Santo, 10.00%, 2007 100 98
Mariner Energy, 10.50%, 2006 100 104
Michael Petroleum Corp., 11.50%, 2005 100 99
Pacalta Resources, Ltd., 10.75%, 2004 100 103
Parker Drilling Corp., 9.75%, 2006 100 106
Plains Resources, 10.25%, 2006 100 108
RAM Energy, 11.50%, 2008 100 100
Stone Energy Corp., 8.75%, 2007 100 102
(b)Universal Compress, 9.875%, 2008 300 187
------------------------------------------------------------------------------
1,519
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES,
HOME BUILDERS AND
REAL ESTATE--2.4%
Beazer Homes, 8.875%, 2008 100 100
Emergent Group, 10.75%, 2004 80 77
Engle Homes, Inc., 9.25%, 2008 50 51
Forecast Group, L.P., 11.375%, 2000 100 96
UDC Homes, 12.50%, 2000 70 71
------------------------------------------------------------------------------
395
- ---------------------------------------------------------------------------------------------------------------------------
HOTELS AND GAMING--2.0%
Empress River Casino, 10.75%, 2002 100 108
Hard Rock Hotel, 9.25%, 2005 100 101
Harvey's Casino Resorts, 10.625%, 2006 100 112
------------------------------------------------------------------------------
321
- ---------------------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS
AND MINING--12.7%
Accuride, 9.25%, 2008 100 100
Alvey Systems, 11.375%, 2003 100 106
Centaur Mining, 11.00%, 2007 100 104
Columbus Mckinnon, 8.50%, 2008 100 101
Day International Group, Inc.
11.125%, 2005 15 16
9.50%, 2008 100 102
Doe Run Co.
12.00%, 2003 50 51
11.25%, 2005 100 104
E-P Acquisition, Inc., 9.375%, 2008 50 51
Earle M. Jorgensen Co., 9.50%, 2005 100 100
Euramax International, PLC, 11.25%, 2006 100 110
JPS Automotive Products Corp., 11.125%, 2001 40 45
Metal USA, 8.625%, 2008 100 100
</TABLE>
20
Portfolio of INVESTMENTS
<PAGE> 143
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
PRINCIPAL AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
Morris Material Holdings, 9.50%, 2008 $ 100 $ 100
NSM Steel
12.00%, 2006 60 57
12.25%, 2008 60 58
Neenah Corp., 11.125%, 2007 100 111
Prestolite Electric, 9.625%, 2008 100 102
Renco Metals, 10.875%, 2005 100 104
Scovill Fasteners, 11.25%, 2007 50 52
Venture Holdings
9.75%, 2004 70 71
9.50%, 2005 30 31
WCI Steel, Inc., 10.00%, 2004 100 106
Wells Aluminum Corp., 10.125%, 2005 64 69
Wheeling Pitt Corp., 9.25%, 2007 100 102
------------------------------------------------------------------------------
2,053
- ---------------------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS
AND CONTAINERS--8.0%
AEP Industries Inc., 9.875%, 2007 100 105
Doman Industry, 9.25%, 2007 100 101
Gaylord Container Corp.
12.75%, 2005 10 11
9.75%, 2007 40 41
9.875%, 2008 100 100
Graham Packaging Co.
8.75%, 2008 30 30
9.25%, 2008 30 30
10.75%, 2009 60 38
National Fiberstock Corp., 11.625%, 2002 100 107
Norampac, 9.50%, 2008 100 104
Plainwell Inc., 11.00%, 2008 100 103
Printpack, Inc., 10.625%, 2006 100 109
Riverwood International
10.25%, 2006 30 31
10.875%, 2008 65 65
(b)SF Holdings Group, Inc., 12.75%, 2008 200 112
Stone Container Corp.
9.875%, 2001 65 66
11.50%, 2006 40 43
U.S. Can Corp., 10.125%, 2006 100 106
------------------------------------------------------------------------------
1,302
- ---------------------------------------------------------------------------------------------------------------------------
RETAILING--5.7%
Advantica Restaurant Co., 11.25%, 2008 100 107
Cole National Group
9.875%, 2006 50 54
8.625%, 2007 50 51
Galey & Lord, 9.125%, 2008 100 101
Hedstrom Corp., 10.00%, 2007 100 103
J. Crew Group
10.375%, 2007 50 47
(b) 13.125%, 2008 50 25
Krystal Co., 10.25%, 2007 100 104
Pathmark Stores, 9.625%, 2003 110 110
Petro Stopping Centers, 10.50%, 2007 100 108
TravelCenters of America, Inc., 10.25%, 2007 100 107
------------------------------------------------------------------------------
917
</TABLE>
21
PORTFOLIO OF Investments
<PAGE> 144
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
PRINCIPAL AMOUNT OR
NUMBER OF SHARES VALUE
<S> <C> <C> <C> <C> <C>
TECHNOLOGY--1.3%
Axiohm Transaction Solutions, Inc.,
9.75%, 2007 $ 100 $ 102
Viasystems, Inc., 9.75%, 2007 100 105
------------------------------------------------------------------------------
207
- ---------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.3%
TFM, S.A. de C.V., 10.25%, 2007 100 103
Trans World Airlines, Inc., 11.375%, 2006 100 101
------------------------------------------------------------------------------
204
------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost: $14,373) 14,619
------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
COMMON AND PREFERRED
STOCKS--6.3%
Crown American Realty Trust, preferred 1,900shs. 102
Day International Exchange, PIK, preferred 100 103
Dobson Communication, PIK, preferred 60 66
E-P Acquisition, Inc., preferred 20 116
(c)Gaylord Container Corp. 20,000 149
Nextel, PIK, preferred 83 87
Nextlink, convertible preferred 100 5
SF Holdings Group, Inc., PIK, preferred 10 92
Standard & Poor's Depository Receipts 1,000 110
Teligent, Inc. 2,000 61
21st Century Telecom Group, Inc., preferred 50 56
Waxman Industries Inc. 18,000 72
------------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCKS--6.3%
(Cost: $992) 1,019
------------------------------------------------------------------------------
TOTAL INVESTMENTS--98.4%
(Cost: $15,664) 15,937
------------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--1.6% 251
------------------------------------------------------------------------------
NET ASSETS--100% $16,188
------------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Variable rate security. Rate shown is effective on March 31, 1998 and date
shown represents the final maturity of the obligation.
(b) Deferred interest obligation; currently zero coupon under terms of the
initial offering.
(c) Non-income producing security.
Based on the cost of investments of $15,664,000 for federal income tax purposes
at March 31, 1998, the gross unrealized appreciation was $299,000, the gross
unrealized depreciation was $26,000 and the net unrealized appreciation on
investments was $273,000.
See accompanying Notes to Financial Statements.
22
Portfolio of INVESTMENTS
<PAGE> 145
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1998 (unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD
HIGH YIELD OPPORTUNITY
FUND FUND
<S> <C> <C>
ASSETS
Investments, at value (Cost: $5,343,698 and $15,664,
respectively) $5,566,215 15,937
- -----------------------------------------------------------------------------------------
Cash 4,099 436
- -----------------------------------------------------------------------------------------
Receivable for:
Investments sold 100,885 954
- -----------------------------------------------------------------------------------------
Fund shares sold 10,115 157
- -----------------------------------------------------------------------------------------
Interest 117,700 277
- -----------------------------------------------------------------------------------------
TOTAL ASSETS 5,799,014 17,761
- -----------------------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
Payable for:
Investments purchased 137,601 1,538
- -----------------------------------------------------------------------------------------
Fund shares redeemed 2,473 --
- -----------------------------------------------------------------------------------------
Management fee 2,417 8
- -----------------------------------------------------------------------------------------
Administrative services fee 1,074 2
- -----------------------------------------------------------------------------------------
Distribution services fee 1,055 5
- -----------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 948 9
- -----------------------------------------------------------------------------------------
Trustees' fees and other 142 11
- -----------------------------------------------------------------------------------------
Total liabilities 145,710 1,573
- -----------------------------------------------------------------------------------------
NET ASSETS $5,653,304 16,188
- -----------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
Paid-in capital $5,416,878 15,635
- -----------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments (80,719) 169
- -----------------------------------------------------------------------------------------
Net unrealized appreciation on investments 222,517 273
- -----------------------------------------------------------------------------------------
Undistributed net investment income 94,628 111
- -----------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $5,653,304 16,188
- -----------------------------------------------------------------------------------------
THE PRICING OF SHARES
CLASS A SHARES
Net assets applicable to shares outstanding $3,906,418 7,779
- -----------------------------------------------------------------------------------------
Shares outstanding 456,804 778
- -----------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $8.55 10.00
- -----------------------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
4.71%
of net asset value or 4.50% of offering price) $8.95 10.47
- -----------------------------------------------------------------------------------------
CLASS B SHARES
Net assets applicable to shares outstanding $1,523,388 7,269
- -----------------------------------------------------------------------------------------
Shares outstanding 178,317 727
- -----------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $8.54 10.00
- -----------------------------------------------------------------------------------------
CLASS C SHARES
Net assets applicable to shares outstanding $188,114 1,140
- -----------------------------------------------------------------------------------------
Shares outstanding 21,957 114
- -----------------------------------------------------------------------------------------
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
(net assets / shares outstanding) $8.57 10.00
- -----------------------------------------------------------------------------------------
CLASS I SHARES
Net assets applicable to shares outstanding $35,384 --
- -----------------------------------------------------------------------------------------
Shares outstanding 4,138 --
- -----------------------------------------------------------------------------------------
Net asset value and redemption price per share
(net assets / shares outstanding) $8.55 --
- -----------------------------------------------------------------------------------------
</TABLE>
23
FINANCIAL Statements
<PAGE> 146
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended March 31, 1998 (unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD
HIGH YIELD OPPORTUNITY
FUND FUND(a)
- -------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income $259,499 397
- -------------------------------------------------------------------------------------------------
Dividends 2,038 --
- -------------------------------------------------------------------------------------------------
Total investment income 261,537 397
- -------------------------------------------------------------------------------------------------
Expenses:
Management fee 13,892 28
- -------------------------------------------------------------------------------------------------
Administrative services fee 5,866 8
- -------------------------------------------------------------------------------------------------
Distribution services fee 5,940 14
- -------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 3,964 13
- -------------------------------------------------------------------------------------------------
Interest expense -- 10
- -------------------------------------------------------------------------------------------------
Professional fees 52 --
- -------------------------------------------------------------------------------------------------
Reports to shareholders 479 7
- -------------------------------------------------------------------------------------------------
Trustees' fees and other 312 7
- -------------------------------------------------------------------------------------------------
Total expenses 30,505 87
- -------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 231,032 310
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------
Net realized gain on sales of investments 71,516 187
- -------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (524) --
- -------------------------------------------------------------------------------------------------
Net realized gain 70,992 187
- -------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (31,943) 273
- -------------------------------------------------------------------------------------------------
Net gain on investments 39,049 460
- -------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $270,081 770
- -------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the six months ended March 31, 1998 (unaudited) and the year ended September
30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH YIELD
HIGH YIELD FUND OPPORTUNITY FUND(a)
----------------------------------- -------------------
1998 1997 1998
- ------------------------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $ 231,032 396,225 310
- ------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) 70,992 (1,945) 187
- ------------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (31,943) 178,138 273
- ------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 270,081 572,418 770
- ------------------------------------------------------------------------------------------------------------------
Net equalization credits 11,651 12,110 89
- ------------------------------------------------------------------------------------------------------------------
Distribution from net investment income (238,954) (416,460) (288)
- ------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- (18)
- ------------------------------------------------------------------------------------------------------------------
Total dividends to shareholders (238,954) (416,460) (306)
- ------------------------------------------------------------------------------------------------------------------
Net increase from capital share transactions 671,224 674,295 15,535
- ------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 714,002 842,363 16,088
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
Beginning of period 4,939,302 4,096,939 100
- ------------------------------------------------------------------------------------------------------------------
END OF PERIOD $5,653,304 4,939,302 16,188
- ------------------------------------------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME AT END OF
PERIOD $ 94,628 90,899 111
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The High Yield Opportunity Fund commenced operations on October 1, 1997.
See accompanying Notes to Financial Statements.
24
<PAGE> 147
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE The Kemper High Yield Series (the Trust) is an
FUND open-end diversified management investment company
comprised of Kemper High Yield Fund (High Yield
Fund) and Kemper High Yield Opportunity Fund (High
Yield Opportunity Fund). The Trust is organized as
a business trust under the laws of Massachusetts.
The High Yield Opportunity Fund commenced
operations on October 1, 1997.
Each 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 each Fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT INVESTMENT VALUATION. Investments are stated at
ACCOUNTING POLICIES 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.
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 fixed income securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
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
25
<PAGE> 148
NOTES TO FINANCIAL STATEMENTS
Exchange. The net asset value per share is
determined separately for each class by dividing
the Funds' net assets attributable to that class by
the number of shares of the class outstanding.
FEDERAL INCOME TAXES. Each Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended March 31, 1998. For High Yield Fund,
the accumulated net realized loss on sales of
investments for federal income tax purposes at
March 31, 1998, amounting to approximately
$80,662,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 1998 through 2004.
DIVIDENDS TO SHAREHOLDERS. Each 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.
EQUALIZATION ACCOUNTING. A portion of proceeds from
sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment
income so that income per share available for
distribution is not affected by sales or
redemptions of shares.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH INVESTMENT MANAGER COMBINATION. Effective December
AFFILIATES 31, 1997, Zurich Insurance Company, the parent of
Zurich Kemper Investments, Inc. (ZKI), acquired a
majority interest in Scudder, Stevens & Clark, Inc.
(Scudder), another major investment manager. As a
result of this transaction, the operations of ZKI
were combined with Scudder to form a new global
investment organization named Scudder Kemper
Investments, Inc. (Scudder Kemper). The transaction
resulted in the termination of the Funds'
investment management agreement with ZKI, however,
a new investment management agreement between the
Funds and Scudder Kemper was approved by the Funds'
Board of Trustees and by the Funds' shareholders.
The new management agreement, which was effective
December 31, 1997, is the same in all material
respects as the previous management agreement,
except that Scudder Kemper is the new investment
adviser to the Funds. In addition, the names of the
Funds' principal underwriter and shareholder
service agent were changed to Kemper Distributors,
Inc. (KDI) and Kemper Service Company (KSvC),
respectively.
MANAGEMENT AGREEMENT. The Funds have a management
agreement with Scudder Kemper. The High Yield Fund
pays a 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. The High Yield Fund incurred a
management fee of $13,892,000 for the six months
ended March 31, 1998.
The High Yield Opportunity Fund pays a management
fee at an annual rate of .65% of the first $250
million of average daily net assets declining to
.49% of average daily net assets in excess of $12.5
billion. The High Yield Opportunity Fund incurred a
management fee of $28,000 for the six months ended
March 31, 1998.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
Each Fund has an underwriting and distribution
services agreement with KDI. Underwriting
commissions
26
<PAGE> 149
paid in connection with the distribution of Class A
shares for the six months ended March 31, 1998 are
as follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS ----------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
High Yield Fund $847,000 6,163,000 92,000
High Yield Opportunity Fund 10,000 80,000 --
</TABLE>
For services under the distribution services
agreement, each Fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees, CDSC
and commissions related to Class B and Class C
shares for the six months ended March 31, 1998 are
as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES PAID
RECEIVED BY KDI BY KDI TO FIRMS
------------------ ----------------------
<S> <C> <C>
High Yield Fund $6,915,000 10,513,000
High Yield Opportunity Fund 14,000 270,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. Each Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, each
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI 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
for the six months ended March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY THE ----------------------------
FUND TO KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
High Yield Fund $5,866,000 6,051,000 32,000
High Yield Opportunity Fund 8,000 25,000 --
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Funds' transfer agent,
KSvC is the shareholder service agent of each Fund.
Under the agreement, for the six months ended March
31, 1998, KSvC received shareholder services fees
as follows:
High Yield Fund $2,872,000
High Yield Opportunity Fund 5,000
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Trust are also officers or directors of
Scudder Kemper. For the six months ended March 31,
1998, the Funds made no payments to their officers
and incurred trustees' fees of $24,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT For the six months ended March 31, 1998, investment
TRANSACTIONS transactions (excluding short term instruments) are
as follows (in thousands):
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD
FUND OPPORTUNITY FUND
---------- -----------------
<S> <C> <C>
Purchases $4,286,058 30,354
Proceeds from sales 3,659,827 14,877
</TABLE>
27
<PAGE> 150
- --------------------------------------------------------------------------------
5
NOTE PAYABLE The High Yield Opportunity Fund may borrow money
for leverage purposes up to a maximum of 20% of the
total assets of the Fund, including the amount
borrowed. During the six months ended March 31,
1998, the maximum borrowings were $1,000,000.
Interest paid on the amount borrowed was based on
an annual rate of 6.175%. There were no amounts
outstanding as of March 31, 1998.
- --------------------------------------------------------------------------------
6
CAPITAL SHARE
TRANSACTIONS The following tables summarize the activity in
capital shares of the Funds (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
1998 1997
-------------------- ------------------------
HIGH YIELD FUND SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 98,690 $ 815,116 190,692 $ 1,527,552
------------------------------------------------------------------------------
Class B 54,183 457,885 109,720 900,384
------------------------------------------------------------------------------
Class C 10,449 92,481 16,667 137,204
------------------------------------------------------------------------------
Class I 8,158 55,461 12,114 100,487
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 12,569 106,511 22,581 187,057
------------------------------------------------------------------------------
Class B 4,364 36,963 7,931 65,657
------------------------------------------------------------------------------
Class C 575 761 686 5,708
------------------------------------------------------------------------------
Class I 222 1,880 367 3,044
------------------------------------------------------------------------------
SHARES REDEEMED
Class A (74,791) (619,481) (175,031) (1,410,231)
------------------------------------------------------------------------------
Class B (22,340) (187,585) (80,748) (661,407)
------------------------------------------------------------------------------
Class C (3,756) (31,651) (9,742) (80,133)
------------------------------------------------------------------------------
Class I (8,305) (57,097) (12,153) (101,027)
------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 12,947 110,059 15,517 129,053
------------------------------------------------------------------------------
Class B (12,963) (110,059) (15,533) (129,053)
------------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $ 671,244 $ 674,295
------------------------------------------------------------------------------
</TABLE>
28
Notes
to FINANCIAL STATEMENTS
<PAGE> 151
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
1998
----------------------
HIGH YIELD OPPORTUNITY FUND SHARES AMOUNT
---------------------------------------------------------------------------
<S> <C> <C>
SHARES SOLD
---------------------------------------------------------------------------
Class A 841 $ 8,116
---------------------------------------------------------------------------
Class B 855 8,284
---------------------------------------------------------------------------
Class C 119 1,166
---------------------------------------------------------------------------
---------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
---------------------------------------------------------------------------
Class A 13 131
---------------------------------------------------------------------------
Class B 9 90
---------------------------------------------------------------------------
Class C 1 14
---------------------------------------------------------------------------
---------------------------------------------------------------------------
SHARES REDEEMED
---------------------------------------------------------------------------
Class A (81) (792)
---------------------------------------------------------------------------
Class B (140) (1,374)
---------------------------------------------------------------------------
Class C (10) (100)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
CONVERSION OF SHARES
---------------------------------------------------------------------------
Class A 1 12
---------------------------------------------------------------------------
Class B (1) (12)
---------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $ 15,535
---------------------------------------------------------------------------
</TABLE>
29
<PAGE> 152
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------
SIX MONTHS
ENDED
MARCH 31, YEAR ENDED SEPTEMBER 30,
1998 --------------------------------------------------
HIGH YIELD FUND (UNAUDITED) 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.50 8.23 8.01 7.74 8.12
- --------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .38 .76 .76 .83 .73
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .06 .31 .23 .20 (.35)
- --------------------------------------------------------------------------------------------------------------------------
Total from investment operations .44 1.07 .99 1.03 .38
- --------------------------------------------------------------------------------------------------------------------------
Less distributions from net investment income .39 .80 .77 .76 .76
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.55 8.50 8.23 8.01 7.74
- --------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.31% 13.69 13.00 14.10 4.64
- --------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------------
Expenses .88% .88 .88 .90 .86
- --------------------------------------------------------------------------------------------------------------------------
Net investment income 8.95% 9.18 9.45 10.74 9.22
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------
CLASS B
--------------------------------------------------------------
SIX MONTHS
ENDED MAY 31
MARCH 31, YEAR ENDED SEPTEMBER 30, TO
1998 --------------------------- SEPTEMBER 30,
(UNAUDITED) 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.49 8.22 8.00 7.73 7.96
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .34 .69 .69 .76 .23
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .06 .31 .23 .20 (.23)
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations .40 1.00 .92 .96 --
- -----------------------------------------------------------------------------------------------------------------------
Less distributions from net investment income .35 .73 .70 .69 .23
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.54 8.49 8.22 8.00 7.73
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.86% 12.72 12.02 13.09 --
- -----------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -----------------------------------------------------------------------------------------------------------------------
Expenses 1.75% 1.76 1.77 1.77 1.80
- -----------------------------------------------------------------------------------------------------------------------
Net investment income 8.08% 8.30 8.56 9.87 8.70
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 153
<TABLE>
<CAPTION>
------------------------------------------------------
CLASS C
------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER MAY 31
MARCH 31, 30, TO
1998 --------------------- SEPTEMBER 30,
(UNAUDITED) 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.52 8.24 8.02 7.75 7.96
- -------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .35 .70 .69 .77 .25
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .06 .31 .23 .20 (.23)
- -------------------------------------------------------------------------------------------------
Total from investment operations .41 1.01 .92 .97 .02
- -------------------------------------------------------------------------------------------------
Less distribution from net investment
income .36 .73 .70 .70 .23
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $8.57 8.52 8.24 8.02 7.75
- -------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 4.87% 12.88 12.06 13.13 .27
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------
Expenses 1.71% 1.71 1.71 1.71 1.74
- -------------------------------------------------------------------------------------------------
Net investment income 8.12% 8.35 8.62 9.93 8.75
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------
CLASS I
--------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 29, 1994
MARCH 31, SEPTEMBER 30, TO
1998 ------------- SEPTEMBER 30,
(UNAUDITED) 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.50 8.23 8.01 7.55
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .39 .78 .78 .66
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain .06 .31 .23 .39
- ---------------------------------------------------------------------------------------------
Total from investment operations .45 1.09 1.01 1.05
- ---------------------------------------------------------------------------------------------
Less distribution from net investment
income .40 .82 .79 .59
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $8.55 8.50 8.23 8.01
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.46% 13.96 13.32 14.37
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses .60% .62 .61 .61
- ---------------------------------------------------------------------------------------------
Net investment income 9.23% 9.44 9.72 10.70
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
MARCH 31, YEAR ENDED SEPTEMBER 30,
1998 -------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $5,653,304 4,939,302 4,096,939 3,527,954 3,152,029
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 94% 91 102 99 93
- ----------------------------------------------------------------------------------------------------------
</TABLE>
NOTE FOR BOTH FUNDS:
Total return does not reflect the effect of any sales charges.
31
FINANCIAL Highlights
<PAGE> 154
PORTFOLIO OF INVESTMENTS
KEMPER HIGH YIELD FUND
Portfolio of Investments at September 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. TREASURY BOND--1.6% 6.625%, 2002 $ 76,500 $ 78,341
(Cost: $77,476)
-----------------------------------------------------------------------------
CORPORATE OBLIGATIONS Airlines Pass Through Trust, 10.875%, 2019 21,130 24,194
AEROSPACE--2.4% Fairchild Corp., 12.00%, 2001 33,715 34,052
Howmet Inc., 10.00%, 2003 4,510 4,893
K & F Industries, Inc.
11.875%, 2003 11,431 12,088
10.375%, 2004 24,950 28,225
Valujet, Inc., 10.25%, 2001 14,000 13,020
-----------------------------------------------------------------------------
116,472
- --------------------------------------------------------------------------------------------------------------------
BROADCASTING, CABLESYSTEMS Affinity Group, Inc., 11.50%, 2003 23,411 25,108
AND PUBLISHING--16.1%
American Radio Systems, 9.00%, 2006 18,490 19,623
(b)Australis Holdings, 15.00%, 2002 49,213 39,863
(b)Bell Cablemedia, PLC
11.95%, 2004 29,960 27,788
11.875%, 2005 1,490 1,293
Big Flower Press, Inc., 8.875%, 2007 38,070 38,070
Busse Broadcasting, 11.625%, 2000 10,860 11,675
CCA Holdings, 13.00%, 1999 17,500 23,800
Cablevision Systems Corp.
9.25%, 2005 5,880 6,152
8.125%, 2009 12,480 12,636
9.875%, 2013 9,350 10,121
10.50%, 2016 24,755 28,252
Capstar Broadcasting
9.25%, 2007 8,430 8,599
(b) 12.75%, 2009 15,000 10,425
Century Communications Corp., 8.75%, 2007 7,335 7,326
(b)Charter Communications, 14.00%, 2007 30,410 22,960
Comcast Corp., 9.125%, 2006 34,485 37,028
(b)Comcast UK Cable Partners, Ltd., 11.20%,
2007 45,225 34,993
(b)Diamond Cable Communications, PLC
13.25%, 2004 11,560 10,129
11.75%, 2005 25,285 18,948
10.75%, 2007 14,420 9,409
EZ Communications, 9.75%, 2005 8,760 9,724
Frontiervision
11.00%, 2006 17,530 19,108
(b) 11.875%, 2007 12,450 8,497
Garden State Newspapers, 8.75%, 2009 10,500 10,526
Granite Broadcasting Corp., 10.375%, 2005 8,080 8,363
Innova S De, R.L., 12.875%, 2007 22,600 24,295
Intermedia Capital Partners, 11.25%, 2006 20,880 23,020
(b)International Cabletel, Inc., 12.75%,
2005 57,960 46,730
Multicanal Participacoes, 12.625%, 2004 13,330 15,130
NTL, 10.00%, 2007 4,070 4,243
Neodata Services, 12.00%, 2003 23,290 25,386
Newsquest Capital, PLC, 11.00%, 2006 22,990 25,634
Rogers Communications, 8.875%, 2007 13,305 13,372
Salem Communications Corp., 9.50%, 2007 12,490 12,677
Sinclair Broadcasting Group, Inc., 10.00%,
2003 26,040 27,082
Sullivan Broadcasting
10.25%, 2005 6,190 6,438
13.25%, 2006 12,850 16,898
</TABLE>
5
<PAGE> 155
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telewest Communications, PLC
9.625%, 2006 $ 22,005 $ 22,885
(b) 11.00%, 2007 41,443 31,082
(b)UIH Australia Pacific, Inc., 14.00%, 2006 24,550 17,615
(b)Videotron Holdings, PLC
11.125%, 2004 7,825 7,297
11.00%, 2005 14,600 12,684
-----------------------------------------------------------------------------
792,884
- --------------------------------------------------------------------------------------------------------------------
BUSINESS SERVICES--2.6% Allied Waste Industries
10.25%, 2006 12,970 14,202
(b) 11.30%, 2007 26,805 18,110
Corporate Express, Inc., 9.125%, 2004 18,760 19,041
Intertek Finance, 10.25%, 2006 13,190 13,849
Outdoor Systems, Inc.
9.375%, 2006 21,560 22,651
8.875%, 2007 25,870 26,404
Universal Outdoor Holdings, Inc., 9.75%,
2006 14,570 15,553
-----------------------------------------------------------------------------
129,810
- --------------------------------------------------------------------------------------------------------------------
CHEMICALS AND Agriculture, Mining and Chemicals, Inc.,
AGRICULTURE--3.9% 10.75%, 2003 15,080 16,362
Atlantis Group, Inc., 11.00%, 2003 25,355 25,989
Hines Horticulture, 11.75%, 2005 14,450 15,750
Huntsman Package, 9.125%, 2007 3,750 3,844
NL Industries, Inc.
11.75%, 2003 27,770 30,547
(b) 13.00%, 2005 21,370 21,023
Rexene Corp., 11.75%, 2004 31,845 36,383
Terra Industries, Inc., 10.50%, 2005 12,200 13,298
Texas Petrochemicals, 11.125%, 2006 15,560 16,960
UCC Investors Holdings, Inc., 10.50%, 2002 10,480 11,685
-----------------------------------------------------------------------------
191,841
- --------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS--12.3% Brooks Fiber Properties, Inc.
(b) 10.875%, 2006 22,690 18,322
(b) 11.875%, 2006 23,990 18,652
10.00%, 2007 8,450 9,506
(b)Call-Net Enterprises, Inc.
13.25%, 2004 7,240 6,507
9.27%, 2007 16,100 10,747
(b)Cellular, Inc., 11.75%, 2003 29,035 28,890
Comcast Cellular Holdings, Inc., 9.50%, 2007 20,350 21,317
(b)Comcel, 13.125%, with warrants, 2003 30,800 25,348
CommNet Cellular, 11.25%, 2005 10,935 12,534
(b)Dial Call Communications, 12.25%, 2004 19,420 18,206
Dobson Communication Corp., 11.75%, 2007 17,000 16,787
Econophone, Inc., 13.50%, 2007 19,865 21,852
Gabelli & Company, Inc., 9.75%, 2007 22,570 23,473
HighwayMaster Communications, Inc.,
13.75%, 2005 8,340 8,736
(b)ICG Holdings, 13.50%, 2005 40,755 32,808
(b)Intermedia Communications of Florida,
Inc.
12.50%, 2006 19,310 14,917
11.25%, 2007 27,170 18,815
MGC Communications, 13.00%, 2004 8,100 8,404
McLeod, Inc.
9.25%, 2007 13,435 14,308
(b) 10.50%, 2007 21,260 15,041
</TABLE>
6
<PAGE> 156
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Metronet Communications, 12.00%, 2007 $ 8,280 $ 9,191
(b)Millicom International Cellular, S.A.,
13.50%, 2006 34,590 26,894
(b)Nextel Communications, 10.65%, 2007 16,750 10,343
Nextlink Communications, 12.50%, 2006 10,950 12,634
(b)PTC International Finance, B.V., 10.75%,
2007 18,370 12,032
(b)PanAmSat, L.P., 11.375%, 2003 31,615 31,220
Primus Telecommunications Group, 11.75%,
2004 13,050 13,898
Rogers Cantel
11.125%, 2002 4,712 4,882
8.80%, 2007 11,670 11,670
9.375%, 2008 3,130 3,341
9.75%, 2016 17,625 19,211
Telex Communication, 10.50%, 2007 5,165 5,281
USA Mobile Communications, Inc. II
9.50%, 2004 10,370 10,318
14.00%, 2004 12,010 13,631
Vanguard Cellular Systems, 9.375%, 2006 23,390 24,238
Western Wireless
10.50%, 2006 9,055 9,508
10.50%, 2007 18,300 19,215
Winstar Equipment, 12.50%, 2004 20,840 22,924
-----------------------------------------------------------------------------
605,601
- --------------------------------------------------------------------------------------------------------------------
CONSTRUCTION American Standard, Inc., 9.25%, 2016 17,615 18,408
MATERIALS--3.1%
(b)Building Materials Corp. of America,
11.75%, 2004 51,930 48,555
Falcon Building Products, Inc.
9.50%, 2007 6,410 6,618
(b) 10.50%, 2007 16,310 10,357
Nortek
9.875%, 2004 14,255 14,718
9.125%, 2007 19,880 20,079
Triangle Pacific Corp., 10.50%, 2003 26,565 28,225
Waxman Industries, Inc.
(b) 12.75%, 2004 6,510 5,729
800,453 warrants expiring 2004 2,001
-----------------------------------------------------------------------------
154,690
- --------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS AND AFC Enterprises, Inc., 10.25%, 2007 14,530 15,220
SERVICES--10.3%
AMF Group
10.875%, 2006 47,547 52,747
(b) 12.25%, 2006 23,990 18,142
Avondale Mills, 10.25%, 2006 23,400 25,389
Bally Total Fitness Holdings, 9.875%, 1997 11,350 11,407
Cinemark USA, Inc., 9.625%, 2008 14,750 15,193
Coinmach Corp., 11.75%, 2005 36,420 40,426
Commemorative Brands, 11.00%, 2007 15,800 16,313
(b)Dr. Pepper Bottling Holdings, Inc.,
11.625%, 2003 22,209 22,320
Doskocil Manufacturing Co., 10.125%, 2007 12,830 13,151
Dyersburg Corp., 9.75%, 2007 7,190 7,406
HMH Properties
9.50%, 2005 22,790 23,986
8.875%, 2007 10,230 10,435
Hedstrom Corp., 10.00%, 2007 5,900 6,018
Herff Jones, Inc., 11.00%, 2005 15,640 17,048
Hollywood Entertainment Corp., 10.625%, 2004 14,490 14,834
Hollywood Theaters, Inc., 10.625%, 2007 6,280 6,673
</TABLE>
7
<PAGE> 157
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kinder-Care Learning Centers, 9.50%, 2009 $ 41,550 $ 40,615
NBTY, Inc., 8.625%, 2007 4,150 4,119
Nine West Group, 9.00%, 2007 9,950 10,025
Premier Parks, Inc., 12.00%, 2003 8,900 9,901
Regal Cinemas, 8.50%, 2007 5,000 5,013
(b)Six Flags Theme Park, 12.25%, 2005 54,395 56,979
Van De Kamps, Inc., 12.00%, 2005 13,945 15,549
West Point Stevens, Inc.
8.75%, 2005 10,000 10,400
9.375%, 2005 34,045 35,747
Windy Hill Pet Food Company, Inc., 9.75%,
2007 4,020 4,161
-----------------------------------------------------------------------------
509,217
- --------------------------------------------------------------------------------------------------------------------
DRUGS AND HEALTH CARE--4.2% Dade International Inc., 11.125%, 2006 27,400 30,688
Genesis Eldercare, 9.00%, 2007 21,505 21,424
Graham-Field Health, 9.75%, 2007 8,340 8,715
Integrated Health Services, Inc.
9.50%, 2007 14,400 14,814
9.25%, 2008 17,300 17,560
Magellan Health Services, 11.25%, 2004 25,020 27,741
Packard Bioscience, 9.375%, 2007 14,880 15,178
Regency Health, 9.875%, 2002 4,140 4,575
Tenet Healthcare
8.00%, 2005 9,920 10,118
10.125%, 2005 37,405 40,865
8.625%, 2007 9,810 10,129
Vencor, 8.625%, 2007 6,680 6,776
-----------------------------------------------------------------------------
208,583
- --------------------------------------------------------------------------------------------------------------------
ENERGY AND RELATED Belco Oil & Gas, 8.875%, 2007 10,800 10,881
SERVICES--6.9%
Bellweather Exploration Co., 10.875%, 2007 14,410 15,581
Benton Oil & Gas Co., 11.625%, 2003 19,835 21,843
Coda Energy, 10.50%, 2006 23,610 25,145
Dailey Petro Service, 9.75%, 2007 11,620 12,085
Ferrellgas Partners, L.P., 9.375%, 2006 16,760 17,430
Flores & Rucks, Inc., 9.75%, 2006 9,000 9,574
Forcenergy Gas Exploration
9.50%, 2006 23,260 24,423
8.50%, 2007 24,015 23,865
Forman Petroleum Corp., 13.50%, 2004 8,450 8,492
National Energy Corp., 10.75%, 2006 11,620 12,056
Pacalta Resources, Ltd., 10.75%, 2004 21,495 22,570
Parker Drilling Corp., 9.75%, 2006 18,310 19,592
Plains Resources, 10.25%, 2006 15,590 16,837
Rutherford-Moran Oil Corp., 10.75%, 2004 9,120 9,439
Stone Energy Corp., 8.75%, 2007 10,000 9,925
United Meridian Corp., 10.375%, 2005 25,495 27,758
Vintage Petroleum
9.00%, 2005 28,420 29,308
8.625%, 2009 4,020 4,075
Wiser Oil Co., 9.50%, 2007 20,780 20,157
-----------------------------------------------------------------------------
341,036
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 158
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL SERVICES, Continental Homes Holding, 10.00%, 2006 $ 15,620 $ 16,635
HOME BUILDERS AND DVI, Inc., 9.875%, 2004 8,570 8,870
REAL ESTATE--3.4% Del Webb Corp., 9.75%, 2008 14,850 15,147
Forecast Group, L.P., 11.375%, 2000 10,895 10,459
Fortress Group, 13.75%, 2003 14,080 15,734
Hovnanian Enterprises, 11.25%, 2002 27,557 29,073
Kaufman & Broad Home Corp., 9.625%, 2006 13,760 14,310
J.M. Peters Co., 12.75%, 2002 2,415 2,487
Presley Cos., 12.50%, 2001 23,195 22,093
UDC Homes, 12.50%, 2000 13,270 13,536
Williams Scotsman, Inc., 9.875%, 2007 20,600 20,857
-----------------------------------------------------------------------------
169,201
- --------------------------------------------------------------------------------------------------------------------
HOTELS AND GAMING--2.1% Eldorado Resorts, 10.50%, 2006 16,040 17,644
Empress River Casino, 10.75%, 2002 17,573 18,935
Harvey's Casino Resorts, 10.625%, 2006 11,580 12,680
Players International, 10.875%, 2005 9,765 10,497
Trump Atlantic City, 11.25%, 2006 46,705 45,304
-----------------------------------------------------------------------------
105,060
- --------------------------------------------------------------------------------------------------------------------
MANUFACTURING, METALS Aftermarket Technology, 12.00%, 2004 16,624 18,536
AND MINING--11.8% Alvey Systems, 11.375%, 2003 5,715 6,001
Bar Technologies, 13.50%, with warrants,
2001 16,335 18,116
Bucyrus International, Inc., 9.75%, 2007 8,340 8,413
Collins & Aikman Corp., 11.50%, 2006 26,400 30,162
Crain Industries, Inc., 13.50%, 2005 19,500 22,328
Day International Group, Inc., 11.125%, 2005 25,025 26,777
Delco Remy International, 10.625%, 2006 26,115 28,041
Euramax International, PLC, 11.25%, 2006 23,595 25,896
Fairfield Manufacturing Co., 11.375%, 2001 13,160 13,983
Foamex, L.P., 9.875%, 2007 22,770 23,681
GS Technologies
12.00%, 2004 5,875 6,440
12.25%, 2005 8,970 10,024
Hayes Wheels International, Inc., 11.00%,
2006 23,070 25,838
IMO Industries, 11.75%, 2006 22,940 24,890
Johnstown American, 11.75%, 2005 9,880 10,670
JPS Automotive Products Corp., 11.125%, 2001 27,270 29,861
Knoll, Inc., 10.875%, 2006 10,062 11,219
MMI Products, Inc., 11.25%, 2007 7,090 7,728
Motors and Gears, Inc., 10.75%, 2006 17,250 18,458
Neenah Corp., 11.125%, 2007 20,150 21,963
Newflo Corp., 13.25%, 2002 17,850 18,921
Oxford Automotive, Inc., 10.125%, 2007 5,740 5,984
Renco Metals, 11.50%, 2003 29,715 31,944
Spinnaker Industries, 10.75%, 2006 23,070 24,166
Thermadyne Industries, Inc.
10.25%, 2002 12,226 12,791
10.75%, 2003 10,536 11,366
UCAR Global, 12.00%, 2005 35,060 39,837
Venture Holdings, 9.50%, 2005 16,730 16,730
WCI Steel, Inc., 10.00%, 2004 10,880 11,560
Weirton Steel Corp., 11.375%, 2004 5,090 5,548
Wells Aluminum Corp., 10.125%, 2005 15,130 15,887
-----------------------------------------------------------------------------
583,759
- --------------------------------------------------------------------------------------------------------------------
PAPER, FOREST PRODUCTS, BPC Holding Corp., 12.50%, 2006 12,240 13,525
AND CONTAINERS--7.8%
BWAY Corp., 10.25%, 2007 14,060 15,396
Berry Plastics Corp., 12.25%, 2004 20,499 22,600
</TABLE>
9
<PAGE> 159
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
PRINCIPAL
AMOUNT VALUE
<S> <C> <C> <C>
Container Corporation of America, 11.25%,
2004 $ 7,730 $ 8,580
Fonda Group, 9.50%, 2007 11,730 11,437
Gaylord Container Corp.
9.75%, 2007 11,280 11,421
12.75%, 2005 20,850 22,726
Maxxam Group, Inc.
11.25%, 2003 24,325 25,541
(b) 12.25%, 2003 7,265 7,120
National Fiberstock Corp., 11.625%, 2002 11,810 12,460
Owens-Illinois, Inc., 9.95%, 2004 13,062 13,748
Pindo Deli Finance Mauritius, Ltd., 10.75%,
2007 8,100 8,232
Plastic Container, 10.00%, 2006 960 1,022
Printpack, Inc.
9.875%, 2004 8,440 8,946
10.625%, 2006 21,920 23,674
Riverwood International
10.25%, 2006 19,880 20,377
10.625%, 2007 9,340 9,760
10.875%, 2008 61,480 61,326
Specialty Paperboard, 9.375%, 2006 13,370 13,905
Stone Container Corp.
9.875%, 2001 24,740 25,111
12.25%, 2002 3,280 3,395
11.50%, 2006 11,480 12,054
Tjiwi Kimia Finance Mauritius, Ltd., 10.00%,
2004 7,800 7,644
U.S. Can Corp., 10.125%, 2006 24,455 25,922
-----------------------------------------------------------------------------
385,922
- --------------------------------------------------------------------------------------------------------------------
RETAILING--4.6%
Ameriking, 10.75%, 2006 15,635 16,573
Cole National Group
9.875%, 2006 3,760 4,014
8.625%, 2007 14,830 14,811
(a)Color Tile, Inc., 10.75%, 2001 20,480 307
Dominick's Finer Foods, 10.875%, 2005 3,600 4,122
Emergent Group, 10.75%, 2004 8,340 8,491
Finlay Fine Jewelry Corp., 10.625%, 2003 27,300 28,938
Flagstar Corp.
10.75%, 2001 12,880 13,252
10.875%, 2002 7,900 8,169
Guitar Center Management, 11.00%, 2006 15,050 16,706
Krystal Co., 10.25%, 2007 5,820 5,936
Pamida Holdings, 11.75%, 2003 21,845 21,845
Pathmark Stores
12.625%, 2002 18,100 18,643
9.625%, 2003 8,125 8,044
Petro Stopping Centers, 10.50%, 2007 26,000 27,170
Riddell Sports, Inc., 10.50%, 2007 10,410 10,878
TravelCenters of America, Inc., 10.25%, 2007 16,830 17,671
-----------------------------------------------------------------------------
225,570
- --------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--1.0% Communication and Power Industry, Inc.,
12.00%, 2005 7,975 8,892
EV International, 11.00%, 2007 13,930 14,348
L-3 Communucation Corp., 10.375%, 2007 7,220 7,762
Viasystems, Inc., 9.75%, 2007 16,740 17,493
-----------------------------------------------------------------------------
48,495
</TABLE>
10
<PAGE> 160
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT OR VALUE
NUMBER OF SHARES
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MISCELLANEOUS--.9% Espirito Santo Centrais Eletricas, S.A.,
10.00%, 2007 $ 14,600 $ 14,600
TFM, S.A. de C.V., 10.25%, 2007 19,920 21,065
(b)Transtar Holdings, L.P., 13.375%, 2003 10,100 8,686
44,351
-----------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS--93.4%
(Cost: $4,381,616) 4,612,492
-----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
COMMON AND PREFERRED Benedek Unit, PIK, preferred with warrants 90,000shs. 11,295
STOCKS--1.8%
(a)Capital Pacific Holdings 54,431 54
Clark USA, PIK, preferred 41,400 4,243
Computervision Corp. 3,112,436 11,477
Crown American Realty Trust, preferred 250,000 13,375
(a)EchoStar Communications Corp. 218,250 5,293
Empire Gas Corp. 31,795 159
Foamex International 16,620 465
(a)Gaylord Container Corp. 1,805,934 15,350
Gulf States Steel 29,670 148
(a)Intelcom Group, Inc. 67,617 879
(a)Intermedia Communications of Florida,
Inc. 16,300 1,239
(a)Sinclair Capital, preferred 210,400 22,828
(a)Sullivan Broadcasting 205,600 2,056
-----------------------------------------------------------------------------
TOTAL COMMON AND PREFERRED STOCKS--1.8%
(Cost: $66,140) 88,861
-----------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
MONEY MARKET Yields--5.53% to 5.71%
INSTRUMENTS--1.0%
Due--October 1997
(Cost: $52,422) $ 52,500 52,422
-----------------------------------------------------------------------------
TOTAL INVESTMENTS--97.8%
(Cost: $4,577,654) 4,832,116
-----------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--2.2% 107,186
-----------------------------------------------------------------------------
NET ASSETS--100% $4,939,302
-----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security. In the case of a bond, generally denotes that
issuer has defaulted on the payment of principal or interest or has filed
for bankruptcy.
(b) Deferred interest obligation; currently zero coupon under terms of the
initial offering.
Based on the cost of investments of $4,577,654,000 for federal income tax
purposes at September 30, 1997, the gross unrealized appreciation was
$281,187,000, the gross unrealized depreciation was $26,725,000 and the net
unrealized appreciation on investments was $254,462,000.
See accompanying Notes to Financial Statements.
11
<PAGE> 161
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER HIGH YIELD FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper High Yield Fund as of
September 30, 1997, and 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
September 30, 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
High Yield Fund at September 30, 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
November 18, 1997
12
<PAGE> 162
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Investments, at value
(Cost: $4,577,654) $4,832,116
- --------------------------------------------------------------------------
Receivable for:
Fund shares sold 21,508
- --------------------------------------------------------------------------
Investments sold 44,471
- --------------------------------------------------------------------------
Interest 108,841
- --------------------------------------------------------------------------
TOTAL ASSETS 5,006,936
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Cash overdraft 3,366
- --------------------------------------------------------------------------
Payable for:
Fund shares redeemed 5,296
- --------------------------------------------------------------------------
Investments purchased 54,289
- --------------------------------------------------------------------------
Management fee 2,132
- --------------------------------------------------------------------------
Distribution services fee 882
- --------------------------------------------------------------------------
Administrative services fee 880
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 656
- --------------------------------------------------------------------------
Trustees' fees and other 133
- --------------------------------------------------------------------------
Total liabilities 67,634
- --------------------------------------------------------------------------
NET ASSETS $4,939,302
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
Paid-in capital $4,745,654
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (151,713)
- --------------------------------------------------------------------------
Net unrealized appreciation on investments 254,462
- --------------------------------------------------------------------------
Undistributed net investment income 90,899
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $4,939,302
- --------------------------------------------------------------------------
THE PRICING OF SHARES
CLASS A SHARES
Net asset value and redemption price per share
($3,462,790 / 407,389 shares outstanding) $8.50
- --------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 4.71% of
net asset value or 4.50% of offering price) $8.90
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($1,316,902 / 155,073 shares outstanding) $8.49
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($125,074 / 14,689 shares outstanding) $8.52
- --------------------------------------------------------------------------
CLASS I SHARES
Net asset value and redemption price per share
($34,536 / 4,063 shares outstanding) $8.50
- --------------------------------------------------------------------------
</TABLE>
13
<PAGE> 163
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended September 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
NET INVESTMENT INCOME
Interest $445,055
- ------------------------------------------------------------------------
Dividends 1,499
- ------------------------------------------------------------------------
Total investment income 446,554
- ------------------------------------------------------------------------
Expenses:
Management fee 23,419
- ------------------------------------------------------------------------
Distribution services fee 9,582
- ------------------------------------------------------------------------
Administrative services fee 9,596
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 6,774
- ------------------------------------------------------------------------
Professional fees 90
- ------------------------------------------------------------------------
Reports to shareholders 600
- ------------------------------------------------------------------------
Trustees' fees and other 268
- ------------------------------------------------------------------------
Total expenses 50,329
- ------------------------------------------------------------------------
NET INVESTMENT INCOME 396,225
- ------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on sales of investments (948)
- ------------------------------------------------------------------------
Net realized loss from futures transactions (997)
- ------------------------------------------------------------------------
Net realized loss (1,945)
- ------------------------------------------------------------------------
Change in net unrealized appreciation on investments 178,138
- ------------------------------------------------------------------------
Net gain on investments 176,193
- ------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $572,418
- ------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 396,225 336,758
- -----------------------------------------------------------------------------------------------
Net realized gain (loss) (1,945) 42,422
- -----------------------------------------------------------------------------------------------
Change in net unrealized appreciation 178,138 66,471
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 572,418 445,651
- -----------------------------------------------------------------------------------------------
Net equalization credits 12,110 7,259
- -----------------------------------------------------------------------------------------------
Distribution from net investment income (416,460) (338,218)
- -----------------------------------------------------------------------------------------------
Net increase from capital share transactions 674,295 454,293
- -----------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 842,363 568,985
- -----------------------------------------------------------------------------------------------
NET ASSETS
Beginning of year 4,096,939 3,527,954
- -----------------------------------------------------------------------------------------------
END OF YEAR (including undistributed
net investment income of
$90,899 and $99,021, respectively) $4,939,302 4,096,939
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 164
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE Kemper High Yield Fund is an open-end diversified
FUND 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 any initial sales charges
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 INVESTMENT VALUATION. Investments are stated at
ACCOUNTING POLICIES 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.
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 fixed income securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
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.
15
<PAGE> 165
NOTES TO FINANCIAL STATEMENTS
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
September 30, 1997, amounting to approximately
$151,654,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 1998 through 2006.
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.
EQUALIZATION ACCOUNTING. A portion of proceeds from
sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment
income so that income per share available for
distribution is not affected by sales or
redemptions of shares.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH MANAGEMENT AGREEMENT. The Fund has a management
AFFILIATES 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. The Fund
incurred a management fee of $23,419,000 for the
year ended September 30, 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
ALLOWED BY ZKDI
COMMISSIONS ----------------------------
RETAINED BY ZKDI TO ALL FIRMS TO AFFILIATES
---------------- ------------ -------------
<S> <C> <C> <C>
Year ended September 30, 1997 $1,714,000 11,779,000 181,000
</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 the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES PAID
RECEIVED BY ZKDI BY ZKDI TO FIRMS
----------------- ----------------------
<S> <C> <C>
Year ended September 30, 1997 $11,113,000 17,522,000
</TABLE>
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
16
<PAGE> 166
NOTES TO FINANCIAL STATEMENTS
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 September 30, 1997 $9,596,000 10,067,000 49,000
</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 $4,802,000 for the year ended September 30,
1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
During the year ended September 30, 1997, the Fund
made no payments to its officers and incurred
trustees' fees of $49,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT For the year ended September 30, 1997, investment
TRANSACTIONS transactions (excluding short term instruments) are
as follows (in thousands):
Purchases $5,497,888
Proceeds from sales 4,757,024
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 190,692 $ 1,527,552 119,890 $ 932,368
--------------------------------------------------------------------------------------
Class B 109,720 900,384 71,697 573,147
--------------------------------------------------------------------------------------
Class C 16,667 137,204 8,808 70,603
--------------------------------------------------------------------------------------
Class I 12,114 100,487 2,785 22,315
--------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 22,581 187,057 18,832 151,343
--------------------------------------------------------------------------------------
Class B 7,931 65,657 6,906 55,478
--------------------------------------------------------------------------------------
Class C 686 5,708 299 2,414
--------------------------------------------------------------------------------------
Class I 367 3,044 300 2,407
--------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
SHARES REDEEMED
Class A (175,031) (1,410,231) (112,436) (879,849)
--------------------------------------------------------------------------------------
Class B (80,748) (661,407) (52,980) (422,563)
--------------------------------------------------------------------------------------
Class C (9,742) (80,133) (4,106) (32,901)
--------------------------------------------------------------------------------------
Class I (12,153) (101,027) (2,554) (20,469)
--------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 15,517 129,053 15,982 129,116
--------------------------------------------------------------------------------------
Class B (15,533) (129,053) (16,001) (129,116)
--------------------------------------------------------------------------------------
Net increase from
capital share
transactions $ 674,295 $ 454,293
--------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 167
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------------------
Class A
-----------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <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
- ----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .76 .76 .83 .73 .81
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .31 .23 .20 (.35) .23
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.07 .99 1.03 .38 1.04
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions from net investment income .80 .77 .76 .76 .78
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $8.50 8.23 8.01 7.74 8.12
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 13.69% 13.00 14.10 4.64 13.92
RATIOS TO AVERAGE NET ASSETS
Expenses .88% .88 .90 .86 .80
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 9.18% 9.45 10.74 9.22 10.22
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
Class B
-----------------------------------------------------------
YEAR ENDED MAY 31 TO
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.22 8.00 7.73 7.96
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .69 .69 .76 .23
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .31 .23 .20 (.23)
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.00 .92 .96 --
- -----------------------------------------------------------------------------------------------------------------------
Less distributions from net investment income .73 .70 .69 .23
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.49 8.22 8.00 7.73
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 12.72% 12.02 13.09 --
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.76% 1.77 1.77 1.80
- -----------------------------------------------------------------------------------------------------------------------
Net investment income 8.30% 8.56 9.87 8.70
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 168
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Class C
YEAR ENDED SEPTEMBER
30, MAY 31 TO
----------------------- SEPTEMBER 30,
1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.24 8.02 7.75 7.96
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .70 .69 .77 .25
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .31 .23 .20 (.23)
- --------------------------------------------------------------------------------------------
Total from investment operations 1.01 .92 .97 .02
- --------------------------------------------------------------------------------------------
Less distribution from net investment
income .73 .70 .70 .23
- --------------------------------------------------------------------------------------------
Net asset value, end of period $8.52 8.24 8.02 7.75
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 12.88% 12.06 13.13 .27
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.71% 1.71 1.71 1.74
- --------------------------------------------------------------------------------------------
Net investment income 8.35% 8.62 9.93 8.75
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------
Class I
--------------------------------------
YEAR ENDED DECEMBER 29, 1994
SEPTEMBER 30, TO 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 (loss) .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
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $4,939,302 4,096,939 3,527,954 3,152,029 1,957,524
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 91% 102 99 93 101
- --------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
19
<PAGE> 169
KEMPER HIGH YIELD SERIES
PART C.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(i) Financial statements included in Part A of the Registration
Statement:
Kemper High Yield Fund--Financial Highlights.
Kemper High Yield Opportunity Fund--Financial Highlights
(unaudited).
(ii) Financial statements included in Part B of the Registration
Statement:
Kemper High Yield Fund
Statement of assets and liabilities--September 30, 1997.
Statement of operations for the year ended September 30, 1997.
Statement of changes in net assets for each of the two years in
the period ended September 30, 1997.
Portfolio of investments--September 30, 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 September 30, 1997.
Kemper High Yield Opportunity Fund
Statement of Net Assets--September 18, 1997.
Statement of Assets and Liabilities (March 31, 1998) (unaudited).
Statement of Operations for the period from October 1, 1997
(commencement of operations) to March 31, 1998 (unaudited).
Notes to Financial Statements
Portfolio of Investments--March 31, 1998 (unaudited).
Schedule I has been omitted as the required information is
presented in the Portfolio of Investments at March 31, 1998.
Schedules II, III, IV and V have been omitted as the required
information is not present.
(b) Exhibits
<TABLE>
<S> <C>
99.B1 Amended and Restated Agreement and Declaration of Trust*
99.B1(b) Written Instrument Establishing New Trust Name*
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.B4(c) Written Instrument Establishing and Designating New Series*
99.B4(d) Written Instrument Establishing and Designating New Series
Name*
99.B5(a) Investment Management Agreement (High Yield)
99.B5(b) Investment Management Agreement (High Yield Opportunity)
99.B6(a) 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.B9(d) Fund Accounting Agreement (High Yield)
99.B9(e) Fund Accounting Agreement (High Yield Opportunity)
99.B10 Inapplicable
</TABLE>
C-1
<PAGE> 170
<TABLE>
<S> <C>
99.B11 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))
27. Financial Data Schedule
</TABLE>
- ---------------
* Incorporated herein by reference to the Amendment to Registrant's
Registration Statement on Form N-1A identified below.
<TABLE>
<CAPTION>
POST-EFFECTIVE
EXHIBIT NO. AMENDMENT NO. DATE OF FILING
----------- -------------- --------------
<S> <C> <C>
1, 2, 4(a), 8(a), 8(b), 9(a), 14(a) and 14(b)............... 29 11/30/95
4(b), 18.................................................... 30 12/20/96
1(b), 4(c), 4(d), 9(b), 9(c), 16............................ 32 9/23/97
6(b), 15.................................................... 33 12/30/97
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Inapplicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of March 31, 1998, the number of recordholders of each series were as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS I
SERIES NAME SHARES SHARES SHARES SHARES
- ----------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Kemper High Yield Fund...................................... 146,611 72,311 7,265 366
Kemper High Yield Opportunity Fund.......................... 344 355 86 0
</TABLE>
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.
C-2
<PAGE> 171
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-3
<PAGE> 172
Item 28b(i) Business or Other Connections of Investment Adviser
Scudder Kemper Investments, Inc. has stockholders and employees who are
denominated officers but do not as such have corporation-wide responsibilities.
Such persons are not considered officers for the purpose of this Item 28.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ---------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.
Director and President, Scudder Capital Asset Corporation
Director and President, Scudder Capital Stock Corporation
Director and President, Scudder Capital Planning Corporation
Director and President, SS&C Investment Corporation
Director and President, SIS Investment Corporation
Director and President, SRV Investment Corporation
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investment, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member Corporate Executive Board, Zunica Insurance Company of Switzerland
Director, ZKI Holding Corporation
Steven Gluckstern Director, Scudder Kemper Investments, Inc.**
Member Corporate Executive Board, Zurich Insurance Company of Switzerland
Director, Zurich Holding Company of America
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc. **
Member Corporate Executive Board, Zurich Insurance Company of Switzerland
Director, Chairman of the Board, Zurich Holding Company of America
Director, ZKI Holding Corporation
Kathryn L. Quirk Director, Chief Legal Officer, Chief Compliance Officer and Secretary,
Scudder Kemper Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services,
Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.
***
Director, Scudder, Stevens & Clark Japan, Inc.###
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada,
Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services
Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc.x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.
Director, Vice President and Secretary, Scudder Defined Contribution
Services, Inc.
Director, Vice President and Secretary, Scudder Capital Asset Corporation
</TABLE>
<PAGE> 173
<TABLE>
<S> <C>
Director, Vice President and Secretary, Scudder Capital Stock Corporation
Director, Vice President and Secretary, Scudder Capital Planning Corporation
Director, Vice President and Secretary, SS&C Investment Corporation
Director, Vice President and Secretary, SIS Investment Corporation
Director, Vice President and Secretary, SRV Investment Corporation
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.
Director, Korea Bond Fund Management Co., Ltd.
Markus Rohrbasser Director, Scudder Kemper Investments, Inc.**
Member Corporate Executive Board, Zurich Insurance Company of Switzerland
President, Director, Chairman of the Board, ZKI Holding Corporation
Cornelia M. Small Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President, Chief Executive Officer, Scudder Kemper Investments,
Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President & Director, Scudder, Stevens & Clark Overseas Corporationo oo
President & Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy
of Luxembourg
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Socjete Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. Luxembourg B
34.564
*** Toronto, Ontario, Canada
XXX Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
</TABLE>
<PAGE> 174
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.
(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 President None
Thomas W. Littauer Director, Chief Executive Officer Vice President
Kathryn L. Quirk Director, Secretary, Chief Legal
Officer & Vice President Vice President
James J. McGovern Chief Financial Officer
& Vice President None
Linda J. Wondrack Vice President & Chief
Compliance Officer None
Paula Gaccione Vice President None
Michael E. Harrington Vice President None
Robert A. Rudell Vice President None
William M. Thomas Vice President None
Elizabeth C. Werth Vice President Assistant Secretary
Todd N. Gierke Assistant Treasurer None
Philip J. Collora Assistant Secretary Vice President,
Secretary & Treasurer
Paul J. Elmlinger Assistant Secretary None
Diane E. Ratekin Assistant Secretary None
Daniel Pierce Director, Chairman Director
Mark S. Casady Director, Vice Chairman President
Stephen R. Beckwith Director None
</TABLE>
(c) Not applicable.
<PAGE> 175
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, Scudder
Kemper Investments, 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
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-20
<PAGE> 176
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 27th day of April,
1998.
KEMPER HIGH YIELD SERIES
By /s/ Mark S. Casady
------------------------------
Mark S. Casady, President
Pursuant to the requirements of the Securities Act of
1933, this Registration Statement has been signed below on
April 27, 1998 on behalf of the following persons in the
capacities indicated.
Signature Title
--------- -----
/s/Mark S. Casady President
--------------------------------------
Mark S. Casady
--------------------------------------
/s/Daniel Pierce * Chairman 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/Edmond D. Villani* Trustee
--------------------------------------
/s/Philip J. Collora Treasurer
*Philip J. Collora signs this document pursuant to powers of
attorney filed herewith.
/s/ Philip J. Collora
--------------------------------
Philip J. Collora
<PAGE> 177
KEMPER HIGH YIELD SERIES
INDEX TO EXHIBITS
<TABLE>
Exhibits
<S> <C>
99.B1 Amended and Restated Agreement and Declaration of Trust*
99.B1(b) Written Instrument Establishing New Trust Name*
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.B4(c) Written Instrument Establishing and Designating New Series*
99.B4(d) Written Instrument Establishing and Designating New Series
Name*
99.B5(a) Investment Management Agreement (High Yield)
99.B5(b) Investment Management Agreement (High Yield Opportunity)
99.B6(a) 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.B9(d) Fund Accounting Agreement (High Yield)
99.B9(e) Fund Accounting Agreement (High Yield Opportunity)
99.B10 Inapplicable
99.B11 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))
27. Financial Data Schedule
</TABLE>
- ---------------
* Incorporated herein by reference to the Amendment to Registrant's
Registration Statement on Form N-1A identified below.
<TABLE>
<CAPTION>
POST-EFFECTIVE
EXHIBIT NO. AMENDMENT NO. DATE OF FILING
----------- -------------- --------------
<S> <C> <C>
1, 2, 4(a), 8(a), 8(b), 9(a), 14(a) and 14(b)............... 29 11/30/95
4(b), 18.................................................... 30 12/20/96
1(b), 4(c), 4(d), 9(b), 9(c), 16............................ 32 9/23/97
6(b), 15.................................................... 33 12/30/97
</TABLE>
<PAGE> 1
EX-99.B5(a).
INVESTMENT MANAGEMENT AGREEMENT
Kemper High Yield Series
222 South Riverside Plaza
Chicago, Illinois 60606
December 31, 1997
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Kemper High Yield Fund
Ladies and Gentlemen:
KEMPER HIGH YIELD SERIES (the "Trust") has been established as a
Massachusetts business trust to engage in the business of an investment
company. Pursuant to the Trust's Declaration of Trust, as amended from
time-to-time (the "Declaration"), the Board of Trustees is authorized to issue
the Trust's shares of beneficial interest (the "Shares"), in separate series,
or funds. The Board of Trustees has authorized Kemper High Yield Fund (the
"Fund"). Series may be abolished and dissolved, and additional series
established, from time to time by action of the Trustees.
The Trust, on behalf of the Fund, has selected you to act as the
investment manager of the Fund and to provide certain other services, as more
fully set forth below, and you have indicated that you are willing to act as
such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Trust on behalf of the Fund
agrees with you as follows:
1. Delivery of Documents. The Trust engages in the business of
investing and reinvesting the assets of the Fund in the manner and in
accordance with the investment objectives, policies and restrictions specified
in the currently effective Prospectus (the "Prospectus") and Statement of
Additional Information (the "SAI") relating to the Fund included in the Trust's
Registration Statement on Form N-1A, as amended from time to time, (the
"Registration Statement") filed by the Trust under the Investment Company Act
of 1940, as amended, (the "1940 Act") and the Securities Act of 1933, as
amended. Copies of the documents referred to in the preceding sentence have
been furnished to you by the Trust. The Trust has also furnished you with
copies properly certified or authenticated of each of the following additional
documents related to the Trust and the Fund:
<PAGE> 2
The Declaration, as amended to date.
(a) By-Laws of the Trust as in effect on the date hereof (the "By-Laws").
(b) Resolutions of the Trustees of the Trust and the shareholders of
the Fund selecting you as investment manager and approving the form of this
Agreement.
(c) Establishment and Designation of Series of Shares of Beneficial
Interest relating to the Fund, as applicable.
The Trust will furnish you from time to time with copies, properly certified
or authenticated, of all amendments of or supplements, if any, to the
foregoing, including the Prospectus, the SAI and the Registration Statement.
1. Portfolio Management Services. As manager of the assets of the Fund,
you shall provide continuing investment management of the assets of the
Fund in accordance with the investment objectives, policies and restrictions
set forth in the Prospectus and SAI; the applicable provisions of the 1940 Act
and the Internal Revenue Code of 1986, as amended, (the "Code") relating to
regulated investment companies and all rules and regulations thereunder; and
all other applicable federal and state laws and regulations of which you have
knowledge; subject always to policies and instructions adopted by the Trust's
Board of Trustees. In connection therewith, you shall use reasonable efforts
to manage the Fund so that it will qualify as a regulated investment company
under Subchapter M of the Code and regulations issued thereunder. The Fund
shall have the benefit of the investment analysis and research, the review of
current economic conditions and trends and the consideration of long-range
investment policy generally available to your investment advisory clients. In
managing the Fund in accordance with the requirements set forth in this section
2, you shall be entitled to receive and act upon advice of counsel to the
Trust. You shall also make available to the Trust promptly upon request all of
the Fund's investment records and ledgers as are necessary to assist the Trust
in complying with the requirements of the 1940 Act and other applicable laws.
To the extent required by law, you shall furnish to regulatory authorities
having the requisite authority any information or reports in connection with
the services provided pursuant to this Agreement which may be requested in
order to ascertain whether the operations of the Trust are being conducted in a
manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Fund and place orders
with broker-dealers,
2
<PAGE> 3
foreign currency dealers, futures commission merchants or others
pursuant to your determinations and all in accordance with Fund policies as
expressed in the Registration Statement. You shall determine what portion of
the Fund s portfolio shall be invested in securities and other assets and what
portion, if any, should be held uninvested.
You shall furnish to the Trust's Board of Trustees periodic reports on the
investment performance of the Fund and on the performance of your obligations
pursuant to this Agreement, and you shall supply such additional reports and
information as the Trust's officers or Board of Trustees shall reasonably
request.
2. Administrative Services. In addition to the portfolio management services
specified above in section 2, you shall furnish at your expense for the use of
the Fund such office space and facilities in the United States as the Fund may
require for its reasonable needs, and you (or one or more of your affiliates
designated by you) shall render to the Trust administrative services on behalf
of the Fund necessary for operating as an open end investment company and not
provided by persons not parties to this Agreement including, but not limited
to, preparing reports to and meeting materials for the Trust's Board of
Trustees and reports and notices to Fund shareholders; supervising, negotiating
contractual arrangements with, to the extent appropriate, and monitoring the
performance of, accounting agents, custodians, depositories, transfer agents
and pricing agents, accountants, attorneys, printers, underwriters, brokers and
dealers, insurers and other persons in any capacity deemed to be necessary or
desirable to Fund operations; preparing and making filings with the Securities
and Exchange Commission (the "SEC") and other regulatory and self-regulatory
organizations, including, but not limited to, preliminary and definitive proxy
materials, post-effective amendments to the Registration Statement, semi-annual
reports on Form N-SAR and notices pursuant to Rule 24f-2 under the 1940 Act;
overseeing the tabulation of proxies by the Fund's transfer agent; assisting in
the preparation and filing of the Fund's federal, state and local tax returns;
preparing and filing the Fund's federal excise tax return pursuant to Section
4982 of the Code; providing assistance with investor and public relations
matters; monitoring the valuation of portfolio securities and the calculation
of net asset value; monitoring the registration of Shares of the Fund under
applicable federal and state securities laws; maintaining or causing to be
maintained for the Fund all books, records and reports and any other
information required under the 1940 Act, to the extent that such books, records
and reports and other information are not maintained by the Fund's custodian or
other agents of the Fund; assisting in establishing the accounting policies of
the Fund; assisting in the resolution of accounting issues that may arise with
respect to the Fund's operations and consulting with the Fund's independent
accountants, legal counsel
3
<PAGE> 4
and the Fund's other agents as necessary in connection therewith;
establishing and monitoring the Fund's operating expense budgets; reviewing the
Fund's bills; processing the payment of bills that have been approved by an
authorized person; assisting the Fund in determining the amount of dividends
and distributions available to be paid by the Fund to its shareholders,
preparing and arranging for the printing of dividend notices to shareholders,
and providing the transfer and dividend paying agent, the custodian, and the
accounting agent with such information as is required for such parties to
effect the payment of dividends and distributions; and otherwise assisting the
Trust as it may reasonably request in the conduct of the Fund's business,
subject to the direction and control of the Trust's Board of Trustees. Nothing
in this Agreement shall be deemed to shift to you or to diminish the
obligations of any agent of the Fund or any other person not a party to this
Agreement which is obligated to provide services to the Fund.
3. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 4, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Trust (including the Fund's
share of payroll taxes) who are affiliated persons of you, and you shall make
available, without expense to the Fund, the services of such of your directors,
officers and employees as may duly be elected officers of the Trust, subject to
their individual consent to serve and to any limitations imposed by law. You
shall provide at your expense the portfolio management services described in
section 2 hereof and the administrative services described in section 3 hereof.
You shall not be required to pay any expenses of the Fund other than those
specifically allocated to you in this section 4. In particular, but without
limiting the generality of the foregoing, you shall not be responsible, except
to the extent of the reasonable compensation of such of the Fund's Trustees and
officers as are directors, officers or employees of you whose services may be
involved, for the following expenses of the Fund: organization expenses of the
Fund (including out-of-pocket expenses, but not including your overhead or
employee costs); fees payable to you and to any other Fund advisors or
consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian
or other agents of the Trust; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent for which the
Trust is responsible pursuant to the terms of the Fund Accounting Services
Agreement, custodians, subcustodians, transfer agents, dividend disbursing
agents and registrars; payment for portfolio pricing or valuation services
4
<PAGE> 5
to pricing agents, accountants, bankers and other specialists, if any; expenses
of preparing share certificates and, except as provided below in this section
4, other expenses in connection with the issuance, offering, distribution,
sale, redemption or repurchase of securities issued by the Fund; expenses
relating to investor and public relations; expenses and fees of registering or
qualifying Shares of the Fund for sale; interest charges, bond premiums and
other insurance expense; freight, insurance and other charges in connection
with the shipment of the Fund's portfolio securities; the compensation and all
expenses (specifically including travel expenses relating to Trust business) of
Trustees, officers and employees of the Trust who are not affiliated persons of
you; brokerage commissions or other costs of acquiring or disposing of any
portfolio securities of the Fund; expenses of printing and distributing
reports, notices and dividends to shareholders; expenses of printing and
mailing Prospectuses and SAIs of the Fund and supplements thereto; costs of
stationery; any litigation expenses; indemnification of Trustees and officers
of the Trust; and costs of shareholders and other meetings.
You shall not be required to pay expenses of any activity which is primarily
intended to result in sales of Shares of the Fund if and to the extent that (i)
such expenses are required to be borne by a principal underwriter which acts as
the distributor of the Fund's Shares pursuant to an underwriting agreement
which provides that the underwriter shall assume some or all of such expenses,
or (ii) the Trust on behalf of the Fund shall have adopted a plan in conformity
with Rule 12b-1 under the 1940 Act providing that the Fund (or some other
party) shall assume some or all of such expenses. You shall be required to pay
such of the foregoing sales expenses as are not required to be paid by the
principal underwriter pursuant to the underwriting agreement or are not
permitted to be paid by the Fund (or some other party) pursuant to such a plan.
4. Management Fee. For all services to be rendered, payments to be made
and costs to be assumed by you as provided in sections 2, 3, and 4 hereof, the
Trust on behalf of the Fund shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of (a) 1/12
of .58 of 1 percent of the average daily net assets as defined below of the
Fund for such month; provided that, for any calendar month during which the
average of such values exceeds $250,000,000 the fee payable for that month
based on the portion of the average of such values in excess of $250,000,000
shall be 1/12 of .55 of 1 percent of such portion; provided that, for any
calendar month during which the average of such values exceeds $1,000,000,000,
the fee payable for that month based on the portion of the average of such
values in excess of $1,000,000,000 shall be 1/12 of .53 of 1 percent of such
portion; provided that, for any calendar month during which the average of such
values exceeds
5
<PAGE> 6
$2,500,000,000, the fee payable for that month based on the portion of the
average of such values in excess of $2,500,000,000 shall be 1/12 of .51 of 1
percent of such portion; provided that, for any calendar month during which the
average of such values exceeds $5,000,000,000, the fee payable for that month
based on the portion of the average of such values in excess of $5,000,000,000
shall be 1/12 of .48 of 1 percent of such portion; provided that, for any
calendar month during which the average of such values exceeds $7,500,000,000,
the fee payable for that month based on the portion of the average of such
values in excess of $7,500,000,000 shall be 1/12 of .46 of 1 percent of such
portion; provided that, for any calendar month during which the average of such
values exceeds 10,000,000,000, the fee payable for that month based on the
portion of the average of such values in excess of $10,000,000,000 shall be
1/12 of .44 of 1 percent of such portion; and provided that, for any calendar
month during which the average of such values exceeds 12,500,000,000, the fee
payable for that month based on the portion of the average of such values in
excess of $12,500,000,000 shall be 1/12 of .42 of 1 percent of such portion;
over (b) any compensation waived by you from time to time (as more fully
described below). You shall be entitled to receive during any month such
interim payments of your fee hereunder as you shall request, provided that no
such payment shall exceed 75 percent of the amount of your fee then accrued on
the books of the Fund and unpaid.
The "average daily net assets" of the Fund shall mean the average of the values
placed on the Fund's net assets as of 4:00 p.m. (New York time) on each day on
which the net asset value of the Fund is determined consistent with the
provisions of Rule 22c-1 under the 1940 Act or, if the Fund lawfully determines
the value of its net assets as of some other time on each business day, as of
such time. The value of the net assets of the Fund shall always be determined
pursuant to the applicable provisions of the Declaration and the Registration
Statement. If the determination of net asset value does not take place for any
particular day, then for the purposes of this section 5, the value of the net
assets of the Fund as last determined shall be deemed to be the value of its
net assets as of 4:00 p.m. (New York time), or as of such other time as the
value of the net assets of the Fund's portfolio may be lawfully determined on
that day. If the Fund determines the value of the net assets of its portfolio
more than once on any day, then the last such determination thereof on that day
shall be deemed to be the sole determination thereof on that day for the
purposes of this section 5.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your
6
<PAGE> 7
fee, or any limitation of the Fund's expenses, as if such waiver or limitation
were fully set forth herein.
5. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other
investments for the account of the Fund, neither you nor any of your directors,
officers or employees shall act as a principal or agent or receive any
commission. You or your agent shall arrange for the placing of all orders for
the purchase and sale of portfolio securities and other investments for the
Fund's account with brokers or dealers selected by you in accordance with Fund
policies as expressed in the Registration Statement. If any occasion should
arise in which you give any advice to clients of yours concerning the Shares of
the Fund, you shall act solely as investment counsel for such clients and not
in any way on behalf of the Fund.
Your services to the Fund pursuant to this Agreement are not to be deemed to be
exclusive and it is understood that you may render investment advice,
management and services to others. In acting under this Agreement, you shall be
an independent contractor and not an agent of the Trust. Whenever the Fund and
one or more other accounts or investment companies advised by you have
available funds for investment, investments suitable and appropriate for each
shall be allocated in accordance with procedures believed by you to be
equitable to each entity. Similarly, opportunities to sell securities shall be
allocated in a manner believed by you to be equitable. The Fund recognizes
that in some cases this procedure may adversely affect the size of the position
that may be acquired or disposed of for the Fund.
6. Limitation of Liability of Manager. As an inducement to your
undertaking to render services pursuant to this Agreement, the Trust agrees
that you shall not be liable under this Agreement for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with the
matters to which this Agreement relates, provided that nothing in this
Agreement shall be deemed to protect or purport to protect you against any
liability to the Trust, the Fund or its shareholders to which you would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of your duties, or by reason of your reckless
disregard of your obligations and duties hereunder.
7. Duration and Termination of This Agreement. This Agreement shall
remain in force until March 1, 1998, and continue in force from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually (a) by the vote of a majority of the Trustees who are not
parties to this Agreement or interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Trustees of the Trust, or by the
7
<PAGE> 8
vote of a majority of the outstanding voting securities of the Fund. The
aforesaid requirement that continuance of this Agreement be "specifically
approved at least annually" shall be construed in a manner consistent with the
1940 Act and the rules and regulations thereunder and any applicable SEC
exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time,
without the payment of any penalty, by the vote of a majority of the
outstanding voting securities of the Fund or by the Trust's Board of Trustees
on 60 days' written notice to you, or by you on 60 days' written notice to the
Trust. This Agreement shall terminate automatically in the event of its
assignment.
This Agreement may be terminated with respect to the Fund at any time
without the payment of any penalty by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund in the event that it
shall have been established by a court of competent jurisdiction that you or
any of your officers or directors has taken any action which results in a
breach of your covenants set forth herein.
8. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
9. Limitation of Liability for Claims. The Declaration, a copy of
which, together with all amendments thereto, is on file in the Office of the
Secretary of the Commonwealth of Massachusetts, provides that the name "Kemper
High Yield Series" refers to the Trustees under the Declaration collectively as
Trustees and not as individuals or personally, and that no shareholder of the
Fund, or Trustee, officer, employee or agent of the Trust, shall be subject to
claims against or obligations of the Trust or of the Fund to any extent
whatsoever, but that the Trust estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability as
set forth in the Declaration and you agree that the obligations assumed by the
Trust on behalf of the Fund pursuant to this Agreement shall be limited in all
cases to the Fund and its assets, and you shall not seek satisfaction of any
such obligation from the shareholders or any shareholder of the Fund or any
other series of the Trust, or from any Trustee, officer, employee or agent of
the Trust. You understand that the rights and obligations of each Fund, or
series, under the Declaration are separate and distinct from those of any and
all other series.
8
<PAGE> 9
10. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
In interpreting the provisions of this Agreement, the definitions
contained in Section 2(a) of the 1940 Act (particularly the definitions of
"affiliated person," "assignment" and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied, subject, however,
to such exemptions as may be granted by the SEC by any rule, regulation or
order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause
the Fund to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Trust on behalf of the Fund.
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract
effective as of the date of this Agreement.
Yours very truly,
KEMPER HIGH YIELD SERIES,
on behalf of Kemper High Yield Fund
By: /s/ John E. Neal
---------------------------------
Vice President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Lynn S. Birdsong
---------------------------------
Vice President
9
<PAGE> 1
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> 2
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> 3
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> 4
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> 5
<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> 6
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> 7
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> 8
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> 9
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> 10
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> 1
EX-99.B6(a)
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT
AGREEMENT made this 31st day of December, 1997, between KEMPER HIGH YIELD
SERIES, 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 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 KDI shall act as exclusive distributor, who wish
to exchange all or a portion of their investment in shares of such other
investment company for shares of the Fund. KDI shall appoint various financial
service firms ("Firms") to provide distribution services to investors. The
Firms shall provide such office space and equipment, telephone facilities,
personnel, literature distribution, advertising and promotion as is necessary
or beneficial for providing information and distribution services to existing
and potential clients of the Firms. KDI may also provide some of the above
services for the Fund.
KDI accepts such appointment as distributor and principal underwriter and
agrees to render such services and to assume the obligations herein set forth
for the compensation herein provided. KDI shall for all purposes herein
provided be deemed to be an independent contractor and, unless expressly
provided herein or otherwise authorized, shall have no authority to act for or
represent the Fund in any way. KDI, by separate agreement with the Fund, may
also serve the Fund in other capacities. The services of KDI to the Fund under
this Agreement are not to be deemed exclusive, and KDI shall be free to render
similar services or other services to others so long as its services hereunder
are not impaired thereby.
In carrying out its duties and responsibilities hereunder, KDI will, pursuant
to separate written contracts, appoint various
<PAGE> 2
Firms to provide advertising, promotion and other distribution services
contemplated hereunder directly to or for the benefit of existing and potential
shareholders who may be clients of such Firms. Such Firms shall at all times be
deemed to be independent contractors retained by KDI and not the Fund.
KDI shall use its best efforts with reasonable promptness to sell such
part of the authorized shares of the Fund remaining unissued as from time to
time shall be effectively registered under the Securities Act of 1933
("Securities Act"), at prices determined as hereinafter provided and on terms
hereinafter set forth, all subject to applicable federal and state laws and
regulations and to the Agreement and Declaration of Trust of the Fund.
2. KDI 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 KDI may determine from time to time, provided that no Firm
or other person shall be appointed or authorized to act as agent of the Fund
without the prior consent of the Fund. In addition to sales made by it as agent
of the Fund, KDI may, in its discretion, also sell shares of the Fund as
principal to persons with whom it does not have selling group agreements.
Shares of any class of any series of the Fund offered for sale or sold by
KDI shall be so offered or sold at a price per share determined in accordance
with the 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 KDI as
agent shall be retained by KDI as a commission for its services hereunder. KDI
may compensate Firms for sales of shares at the commission levels provided in
the Fund's prospectus from time to time. KDI may pay other commissions, fees or
concessions to Firms, and may pay them to others in its discretion, in such
amounts as KDI shall determine from time to time. KDI shall be entitled to
receive and retain any applicable contingent deferred sales charge as described
in the Fund's prospectus. KDI shall also receive any distribution services fee
payable by the Fund as provided in Section 8 hereof.
KDI 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 KDI nor any such Firms shall
withhold the placing of purchase orders so as to make a profit thereby.
3. The Fund will use its best efforts to keep effectively registered under
the Securities Act for sale as herein
- 2 -
<PAGE> 3
contemplated such shares as KDI shall reasonably request and as the Securities
and Exchange Commission shall permit to be so registered. Notwithstanding any
other provision hereof, the Fund may terminate, suspend or withdraw the
offering of shares whenever, in its sole discretion, it deems such action to be
desirable.
4. The Fund will execute any and all documents and furnish any and all
information that may be reasonably necessary in connection with the
qualification of its shares for sale (including the qualification of the Fund
as a dealer where necessary or advisable) in such states as KDI may reasonably
request (it being understood that the Fund shall not be required without its
consent to comply with any requirement which in its opinion is unduly
burdensome). The Fund will furnish to KDI from time to time such information
with respect to the Fund and its shares as KDI may reasonably request for use
in connection with the sale of shares of the Fund.
5. KDI shall issue and deliver or shall arrange for various Firms to issue
and deliver on behalf of the Fund such confirmations of sales made by it
pursuant to this agreement as may be required. At or prior to the time of
issuance of shares, KDI will pay or cause to be paid to the Fund the amount due
the Fund for the sale of such shares. Certificates shall be issued or shares
registered on the transfer books of the Fund in such names and denominations as
KDI may specify.
6. KDI shall order shares of the Fund from the Fund only to the extent
that it shall have received purchase orders therefor. KDI will not make, or
authorize Firms or others to make (a) any short sales of shares of the Fund; or
(b) any sales of such shares to any trustee or officer of the Fund or to any
officer or director of KDI or of any corporation or association furnishing
investment advisory, managerial or supervisory services to the Fund, or to any
corporation or association, unless such sales are made in accordance with the
then current prospectus relating to the sale of such shares. KDI, as agent of
and for the account of the Fund, may repurchase the shares of the Fund at such
prices and upon such terms and conditions as shall be specified in the current
prospectus of the Fund. In selling or reacquiring shares of the Fund for the
account of the Fund, KDI will in all respects conform to the requirements of
all state and federal laws and the 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 KDI or any
employee, representative or agent of KDI. KDI will observe and be bound by all
the provisions of the Agreement and Declaration of Trust of the Fund (and of
any fundamental policies adopted by the Fund pursuant to the Investment Company
Act of 1940, notice of which shall have been given to KDI) which at the
- 3 -
<PAGE> 4
time in any way require, limit, restrict, prohibit or otherwise regulate any
action on the part of KDI hereunder.
7. The Fund shall assume and pay all charges and expenses of its operations
not specifically assumed or otherwise to be provided by KDI under this
Agreement. 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. KDI will pay all
expenses (other than expenses which one or more Firms may bear pursuant to any
agreement with KDI) incident to the sale and distribution of the shares issued
or sold hereunder, including, without limiting the generality of the foregoing,
all (a) expenses of printing and distributing any prospectus and of preparing,
printing and distributing or disseminating any other literature, advertising
and selling aids in connection with the offering of the shares for sale (except
that such expenses need not include expenses incurred by the Fund in connection
with the preparation, typesetting, printing and distribution of any
registration statement or prospectus, report or other communication to
shareholders in their capacity as such), (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 KDI under the conditions herein specified. No transfer taxes, if
any, which may be payable in connection with the issue or delivery of shares
sold as herein contemplated or of the certificates for such shares shall be
borne by the Fund, and KDI will indemnify and hold harmless the Fund against
liability for all such transfer taxes.
8. For the services and facilities described herein in connection with
Class B shares and Class C shares of each series of the Fund, the Fund will pay
to KDI 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 B shares and Class C shares of each such series. 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 the month and year, respectively. The foregoing fee shall be
in addition to and shall not be reduced or offset by the amount of any
contingent deferred sales charge received by KDI under Section 2 hereof.
The net asset value 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
- 4 -
<PAGE> 5
any class of any series 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 previous day on
which such calculation was made. The distribution services fee for any class of
a series of the Fund shall be based upon average daily net assets of the series
attributable to the class and such fee shall be charged only to such class.
9. KDI shall prepare reports for the Board of Trustees of the Fund on a
quarterly basis in connection with the Fund's distribution plan for Class B
shares and Class C shares showing amounts paid to the various Firms and such
other information as from time to time shall be reasonably requested by the
Board of Trustees.
10. To the extent applicable, this Agreement constitutes the plan for the
Class B shares and Class C shares of each series of the Fund pursuant to Rule
12b-1 under the Investment Company Act of 1940; and this Agreement and plan
shall be approved and renewed in accordance with Rule 12b-1 for such Class B
shares and Class C shares separately.
This Agreement shall become effective on the date hereof and shall continue
until March 1, 1998; 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 of 1940.
This Agreement shall automatically terminate in the event of its
assignment and may be terminated at any time without the payment of any penalty
by the Fund or by KDI on sixty (60) days written notice to the other party. The
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 of Trustees, (ii) a majority of the
trustees who are not interested persons of the Fund and who have no direct or
indirect financial interest in this Agreement or in any agreement related to
this Agreement, or (iii) a majority of the outstanding voting securities of the
class. Without prejudice to any other remedies of the Fund, the Fund may
terminate this Agreement at any time immediately upon KDI's failure to fulfill
any of its obligations hereunder.
This Agreement may not be amended to increase the amount to be paid to KDI by
the Fund for services hereunder with respect to a class of any series of the
Fund 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 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 this Agreement or in any agreement related to this
Agreement, cast in person at a meeting called for such purpose.
- 5 -
<PAGE> 6
The terms "assignment", "interested" and "vote of a majority of the outstanding
voting securities" shall have the meanings set forth in the Investment Company
Act of 1940 and the rules and regulations thereunder.
Termination of this Agreement shall not affect the right of KDI to receive
payments on any unpaid balance of the compensation described in Section 8
earned prior to such termination.
11. KDI will not use or distribute, or authorize the use, distribution or
dissemination by Firms or others in connection with the sale of Fund shares any
statements other than those contained in the Fund's current prospectus, except
such supplemental literature or advertising as shall be lawful under federal
and state securities laws and regulations. KDI will furnish the Fund with
copies of all such material.
12. 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.
13. 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.
14. 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 KDI 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, KDI 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.
15. This Agreement shall be construed in accordance with applicable federal
law and the laws of the Commonwealth of Massachusetts.
16. 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.
- 6 -
<PAGE> 7
IN WITNESS WHEREOF, the Fund and KDI have caused this Agreement to be executed
as of the day and year first above written.
KEMPER HIGH YIELD SERIES
By: /s/ John E. Neal
---------------------------
Title: Vice President
------------------------
ATTEST:
/s/ Philip J. Collora
-------------------------
Title: Secretary
----------------------
KEMPER DISTRIBUTORS, INC.
By: /s/ James L. Greenawalt
---------------------------
Title: President
------------------------
ATTEST:
/s/ Charles R. Manzoni
-------------------------
Title: Secretary
----------------------
- 7 -
<PAGE> 1
EX-99.B9(d)
FUND ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made on the 31st day of December, 1997 between Kemper
High Yield Series (the "Fund"), on behalf of Kemper High Yield Fund
(hereinafter called the "Portfolio"), a registered open-end management
investment company with its principal place of business in 222 South Riverside
Plaza, Chicago, Illinois 60606 and Scudder Fund Accounting Corporation, with
its principal place of business in Boston, Massachusetts (hereinafter called
"FUND ACCOUNTING").
WHEREAS, the Portfolio has need to determine its net asset value which
service FUND ACCOUNTING is willing and able to provide;
NOW THEREFORE in consideration of the mutual promises herein made, the Fund
and FUND ACCOUNTING agree as follows:
Section 1. Duties of FUND ACCOUNTING - General
FUND ACCOUNTING is authorized to act under the terms of this Agreement
to calculate the net asset value of the Portfolio as provided in the
prospectus of the Portfolio and in connection therewith shall:
a. Maintain and preserve all accounts, books, financial records and
other documents as are required of the Fund under Section 31 of the
Investment Company Act of 1940 (the "1940 Act") and Rules 31a-1,
31a-2 and 31a-3 thereunder, applicable federal and state laws and any
other law or administrative rules or procedures which may be
applicable to the Fund on behalf of the Portfolio, other than those
accounts, books and financial records required to be maintained by
the Fund's investment adviser, custodian or transfer agent and/or
books and records maintained by all other service providers necessary
for the Fund to conduct its business as a registered open-end
management investment company. All such books and records shall be
the property of the Fund and shall at all times during regular
business hours be open for inspection by, and shall be surrendered
promptly upon request of, duly authorized officers of the Fund. All
such books and records shall at all times during regular business
hours be open for inspection, upon request of duly authorized
officers of the Fund, by employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission.
b. Record the current day's trading activity and such other proper
bookkeeping entries as are necessary for determining that day's net
asset value and net income.
<PAGE> 2
c. Render statements or copies of records as from time to time are
reasonably requested by the Fund.
d. Facilitate audits of accounts by the Fund's independent public
accountants or by any other auditors employed or engaged by the Fund
or by any regulatory body with jurisdiction over the Fund.
e. Compute the Portfolio's public offering price and/or its daily
dividend rates and money market yields, if applicable, in accordance
with Section 3 of the Agreement and notify the Fund and such other
persons as the Fund may reasonably request of the net asset value
per share, the public offering price and/or its daily dividend rates
and money market yields.
Section 2. Valuation of Securities
Securities shall be valued in accordance with (a) the Fund's
Registration Statement, as amended or supplemented from time to time
(hereinafter referred to as the "Registration Statement"); (b) the
resolutions of the Board of Trustees of the Fund at the time in force and
applicable, as they may from time to time be delivered to FUND ACCOUNTING,
and (c) Proper Instructions from such officers of the Fund or other
persons as are from time to time authorized by the Board of Trustees of
the Fund to give instructions with respect to computation and
determination of the net asset value. FUND ACCOUNTING may use one or more
external pricing services, including broker-dealers, provided that an
appropriate officer of the Fund shall have approved such use in advance.
Section 3. Computation of Net Asset Value, Public Offering Price, Daily
Dividend Rates and Yields
FUND ACCOUNTING shall compute the Portfolio's net asset value,
including net income, in a manner consistent with the specific provisions
of the Registration Statement. Such computation shall be made as of the
time or times specified in the Registration Statement.
FUND ACCOUNTING shall compute the daily dividend rates and money market
yields, if applicable, in accordance with the methodology set forth in the
Registration Statement.
Section 4. FUND ACCOUNTING's Reliance on Instructions and Advice
In maintaining the Portfolio's books of account and making the necessary
computations FUND ACCOUNTING shall be entitled to receive, and may rely
upon, information furnished it by means of Proper Instructions, including
but not limited to:
a. The manner and amount of accrual of expenses to be recorded on the
books of the Portfolio;
2
<PAGE> 3
b. The source of quotations to be used for such securities as may not
be available through FUND ACCOUNTING's normal pricing services;
c. The value to be assigned to any asset for which no price quotations
are readily available;
d. If applicable, the manner of computation of the public offering
price and such other computations as may be necessary;
e. Transactions in portfolio securities;
f. Transactions in capital shares.
FUND ACCOUNTING shall be entitled to receive, and shall be entitled to
rely upon, as conclusive proof of any fact or matter required to be
ascertained by it hereunder, a certificate, letter or other instrument
signed by an authorized officer of the Fund or any other person authorized
by the Fund's Board of Trustees.
FUND ACCOUNTING shall be entitled to receive and act upon advice of
Counsel for the Fund at the reasonable expense of the Portfolio and shall
be without liability for any action taken or thing done in good faith in
reliance upon such advice.
FUND ACCOUNTING shall be entitled to receive, and may rely upon,
information received from the Transfer Agent.
Section 5. Proper Instructions
"Proper Instructions" as used herein means any certificate, letter
or other instrument or telephone call reasonably believed by FUND
ACCOUNTING to be genuine and to have been properly made or signed by any
authorized officer of the Fund or person certified to FUND ACCOUNTING as
being authorized by the Board of Trustees. The Fund, on behalf of the
Portfolio, shall cause oral instructions to be confirmed in writing.
Proper Instructions may include communications effected directly between
electro-mechanical or electronic devices as from time to time agreed to by
an authorized officer of the Fund and FUND ACCOUNTING.
The Fund, on behalf of the Portfolio, agrees to furnish to the appropriate
person(s) within FUND ACCOUNTING a copy of the Registration Statement as
in effect from time to time. FUND ACCOUNTING may conclusively rely on the
Fund's most recently delivered Registration Statement for all purposes
under this Agreement and shall not be liable to the Portfolio or the Fund
in acting in reliance thereon.
3
<PAGE> 4
Section 6. Standard of Care
FUND ACCOUNTING shall exercise reasonable care and diligence in the
performance of its duties hereunder. The Fund agrees that FUND ACCOUNTING
shall not be liable under this Agreement for any error of judgment or
mistake of law made in good faith and consistent with the foregoing
standard of care, provided that nothing in this Agreement shall be deemed
to protect or purport to protect FUND ACCOUNTING against any liability to
the Fund, the Portfolio or its shareholders to which FUND ACCOUNTING would
otherwise be subject by reason of willful misfeasance, bad faith or
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties hereunder.
Section 7. Compensation and FUND ACCOUNTING Expenses
FUND ACCOUNTING shall be paid as compensation for its services
pursuant to this Agreement such compensation as may from time to time be
agreed upon in writing by the two parties. FUND ACCOUNTING shall be
entitled, if agreed to by the Fund on behalf of the Portfolio, to recover
its reasonable telephone, courier or delivery service, and all other
reasonable out-of-pocket, expenses as incurred, including, without
limitation, reasonable attorneys' fees and reasonable fees for pricing
services.
Section 8. Amendment and Termination
This Agreement shall continue in full force and effect until
terminated as hereinafter provided, may be amended at any time by mutual
agreement of the parties hereto and may be terminated by an instrument in
writing delivered or mailed to the other party. Such termination shall
take effect not sooner than sixty (60) days after the date of delivery or
mailing of such notice of termination. Any termination date is to be no
earlier than four months from the effective date hereof. Upon
termination, FUND ACCOUNTING will turn over to the Fund or its designee
and cease to retain in FUND ACCOUNTING files, records of the calculations
of net asset value and all other records pertaining to its services
hereunder; provided, however, FUND ACCOUNTING in its discretion may make
and retain copies of any and all such records and documents which it
determines appropriate or for its protection.
Section 9. Services Not Exclusive
FUND ACCOUNTING's services pursuant to this Agreement are not to be
deemed to be exclusive, and it is understood that FUND ACCOUNTING may
perform fund accounting services for
4
<PAGE> 5
others. In acting under this Agreement, FUND ACCOUNTING shall be an
independent contractor and not an agent of the Fund or the Portfolio.
Section 10. Limitation of Liability for Claims
The Fund's Amended and Restated Declaration of Trust, as amended to date
(the "Declaration"), a copy of which, together with all amendments
thereto, is on file in the Office of the Secretary of State of the
Commonwealth of Massachusetts, provides that the name "Kemper High Yield
Series" refers to the Trustees under the Declaration collectively as
trustees and not as individuals or personally, and that no shareholder of
the Fund or the Portfolio, or Trustee, officer, employee or agent of the
Fund shall be subject to claims against or obligations of the Trust or of
the Portfolio to any extent whatsoever, but that the Trust estate only
shall be liable.
FUND ACCOUNTING is expressly put on notice of the limitation of
liability as set forth in the Declaration and FUND ACCOUNTING agrees that
the obligations assumed by the Fund and/or the Portfolio under this
Agreement shall be limited in all cases to the Portfolio and its assets,
and FUND ACCOUNTING shall not seek satisfaction of any such obligation
from the shareholders or any shareholder of the Fund or the Portfolio or
any other series of the Fund, or from any Trustee, officer, employee or
agent of the Fund. FUND ACCOUNTING understands that the rights and
obligations of the Portfolio under the Declaration are separate and
distinct from those of any and all other series of the Fund.
Section 11. Notices
Any notice shall be sufficiently given when delivered or mailed to the
other party at the address of such party set forth below or to such other
person or at such other address as such party may from time to time
specify in writing to the other party.
If to FUND ACCOUNTING: Scudder Fund Accounting Corporation
Two International Place
Boston, Massachusetts 02110
Attn: Vice President
If to the Fund - Portfolio: Kemper High Yield Series
222 South Riverside Plaza
Chicago, Illinois 60606
Attn: President, Secretary
or Treasurer
5
<PAGE> 6
Section 12. Miscellaneous
This Agreement may not be assigned by FUND ACCOUNTING without the
consent of the Fund as authorized or approved by resolution of its Board
of Trustees.
In connection with the operation of this Agreement, the Fund and
FUND ACCOUNTING may agree from time to time on such provisions
interpretive of or in addition to the provisions of this Agreement as in
their joint opinions may be consistent with this Agreement. Any such
interpretive or additional provisions shall be in writing, signed by both
parties and annexed hereto, but no such provisions shall be deemed to be
an amendment of this Agreement.
This Agreement shall be governed and construed in accordance with the
laws of the Commonwealth of Massachusetts.
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof, and supersedes any and all prior
understandings.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized and its seal to
be hereunder affixed as of the date first written above.
[SEAL] KEMPER HIGH YIELD SERIES
on behalf of Kemper High Yield Fund
By:
---------------------------------------
President
[SEAL] SCUDDER FUND ACCOUNTING CORPORATION
By:
---------------------------------------
Vice President
6
<PAGE> 1
EX-99.B9(e)
FUND ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made on the 31st day of December, 1997 between Kemper
High Yield Series (the "Fund"), on behalf of Kemper High Yield Opportunity Fund
(hereinafter called the "Portfolio"), a registered open-end management
investment company with its principal place of business in 222 South Riverside
Plaza, Chicago, Illinois 60606 and Scudder Fund Accounting Corporation, with
its principal place of business in Boston, Massachusetts (hereinafter called
"FUND ACCOUNTING").
WHEREAS, the Portfolio has need to determine its net asset value which
service FUND ACCOUNTING is willing and able to provide;
NOW THEREFORE in consideration of the mutual promises herein made, the Fund
and FUND ACCOUNTING agree as follows:
Section 1. Duties of FUND ACCOUNTING - General
FUND ACCOUNTING is authorized to act under the terms of this
Agreement to calculate the net asset value of the Portfolio
as provided in the prospectus of the Portfolio and in
connection therewith shall:
a. Maintain and preserve all accounts, books, financial records and
other documents as are required of the Fund under Section 31 of the
Investment Company Act of 1940 (the "1940 Act") and Rules 31a-1,
31a-2 and 31a-3 thereunder, applicable federal and state laws and any
other law or administrative rules or procedures which may be
applicable to the Fund on behalf of the Portfolio, other than those
accounts, books and financial records required to be maintained by
the Fund's investment adviser, custodian or transfer agent and/or
books and records maintained by all other service providers necessary
for the Fund to conduct its business as a registered open-end
management investment company. All such books and records shall be
the property of the Fund and shall at all times during regular
business hours be open for inspection by, and shall be surrendered
promptly upon request of, duly authorized officers of the Fund. All
such books and records shall at all times during regular business
hours be open for inspection, upon request of duly authorized
officers of the Fund, by employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission.
b. Record the current day's trading activity and such other proper
bookkeeping entries as are necessary for determining that day's net
asset value and net income.
<PAGE> 2
c. Render statements or copies of records as from time to time are
reasonably requested by the Fund.
d. Facilitate audits of accounts by the Fund's independent public
accountants or by any other auditors employed or engaged by the Fund
or by any regulatory body with jurisdiction over the Fund.
e. Compute the Portfolio's public offering price and/or its daily
dividend rates and money market yields, if applicable, in accordance
with Section 3 of the Agreement and notify the Fund and such other
persons as the Fund may reasonably request of the net asset value
per share, the public offering price and/or its daily dividend rates
and money market yields.
Section 2. Valuation of Securities
Securities shall be valued in accordance with (a) the Fund's
Registration Statement, as amended or supplemented from time to time
(hereinafter referred to as the "Registration Statement"); (b) the
resolutions of the Board of Trustees of the Fund at the time in force and
applicable, as they may from time to time be delivered to FUND ACCOUNTING,
and (c) Proper Instructions from such officers of the Fund or other
persons as are from time to time authorized by the Board of Trustees of
the Fund to give instructions with respect to computation and
determination of the net asset value. FUND ACCOUNTING may use one or more
external pricing services, including broker-dealers, provided that an
appropriate officer of the Fund shall have approved such use in advance.
Section 3. Computation of Net Asset Value, Public Offering Price, Daily
Dividend Rates and Yields
FUND ACCOUNTING shall compute the Portfolio's net asset value,
including net income, in a manner consistent with the specific provisions
of the Registration Statement. Such computation shall be made as of the
time or times specified in the Registration Statement.
FUND ACCOUNTING shall compute the daily dividend rates and money market
yields, if applicable, in accordance with the methodology set forth in the
Registration Statement.
Section 4. FUND ACCOUNTING's Reliance on Instructions and Advice
In maintaining the Portfolio's books of account and making the necessary
computations FUND ACCOUNTING shall be entitled to receive, and may rely
upon, information furnished it by means of Proper Instructions, including
but not limited to:
a. The manner and amount of accrual of expenses to be recorded on the
books of the Portfolio;
2
<PAGE> 3
b. The source of quotations to be used for such securities as may not
be available through FUND ACCOUNTING's normal pricing services;
c. The value to be assigned to any asset for which no price quotations
are readily available;
d. If applicable, the manner of computation of the public offering price
and such other computations as may be necessary;
e. Transactions in portfolio securities;
f. Transactions in capital shares.
FUND ACCOUNTING shall be entitled to receive, and shall be entitled to
rely upon, as conclusive proof of any fact or matter required to be
ascertained by it hereunder, a certificate, letter or other instrument
signed by an authorized officer of the Fund or any other person authorized
by the Fund's Board of Trustees.
FUND ACCOUNTING shall be entitled to receive and act upon advice of
Counsel for the Fund at the reasonable expense of the Portfolio and shall
be without liability for any action taken or thing done in good faith in
reliance upon such advice.
FUND ACCOUNTING shall be entitled to receive, and may rely upon,
information received from the Transfer Agent.
Section 5. Proper Instructions
"Proper Instructions" as used herein means any certificate, letter
or other instrument or telephone call reasonably believed by FUND
ACCOUNTING to be genuine and to have been properly made or signed by any
authorized officer of the Fund or person certified to FUND ACCOUNTING as
being authorized by the Board of Trustees. The Fund, on behalf of the
Portfolio, shall cause oral instructions to be confirmed in writing.
Proper Instructions may include communications effected directly between
electro-mechanical or electronic devices as from time to time agreed to by
an authorized officer of the Fund and FUND ACCOUNTING.
The Fund, on behalf of the Portfolio, agrees to furnish to the appropriate
person(s) within FUND ACCOUNTING a copy of the Registration Statement as
in effect from time to time. FUND ACCOUNTING may conclusively rely on the
Fund's most recently delivered Registration Statement for all purposes
under this Agreement and shall not be liable to the Portfolio or the Fund
in acting in reliance thereon.
3
<PAGE> 4
Section 6. Standard of Care
FUND ACCOUNTING shall exercise reasonable care and diligence in the
performance of its duties hereunder. The Fund agrees that FUND ACCOUNTING
shall not be liable under this Agreement for any error of judgment or
mistake of law made in good faith and consistent with the foregoing
standard of care, provided that nothing in this Agreement shall be deemed
to protect or purport to protect FUND ACCOUNTING against any liability to
the Fund, the Portfolio or its shareholders to which FUND ACCOUNTING would
otherwise be subject by reason of willful misfeasance, bad faith or
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties hereunder.
Section 7. Compensation and FUND ACCOUNTING Expenses
FUND ACCOUNTING shall be paid as compensation for its services
pursuant to this Agreement such compensation as may from time to time be
agreed upon in writing by the two parties. FUND ACCOUNTING shall be
entitled, if agreed to by the Fund on behalf of the Portfolio, to recover
its reasonable telephone, courier or delivery service, and all other
reasonable out-of-pocket, expenses as incurred, including, without
limitation, reasonable attorneys' fees and reasonable fees for pricing
services.
Section 8. Amendment and Termination
This Agreement shall continue in full force and effect until
terminated as hereinafter provided, may be amended at any time by mutual
agreement of the parties hereto and may be terminated by an instrument in
writing delivered or mailed to the other party. Such termination shall
take effect not sooner than sixty (60) days after the date of delivery or
mailing of such notice of termination. Any termination date is to be no
earlier than four months from the effective date hereof. Upon
termination, FUND ACCOUNTING will turn over to the Fund or its designee
and cease to retain in FUND ACCOUNTING files, records of the calculations
of net asset value and all other records pertaining to its services
hereunder; provided, however, FUND ACCOUNTING in its discretion may make
and retain copies of any and all such records and documents which it
determines appropriate or for its protection.
Section 9. Services Not Exclusive
FUND ACCOUNTING's services pursuant to this Agreement are not to be
deemed to be exclusive, and it is understood that FUND ACCOUNTING may
perform fund accounting services for
4
<PAGE> 5
others. In acting under this Agreement, FUND ACCOUNTING shall be an
independent contractor and not an agent of the Fund or the Portfolio.
Section 10. Limitation of Liability for Claims
The Fund's Amended and Restated Declaration of Trust, as amended to date
(the "Declaration"), a copy of which, together with all amendments
thereto, is on file in the Office of the Secretary of State of the
Commonwealth of Massachusetts, provides that the name "Kemper High Yield
Series" refers to the Trustees under the Declaration collectively as
trustees and not as individuals or personally, and that no shareholder of
the Fund or the Portfolio, or Trustee, officer, employee or agent of the
Fund shall be subject to claims against or obligations of the Trust or of
the Portfolio to any extent whatsoever, but that the Trust estate only
shall be liable.
FUND ACCOUNTING is expressly put on notice of the limitation of
liability as set forth in the Declaration and FUND ACCOUNTING agrees that
the obligations assumed by the Fund and/or the Portfolio under this
Agreement shall be limited in all cases to the Portfolio and its assets,
and FUND ACCOUNTING shall not seek satisfaction of any such obligation
from the shareholders or any shareholder of the Fund or the Portfolio or
any other series of the Fund, or from any Trustee, officer, employee or
agent of the Fund. FUND ACCOUNTING understands that the rights and
obligations of the Portfolio under the Declaration are separate and
distinct from those of any and all other series of the Fund.
Section 11. Notices
Any notice shall be sufficiently given when delivered or mailed to the
other party at the address of such party set forth below or to such other
person or at such other address as such party may from time to time
specify in writing to the other party.
If to FUND ACCOUNTING: Scudder Fund Accounting Corporation
Two International Place
Boston, Massachusetts 02110
Attn: Vice President
If to the Fund - Portfolio: Kemper High Yield Series
222 South Riverside Plaza
Chicago, Illinois 60606
Attn: President, Secretary
or Treasurer
5
<PAGE> 6
Section 12. Miscellaneous
This Agreement may not be assigned by FUND ACCOUNTING without the consent
of the Fund as authorized or approved by resolution of its Board of
Trustees.
In connection with the operation of this Agreement, the Fund and
FUND ACCOUNTING may agree from time to time on such provisions
interpretive of or in addition to the provisions of this Agreement as in
their joint opinions may be consistent with this Agreement. Any such
interpretive or additional provisions shall be in writing, signed by both
parties and annexed hereto, but no such provisions shall be deemed to be
an amendment of this Agreement.
This Agreement shall be governed and construed in accordance with the laws
of the Commonwealth of Massachusetts.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof, and supersedes any and all prior
understandings.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized and its seal to
be hereunder affixed as of the date first written above.
[SEAL] KEMPER HIGH YIELD SERIES
on behalf of Kemper High Yield
Opportunity Fund
By:
-------------------------------------
President
[SEAL] SCUDDER FUND ACCOUNTING CORPORATION
By:
-------------------------------------
Vice President
6
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial
Highlights" and to the use of our reports dated November 18, 1997 and September
18, 1997, for Kemper High Yield Fund and Kemper High Yield Opportunity Fund,
respectively, in the Registration Statement (Form N-1A) of Kemper High Yield
Series, and their 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. 34 to
the Registration Statement under the Securities Act of 1933 (File No. 2-60330)
and in this Amendment No. 34 to the Registration Statement under the Investment
Company Act of 1940 (File No. 811-2786).
ERNST & YOUNG LLP
Chicago, Illinois
April 17, 1998
<PAGE> 1
EX-99.B24
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Kathryn L. Quirk,
Caroline Pearson, and Philip J. Collora and each of them, any of whom may act
without the joinder of the others, as such person's attorney-in-fact to sign
and file on such person's behalf individually and in the capacity stated below
such registration statements, amendments, post-effective amendments, exhibits,
applications and other documents with the Securities and Exchange Commission
or any other regulatory authority as may be desirable or necessary in
connection with the public offering of shares of Kemper High Yield Series.
Signature Title Date
/s/ David W. Belin Trustee March 31, 1998
----------------------
<PAGE> 2
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Kathryn L. Quirk,
Caroline Pearson, and Philip J. Collora and each of them, any of whom may
act without the joinder of the others, as such person's attorney-in-fact to
sign and file on such person's behalf individually and in the capacity stated
below such registration statements, amendments, post-effective amendments,
exhibits, applications and other documents with the Securities and Exchange
Commission or any other regulatory authority as may be desirable or necessary
in connection with the public offering of shares of Kemper High Yield Series.
Signature Title Date
/s/ Lewis A. Burnham Trustee March 31, 1998
----------------------
<PAGE> 3
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Kathryn L. Quirk,
Caroline Pearson, and Philip J. Collora and each of them, any of whom may
act without the joinder of the others, as such person's attorney-in-fact to
sign and file on such person's behalf individually and in the capacity stated
below such registration statements, amendments, post-effective amendments,
exhibits, applications and other documents with the Securities and Exchange
Commission or any other regulatory authority as may be desirable or necessary
in connection with the public offering of shares of Kemper High Yield Series.
Signature Title Date
/s/ Donald L. Dunaway Trustee March 31, 1998
----------------------
<PAGE> 4
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Kathryn L. Quirk,
Caroline Pearson, and Philip J. Collora and each of them, any of whom may
act without the joinder of the others, as such person's attorney-in-fact to
sign and file on such person's behalf individually and in the capacity stated
below such registration statements, amendments, post-effective amendments,
exhibits, applications and other documents with the Securities and Exchange
Commission or any other regulatory authority as may be desirable or necessary
in connection with the public offering of shares of Kemper High Yield Series.
Signature Title Date
/s/ Robert B. Hoffman Trustee March 31, 1998
----------------------
<PAGE> 5
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Kathryn L. Quirk,
Caroline Pearson, and Philip J. Collora and each of them, any of whom may
act without the joinder of the others, as such person's attorney-in-fact to
sign and file on such person's behalf individually and in the capacity stated
below such registration statements, amendments, post-effective amendments,
exhibits, applications and other documents with the Securities and Exchange
Commission or any other regulatory authority as may be desirable or necessary
in connection with the public offering of shares of Kemper High Yield Series.
Signature Title Date
/s/ Donald R. Jones Trustee March 31, 1998
----------------------
<PAGE> 6
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Kathryn L. Quirk,
Caroline Pearson, and Philip J. Collora and each of them, any of whom may
act without the joinder of the others, as such person's attorney-in-fact to
sign and file on such person's behalf individually and in the capacity stated
below such registration statements, amendments, post-effective amendments,
exhibits, applications and other documents with the Securities and Exchange
Commission or any other regulatory authority as may be desirable or necessary
in connection with the public offering of shares of Kemper High Yield Series.
Signature Title Date
/s/ Shirley D. Peterson Trustee March 31, 1998
-----------------------
<PAGE> 7
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Kathryn L. Quirk,
Caroline Pearson, and Philip J. Collora and each of them, any of whom may
act without the joinder of the others, as such person's attorney-in-fact to
sign and file on such person's behalf individually and in the capacity stated
below such registration statements, amendments, post-effective amendments,
exhibits, applications and other documents with the Securities and Exchange
Commission or any other regulatory authority as may be desirable or necessary
in connection with the public offering of shares of Kemper High Yield Series.
Signature Title Date
/s/ Daniel Pierce Trustee March 31, 1998
----------------------
<PAGE> 8
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Kathryn L. Quirk,
Caroline Pearson, and Philip J. Collora and each of them, any of whom may
act without the joinder of the others, as such person's attorney-in-fact to
sign and file on such person's behalf individually and in the capacity stated
below such registration statements, amendments, post-effective amendments,
exhibits, applications and other documents with the Securities and Exchange
Commission or any other regulatory authority as may be desirable or necessary
in connection with the public offering of shares of Kemper High Yield Series.
Signature Title Date
/s/ William P. Sommers Trustee March 31, 1998
--------------------------
<PAGE> 9
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Kathryn L. Quirk,
Caroline Pearson, and Philip J. Collora and each of them, any of whom may
act without the joinder of the others, as such person's attorney-in-fact to
sign and file on such person's behalf individually and in the capacity stated
below such registration statements, amendments, post-effective amendments,
exhibits, applications and other documents with the Securities and Exchange
Commission or any other regulatory authority as may be desirable or necessary
in connection with the public offering of shares of Kemper High Yield Series.
Signature Title Date
/s/ Edmond D. Villani Trustee March 31, 1998
----------------------
<PAGE> 1
Exhibit 99.485(b)
[Vedder Price Letterhead]
April 22, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Kemper High Yield Series
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. 34 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 that would render it ineligible to become effective pursuant to
paragraph (b) thereof.
Very truly yours,
/s/ Vedder, Price, Kaufman & Kammholz
--------------------------------------
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
DAS/COK/agw
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PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER
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FINANCIAL INFORMATION EXTRACTED FROM THE 1998 SEMIANNUAL REPORT TO SHAREHOLDERS
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<NAME> KEMPER HIGH YIELD SERIES
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<PERIOD-END> MAR-31-1998
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<SHARES-COMMON-STOCK> 778
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PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER
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<CIK> 0000225528
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
