KEMPER INCOME & CAPITAL PRESERVATION FUND INC, DEF 14A, 1995-07-07

KEMPER INCOME & CAPITAL PRESERVATION FUND INC
DEF 14A, 1995-07-07

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<PAGE> 1

SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the registrant /X/

Filed by a party other than the registrant / /

Check the appropriate box:

/ / Preliminary proxy statement / / Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))

/X/ Definitive proxy statement

/ / Definitive additional materials

/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
KEMPER INCOME AND CAPITAL PRESERVATION FUND
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
KEMPER INCOME AND CAPITAL PRESERVATION FUND
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of filing fee (Check the appropriate box):

/ / $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.

/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

- --------------------------------------------------------------------------------

(2) Aggregate number of securities to which transaction applies:

- --------------------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):

- --------------------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:

- --------------------------------------------------------------------------------

(5) Total fee paid:

- --------------------------------------------------------------------------------

/X/ Fee paid previously with preliminary materials.

- --------------------------------------------------------------------------------

/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.

(1) Amount previously paid:

- --------------------------------------------------------------------------------

(2) Form, schedule or registration statement no.:

- --------------------------------------------------------------------------------

(3) Filing party:

- --------------------------------------------------------------------------------

(4) Date filed:

- --------------------------------------------------------------------------------
<PAGE> 2

IMPORTANT NEWS

FOR KEMPER MUTUAL FUND SHAREHOLDERS JULY 1995

While we encourage you to read the full text of the enclosed proxy statement,
here's a brief overview of major matters to be voted upon.

Q & A QUESTIONS AND ANSWERS

<TABLE>
<S> <C>
Q. WHAT IS HAPPENING?
A. Kemper Corporation -- not your fund -- has agreed to be acquired by an
investor group led by Zurich Insurance Company through a merger. Zurich
is an internationally recognized market leader in life and non-life
insurance and reinsurance and is increasingly involved in the financial
services industry. As part of the merger, your fund's investment
manager, Kemper Financial Services, Inc. (KFS), will be sold to a
subsidiary of Zurich. In order for KFS to serve as investment manager of
your fund after the merger, it is necessary for your fund to approve a
new investment management agreement.

The following pages elaborate on Zurich, the proposed new investment
management agreement and the fund board's evaluation of Zurich's plans
for KFS. A vote is also being sought on a Rule 12b-1 plan* (the
provisions of which are the same as in the current Rule 12b-1 plan) for
the Class B shares and Class C shares of each fund, the election of
trustees to the Board of Trustees and the selection of independent
auditors.

Q. WHY AM I BEING ASKED TO VOTE ON THE PROPOSED NEW INVESTMENT MANAGEMENT
AGREEMENT?
A. The Investment Company Act of 1940 requires a vote whenever there is a
change in control of an investment manager. Kemper Corporation's merger
with Zurich is such a change of control and requires a fund shareholder
vote upon a new investment management agreement with each fund. A vote
upon the Rule 12b-1 distribution plan with each fund, by shareholders of
Class B and Class C shares only, is also required.

Q. WHAT HAPPENED WITH KEMPER CORPORATION'S INTENTION LAST YEAR TO MERGE
WITH CONSECO, INC.?
A. The agreement was terminated by mutual consent of Kemper and Conseco.

</TABLE>

* Rule 12b-1 of the Investment Company Act of 1940 specifies the terms that an
investment company (mutual fund) must comply with when using fund assets to
pay for the distribution of fund shares. Kemper Distributors, Inc., the
principal underwriter and distributor for each fund, distributes each fund's
Class B and Class C shares according to a Rule 12b-1 plan.

[KEMPER LOGO]

<PAGE> 3

<TABLE>
<S> <C>
Q. HOW WILL THE KEMPER/ZURICH MERGER AFFECT ME AS A FUND SHAREHOLDER?
A. Your fund and your fund investment will not change. You will still own
the same shares in the same fund.

The terms of the new management agreement are the same as the current
management agreement. If the new investment management agreement and
Rule 12b-1 plans are approved, your fund shares will not change, the
advisory fees charged to your fund will not change, and the fee rate
payable under your fund's 12b-1 plan will not change.

Zurich has committed to provide all resources necessary to provide your
fund with top quality investment management and shareholder services.

Q. WILL THE INVESTMENT ADVISORY AND RULE 12b-1 FEES BE THE SAME?
A. Yes, the investment advisory and Rule 12b-1 fees paid by your fund will
remain the same.

Q. HOW DO THE BOARD MEMBERS OF MY FUND SUGGEST THAT I VOTE?
A. After careful consideration, the board members of your fund, including
the independent members, recommend that you vote "For" all the items on
the enclosed proxy card.

Q. WHO IS PAYING THE COST OF THE SHAREHOLDER MEETING AND THIS PROXY
SOLICITATION?
A. Kemper Corporation and Zurich Insurance Company -- not your fund -- are
solicitation.

Q. WHOM DO I CALL FOR MORE INFORMATION?
A. Please call Kemper Shareholder Services at 1-800-621-1048.
</TABLE>

ABOUT THE PROXY CARD

[Illustration of front of a proxy card, without actual text
of the proposals to be voted upon]

Because each fund must vote separately, you are being sent a proxy card for each
fund account that you have. Please vote all issues shown on each proxy card that
you receive.

Please vote on each issue using blue or black ink to mark an X in one
of the three boxes provided on each proxy card. On Item 1 (election of
trustees), mark "For All," "Withhold All" or "For All Except". If you mark an X
in the "For All Except" box, you should print the number(s) relating to the
individual(s) for whom you wish to withhold authority. On all other items, mark
"For", "Against" or "Abstain". Then sign, date and return each of your proxy
cards in the accompanying postage-paid envelope. All registered owners of an
account, as shown in the address on the card, must sign the card. If you are
signing for a corporation, trust or estate, please indicate your title or
position.

THANK YOU FOR MAILING YOUR PROXY CARD PROMPTLY!

<PAGE> 4

KEMPER MUTUAL FUNDS

120 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60603
TELEPHONE 1-800-621-1048

July 7, 1995

Dear Kemper Mutual Fund Shareholder:

As you read in the Questions and Answers (Q & A) on the outside cover, Kemper
Corporation has agreed to be acquired by an investor group led by Zurich
Insurance Company through a merger. Zurich is an internationally recognized
market leader in life and non-life insurance and reinsurance and is increasingly
involved in the financial services industry. (More information about Zurich can
be found inside the proxy statement.)

We're sending this proxy statement to you because your vote is important to
the planned Kemper merger. Your fund's investment manager, Kemper Financial
Services, Inc. (KFS), is a subsidiary of Kemper Corporation. Because of the
Zurich/Kemper merger, it is necessary for your fund to approve a new investment
management agreement and the adoption of new Rule 12b-1 Plans for Class B and
Class C shares.

As you review these materials, please keep in mind that Kemper Corporation and
KFS -- NOT YOUR FUND -- are being acquired by Zurich. If the new investment
management agreement and Rule 12b-1 Plans are approved, YOUR FUND SHARES WILL
NOT CHANGE, THE ADVISORY FEES CHARGED TO YOUR FUND WILL NOT CHANGE, AND THE FEE
RATE PAYABLE UNDER YOUR FUND'S RULE 12B-1 PLAN WILL NOT CHANGE. Further, you
should continue to receive the high quality investment management and
shareholder services that you have come to expect over the years.

Your Fund Board has approved the proposals and recommends them for your
approval. I encourage you to vote in favor of the proposals. PLEASE VOTE NOW TO
HELP SAVE THE COST OF ADDITIONAL SOLICITATIONS.

As always, we thank you for your confidence and support.

Sincerely,

Stephen B. Timbers

President
<PAGE> 5

KEMPER MUTUAL FUNDS
120 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60603
TELEPHONE 1-800-621-1048

NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
SEPTEMBER 19, 1995 AND PROXY STATEMENT
July 7, 1995

To the Shareholders:

You are invited to attend a joint special meeting of shareholders of the
following Kemper Mutual Funds (each a "Fund" and collectively the "Funds"):

KEMPER TECHNOLOGY FUND ("KTEC")
KEMPER TOTAL RETURN FUND ("KTRF")
KEMPER GROWTH FUND ("KGF")
KEMPER SMALL CAPITALIZATION EQUITY FUND ("KSCF")
KEMPER INCOME AND CAPITAL PRESERVATION FUND ("KICPF")
KEMPER NATIONAL TAX-FREE INCOME SERIES ("KNTIS")
KEMPER DIVERSIFIED INCOME FUND ("KDIF")
KEMPER HIGH YIELD FUND ("KHYF")
KEMPER U.S. GOVERNMENT SECURITIES FUND ("KGSF")
KEMPER INTERNATIONAL FUND ("KIF")
KEMPER STATE TAX-FREE INCOME SERIES ("KSTIS")
KEMPER PORTFOLIOS ("KP")
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND ("KARGF")
KEMPER BLUE CHIP FUND ("KBCF")
KEMPER GLOBAL INCOME FUND ("KGIF")

The meeting will be held in Room 17L on the 17th Floor at the offices of the
Funds, 120 South LaSalle Street, Chicago, Illinois on Tuesday, September 19,
1995 at 2:30 p.m., Chicago time, for the following purposes and to transact such
other business as may properly come before the meeting or any adjournment of the
meeting:

1. To elect nine (9) Trustees to the Board of Trustees.

2. To ratify or reject the selection of Ernst & Young LLP as independent
auditors for the current fiscal year.

3. To approve or disapprove a new investment management agreement with
Kemper Financial Services, Inc. or its successor on the same terms as
the current agreement.

4. For Class B and Class C shareholders only, to approve or disapprove a
new Rule 12b-1 distribution plan with Kemper Distributors, Inc. or its
successor on the same terms as the current plan.

The Board of Trustees of each Fund has selected the close of business on June
23, 1995 as the record date for the determination of shareholders of each Fund
entitled to notice of and to vote at the meeting. Shareholders are entitled to
one vote for each share held.

- --------------------------------------------------------------------------------

PLEASE INDICATE YOUR VOTING INSTRUCTIONS ON THE ENCLOSED PROXY CARD. SIGN, DATE
AND RETURN IT IN THE ENVELOPE PROVIDED. TO SAVE THE COST OF ADDITIONAL
SOLICITATIONS, PLEASE MAIL YOUR PROXY PROMPTLY.
- --------------------------------------------------------------------------------
<PAGE> 6

The accompanying proxy is solicited by the Boards of Trustees (the "Boards") of
the Funds for voting at the joint special meeting of shareholders of the Funds
to be held on Tuesday, September 19, 1995, and at any and all adjournments
thereof (the "Meeting"). This proxy statement was first mailed to shareholders
on or about July 7, 1995.

THE SERIES FUNDS. Each of KNTIS, KSTIS and KP is a "series company" that issues
various series of shares. (Each series also is sometimes described herein as a
"Fund.") Each series has its own investment objective and policies and operates
independently for purposes of investments, dividends and redemptions.

The series of KSTIS are: Kemper California Tax-Free Income Fund ("KCATF");
Kemper New York Tax-Free Income Fund ("KNYTF"); Kemper Florida Tax-Free
Income Fund ("KFLTF"); Kemper Texas Tax-Free Income Fund ("KTXTF"); Kemper
Ohio Tax-Free Income Fund ("KOHTF"); Kemper Michigan Tax-Free Income Fund
("KMITF"); Kemper New Jersey Tax-Free Income Fund ("KNJTF"); and Kemper
Pennsylvania Tax-Free Income Fund ("KPATF").

The series of KNTIS are Kemper Municipal Bond Fund ("KMBF") and Kemper
Intermediate Municipal Bond Fund ("KIMBF").

The series of KP are: Kemper Cash Reserves Fund ("KCRF"); Kemper U.S.
Mortgage Fund ("KUSMF"); and Kemper Short-Intermediate Government Fund
("KSIGF").

Each Fund (and each series of each series company) is divided into four classes
of shares, including Class A Shares, Class B Shares, Class C Shares and, except
for KSTIS, Class I Shares. (As of May 31, 1995, no Class I shares of any Fund
are outstanding except for KHYF). Shares of each class represent a proportionate
interest in that class.

The shareholders of each Fund are being asked to vote on four items. On Item 1
(election of trustees) and Item 2 (ratification of selection of auditors), each
Fund will vote in the aggregate and not by series or class. On Item 3 (approval
of new investment management agreement), each Fund will vote in the aggregate
except, in the case of KNTIS, KSTIS, and KP, each series will vote separately.
On Item 4 (approval of new Rule 12b-1 Plan), the Class B Shares and the Class C
Shares of each Fund (or in the case of KNTIS, KSTIS and KP, of each series) will
each vote separately. The Board of each Fund recommends an affirmative vote on
all items. The vote required to approve each item is described under the section
of this proxy statement entitled "Miscellaneous."

The following table indicates which shareholders are solicited with respect to
each Item:

<TABLE>
<CAPTION>
ITEM CLASS A CLASS B CLASS C CLASS I
- -------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
1. Elect Trustees..................... X X X X
2. Ratify Selection of Auditors....... X X X X
3. Approval of New Investment
Management Agreement............... X X X X
4. Approval of New Rule 12b-1 Plan.... X X
</TABLE>

2
<PAGE> 7

The Board of each Fund has fixed the close of business on June 23, 1995 as the
record date for the determination of shareholders of each Fund entitled to
notice of and to vote at the Meeting. As of May 31, 1995, KHYF had 1,285,559
Class I Shares issued and outstanding; each Fund had Class A, Class B and Class
C Shares issued and outstanding as follows:

<TABLE>
<CAPTION>
FUND CLASS A CLASS B CLASS C
- ------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
KTEC..................... 65,999,043 1,823,574 63,730
KTRF..................... 174,514,632 112,081,398 377,942
KGF...................... 109,953,700 50,176,134 252,373
KSCF..................... 83,098,067 30,138,337 303,484
KICPF.................... 60,572,804 3,791,575 96,958
KNTIS
KMBF................... 351,777,124 2,907,496 89,434
KIMBF.................. 1,011,674 27,082,888 68,375
KDIF..................... 82,942,506 45,111,364 23,474
KHYF..................... 307,858,387 130,866,894 1,686,933
KGSF..................... 545,198,365 4,023,149 205,832
KIF...................... 33,264,070 3,468,149 155,701
KSTIS
KCATF.................. 150,892,011 1,336,293 23,474
KNYTF.................. 29,691,967 300,471 16,944
KFLTF.................. 11,576,682 182,621 3,685
KTXTF.................. 1,396,150 34,588 44,369
KOHTF.................. 2,646,775 415,763 15,685
KMITF.................. 158,849 61,121 12,196
KNJTF.................. 215,161 126,358 13,711
KPATF.................. 68,900 71,132 11,865
KP
KCRF................... 37,403,489 174,894,317 1,967,898
KUSMF.................. 284,357,246 226,257,486 153,402
KSIGF.................. 3,474,230 27,082,888 313,621
KARGF.................... 17,151,159 598,964 78,561
KBCF..................... 10,832,430 595,240 43,680
KGIF..................... 12,223,907 5,560,490 12,202
</TABLE>

ITEM 1. ELECTION OF BOARD OF TRUSTEES

At the Meeting, nine (9) trustees are to be elected to constitute the Board of
each Fund. All the nominees (except for Mr. Mathis and Ms. Peterson) were
elected to the Board of each Fund except KP at a special meeting of shareholders
held on May 25, 1994. All the nominees (except Messrs. Mathis and Timbers and
Ms. Peterson) were elected to the Board of KP at a special meeting of
shareholders held on July 30, 1991. Mr. Mathis was appointed to each Board on
March 11, 1995 to fill a vacancy and Ms. Peterson was appointed to each Board on
June 15, 1995 to fill a vacancy created by an expansion of the size of the Board
to nine (9) from eight (8) trustees. Mr. Timbers was appointed to the Board of
KP on January 23, 1992 to fill a vacancy created by an expansion of the size of
the Board. Mr. Mathis and Ms. Peterson are standing for election by each

3
<PAGE> 8

Fund's shareholders and Mr. Timbers is standing for election by KP's
shareholders for the first time at the Meeting.

It is intended that the proxies will be voted for the election of the nominees
described below. Each trustee so elected will serve as a trustee of the
respective Fund 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 or is removed as provided
in the Agreement and Declaration of Trust of each Fund ("Declaration of Trust").
Since the Funds do not hold annual meetings, trustees will hold office for an
indeterminate period.

All the nominees listed below have consented to serve as trustees of the
respective Funds, if elected. In case any nominee shall be unable or shall fail
to act as a trustee by virtue of an unexpected occurrence, the proxies may be
voted for such other person(s) as shall be determined by the persons acting
under the proxies in their discretion.

<TABLE>
<CAPTION>
NAME (DATE OF BIRTH), PRINCIPAL YEAR FIRST BECAME
OCCUPATION AND AFFILIATIONS A TRUSTEE
- ------------------------------------- -----------------------------
<S> <C>
David W. Belin (6/20/28) 1976 -- KNTIS; 1977 -- KDIF,
Member, Belin Harris Lamson KGF, KHYF, KICPF, KSCF, KTEC,
McCormick, P.C., Attorneys KTRF; 1979 -- KGSF; 1981 --
KIF; 1982 -- KP; 1983 --
KSTIS; 1987 -- KARGF, KBCF;
1989 -- KGIF;
Lewis A. Burnham (1/8/33) 1977 -- KDIF, KGF, KHYF,
Partner, Business Resources Group; KICPF, KNTIS, KSCF, KTEC,
formerly, Executive Vice President, KTRF; 1979 -- KGSF; 1981 --
Anchor Glass Container Corporation KIF; 1982 -- KP; 1983 --
KSTIS; 1987 -- KARGF, KBCF;
1989 -- KGIF;
Donald L. Dunaway (3/8/37) 1980 -- KDIF, KGSF, KGF,
Retired; formerly, Executive Vice KHYF, KICPF, KNTIS, KSCF,
President, A. O. Smith Corporation KTEC, KTRF; 1981 -- KIF; 1982
-- KP; 1983 -- KSTIS; 1987 --
KARGF, KBCF; 1989 -- KGIF;
Robert B. Hoffman (12/11/36) 1981 -- KDIF, KGSF, KGF,
Senior Vice President and Chief KHYF, KICPF, KIF, KNTIS,
Financial Officer, Monsanto KSCF, KTEC, KTRF; 1982 -- KP;
Company; formerly Vice President, 1983 -- KSTIS; 1987 -- KARGF,
FMC Corporation; prior thereto, KBCF; 1989 -- KGIF;
Director, Executive Vice President
and Chief Financial Officer, Staley
Continental, Inc.
Donald R. Jones (1/17/30) 1988 -- KARGF, KBCF, KDIF,
Retired; Director, Motorola, Inc.; KGSF, KGF, KHYF, KICPF, KIF,
formerly, Executive Vice President KNTIS, KSCF, KSTIS, KTEC,
and Chief Financial Officer, KTRF, KP; 1989 -- KGIF;
Motorola, Inc.
</TABLE>

4
<PAGE> 9

<TABLE>
<CAPTION>
NAME (DATE OF BIRTH), PRINCIPAL YEAR FIRST BECAME
OCCUPATION AND AFFILIATIONS A TRUSTEE
- ------------------------------------- -----------------------------
<S> <C>
</TABLE>

<TABLE>
<S> <C>
David B. Mathis* (4/13/38) 1995 -- All Funds
Chairman, Chief Executive Officer
and Director, Kemper Corporation;
Director, Kemper Financial
Services, Inc. ("KFS"), Kemper
Financial Companies, Inc. ("KFC"),
several other Kemper Corporation
subsidiaries, IMC Global Inc. and
Lumbermens Mutual Casualty Company.
Shirley D. Peterson (9/3/41) 1995 -- All Funds
President, Hood College; formerly
partner, Steptoe & Johnson
(attorneys) January, 1993 -
December, 1994, prior thereto,
Commissioner, Internal Revenue
Service, February, 1992 - January,
1993; prior thereto, Assistant
Attorney General, U. S. Department
of Justice.
William P. Sommers (7/22/33) 1979 -- KDIF, KGF, KHYF,
President and Chief Executive KNTIS, KSCF, KTEC, KTRF; 1981
Officer, SRI International; -- KGSF, KICPF, KIF; 1982 --
formerly, Executive Vice President, KP; 1983 -- KSTIS; 1987 --
Iameter; prior thereto, Senior Vice KARGF, KBCF; 1989 -- KGIF;
President and Director, Booz, Allen
& Hamilton, Inc. (Retired);
Director, Rohr, Inc.; Therapeutic
Discovery Corp.; and Litton
Industries.
Stephen B. Timbers* (8/8/44) 1992 -- All Funds
President, Chief Operating Officer,
and Director, Kemper Corporation;
Chairman, Chief Executive Officer,
Chief Investment Officer and
Director, KFS; Director, KFC,
several other Kemper Corporation
subsidiaries, Gillett Holdings,
Inc. and LTV Corporation.
</TABLE>

- ---------------
* Interested persons of the Funds as defined in the Investment Company Act of
1940 ("1940 Act") because of their positions with KFS, the investment manager
of the Funds.

All the nominees, except Messrs. Mathis and Timbers and Ms. Peterson, serve as
board members of 21 Kemper Funds. Mr. Mathis serves as a board member of 28
Kemper Funds, Mr. Timbers serves as a board member and president of 31 Kemper
Funds and Ms. Peterson serves as a board member of 18 Kemper Funds. Mr. Mathis
has been nominated to serve as a board member of 31 Kemper Funds and Ms.
Peterson has been nominated to serve as a board member of 21 Kemper Funds. A
"Kemper Fund" is an investment company for which KFS serves as investment
manager.

5
<PAGE> 10

The Board of Trustees of each Fund has a nominating committee, the members of
which are Messrs. Burnham, Jones and Sommers. It proposed the nominees for
election by the shareholders; and the Board of Trustees, including the non-
interested trustees, concurred. The nominating committee met two times during
each Fund's most recently completed fiscal year. Shareholders wishing to submit
the name of a candidate for consideration by the nominating committee should
submit their recommendations to the secretary of the applicable Fund.

Each Fund's audit committee is composed of Messrs. Dunaway, Hoffman and Jones.
The audit committee met two times during each Fund's most recently completed
fiscal year. The audit committee of each Fund makes recommendations regarding
the selection of independent auditors for the Fund, confers with the independent
auditors regarding the Fund's financial statements, the results of audits and
related matters and performs such other tasks as the Board of Trustees of that
Fund assigns.

The Board of each Fund met nine times during the Fund's most recently completed
fiscal year. Each then current trustee attended 75% or more of the respective
meetings of the Board and the committees of which he was a member that were held
during that period.

Each Fund pays trustees who are not interested persons of such Fund a monthly
retainer and an attendance fee for each Board meeting and committee meeting
attended, plus expense reimbursement. As reflected above, the trustees currently
serve as trustees of various investment companies for which KFS serves as
investment manager. Trustees or officers who are "interested persons" receive no
compensation from any Fund.

The tables below show, for each trustee entitled to receive compensation from
the Funds, the aggregate compensation paid or accrued by each Fund for its most
recently completed fiscal year and the total compensation that Kemper Funds paid
to each trustee during the calendar year 1994. The trustees do not receive any
pension or retirement benefits from any Fund.

<TABLE>
<CAPTION>
NAME OF TRUSTEE KTEC KTRF KGF KSCF KICPF KNTIS KDIF KHYF KGSF
- ---------------------------- ------ ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
David W. Belin(1)........... $3,900 6,000 5,800 3,400 3,400 7,800 3,500 6,500 10,200
Lewis A. Burnham............ 3,000 4,900 5,000 2,700 2,800 6,600 2,600 5,400 8,600
Donald L. Dunaway(1)........ 3,900 6,200 6,100 3,500 3,500 8,200 3,400 6,900 10,700
Robert B. Hoffman........... 2,900 4,800 4,800 2,600 2,700 6,300 2,500 5,300 8,300
Donald R. Jones............. 3,100 5,100 5,200 2,900 2,900 6,800 2,700 5,600 9,000
William P. Sommers.......... 2,800 4,600 4,700 2,600 2,600 6,300 2,400 5,000 8,100
</TABLE>

6
<PAGE> 11

<TABLE>
<CAPTION>
TOTAL
COMPENSATION
KEMPER
FUNDS
PAID TO
NAME OF TRUSTEE KIF KSTIS KP KARGF KBCF KGIF TRUSTEES(2)
- -------------------------------- ------ ----- ----- ----- ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
David W. Belin(1)............... $2,500 5,200 7,100 1,900 1,800 1,800 $112,200
Lewis A. Burnham................ 1,900 4,500 6,800 1,700 1,700 1,600 90,100
Donald L. Dunaway(1)............ 2,500 5,400 7,700 2,000 2,000 2,000 115,400
Robert B. Hoffman............... 1,900 4,200 6,400 1,600 1,700 1,500 87,400
Donald R. Jones................. 2,000 4,600 7,000 1,800 1,800 1,600 94,300
William P. Sommers.............. 1,800 4,400 7,000 1,700 1,600 1,500 84,100
</TABLE>

- ---------------
(1) Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with the Funds. Deferred amounts accrue interest
monthly at a rate equal to the yield of Kemper Money Market Fund -- Money
Market Portfolio.

(2) Includes compensation for service on the boards of 23 Kemper Funds
(including two Kemper Funds no longer in existence). Also includes amounts
for new portfolios estimated as if they had existed at the beginning of the
year. Ms. Peterson was appointed to the Boards on June 15, 1995; and
therefore, is not included in the above tables.

FUND OFFICERS. Information about the executive officers of the Funds, with their
respective dates of birth and terms as Fund officers indicated, is set forth
below (other than information about Mr. Timbers, president of each Fund since
3/11/95, which is reflected above).

J. Patrick Beimford, Jr. (5/25/50), vice president of KGSF since 2/20/81, KSTIS
since 1/23/84, KNTIS since 1/20/87, KARGF since 1/23/92, and KDIF, KGIF, KHYF,
KP and KICPF since 1/21/93, is executive vice president and director of fixed
income investments of KFS.

Elizabeth A. Byrnes (2/8/57), vice president of KARGF since 7/13/94, is first
vice president of KFS.

Tracy M. Chester (9/27/54), vice president of KBCF since 12/8/94, is senior vice
president of KFS since September 1994; prior thereto, senior vice president and
portfolio manager of an investment management company; prior thereto, managed
private accounts.

Philip J. Collora (11/15/45), vice president of KP since 1/28/86, KTEC, KTRF,
KGF, KSCF, KICPF, KNTIS, KDIF, KHYF, KGSF, KIF, KSTIS, and KBCF since 1/17/89,
KARGF since 5/28/87 and KGIF since 7/25/89, and secretary of each Fund since
1/25/95, is senior vice president and assistant secretary of KFS.

C. Beth Cotner (12/20/52), vice president of KSCF since 1/20/87, KGF since
7/13/94, and KTEC, KTRF and KBCF since 1/25/95, is executive vice president and
director of equity mutual fund portfolio management of KFS.

Robert S. Cessine (1/5/50), vice president of KICPF since 7/13/94 and KDIF since
5/05/95, is senior vice president of KFS since January 1993; prior thereto,
senior corporate bond analyst at an investment management company.

Jerome L. Duffy (6/29/36), treasurer of KTEC, KTRF and KICPF since 1/20/77, KGF
and KSCF since 2/17/77, KNTIS and KDIF since 4/19/77, KHYF since 11/2/77, KGSF
since 9/25/79, KIF since 1/20/81, KP since 3/3/82, KSTIS since

7
<PAGE> 12

1/23/83, KARGF since 5/28/87, KBCF since 1/12/88 and KGIF since 8/3/88, is
senior vice president of KFS.

Dennis H. Ferro (6/20/45), vice president of KIF since 7/13/94, is executive
vice president and director of international equity investments of KFS since
March 1994; prior thereto, president and chief investment officer, Cigna
International Investment Advisors, Inc.

Richard A. Goers (6/20/44), vice president of KTEC since 1/23/92, is senior vice
president of KFS.

Karen A. Hussey (6/18/59), vice president of KSCF since 12/8/94, is senior vice
president of KFS since September 1994; prior thereto, portfolio manager for a
national bank.

Gordon K. Johns (1/25/48), vice president of KGIF since 7/25/89 and KDIF since
5/05/95, is executive vice president of KFS and managing director and director
of Kemper Investment Management Company Limited, a wholly owned subsidiary of
KFS.

Michelle M. Keeley (4/24/64), vice president of KP since 7/13/94, is first vice
president of KFS.

Frank D. Korth (7/11/45), vice president of KTEC since 1/14/94, is senior vice
president of KFS.

Gary A. Langbaum (12/16/48), vice president of KTRF since 6/15/95, is executive
vice president of KFS.

Michael A. McNamara (12/28/44), vice president of KP since 1/20/87, KDIF since
1/17/89 and KHYF since 1/22/91, is senior vice president of KFS.

Christopher J. Mier (8/11/56), vice president of KSTIS since 1/30/90 and KNTIS
since 1/22/91, is senior vice president of KFS.

John E. Peters (11/4/47), vice president of KGIF since 7/25/89 and KTEC, KTRF,
KGF, KSCF, KICPF, KNTIS, KDIF, KHYF, KGSF, KIF, KSTIS, KP, KARGF and KBCF since
1/30/90, is senior executive vice president of KFS and president of Kemper
Distributors, Inc.

Frank J. Rachwalski, Jr. (3/26/45), vice president of KP since 1/23/84, is
senior vice president of KFS.

Harry E. Resis, Jr. (11/24/45), vice president of KICPF since 1/30/90, KDIF and
KHYF since 1/21/93 and KP since 1/21/93, is senior vice president of KFS.

Paul F. Sloan (7/20/47), vice president of KDIF, KGSF, KP and KARGF since
5/05/95, is senior vice president of KFS since April 1995; prior thereto,
director of institutional portfolio management at an investment management
company; prior thereto, vice president for a regional bank.

Jonathan W. Trutter (11/29/57), vice president of KDIF since 5/05/95, is first
vice president of KFS.

Elizabeth C. Werth (10/1/47), assistant secretary of each Fund since 3/17/90, is
vice president and director of state registrations of KFS.

8
<PAGE> 13

The officers of each Fund are elected by the Board of the Fund on an annual
basis to serve until their successors are elected and qualified.

SHAREHOLDINGS

Listed below is the number of shares of each Fund owned beneficially by each
trustee as of May 31, 1995. Also shown is the number of shares owned
beneficially by the trustees and officers as a group. In each case, the amounts
shown are less than 1% of the outstanding shares of each class of each Fund or
any series of KNTIS, KSTIS or KP. All shares shown are Class A shares unless
otherwise noted:

<TABLE>
<CAPTION>
TRUSTEES
AND
OFFICERS
AS A
FUND BELIN BURNHAM DUNAWAY HOFFMAN JONES MATHIS PETERSON SOMMERS TIMBERS GROUP
- ------------ ------ ------- ------- ------- ------ ------ -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
KTEC........ 2,116 6,491 855 552 0 0 0 486 2,842 35,023
KTRF........ 5,147 2,087 4,658 581 0 2,765 0 432 3,875 25,822
KGF......... 674 0 5,207 * 437 0 0 0 5,292 19,582 71,285
KSCF........ 2,787 6,110 5,683 7,183 33,825 0 0 29,679 38,754 149,186
KICPF....... 659 0 494 393 25,405 0 0 0 0 27,428
KNTIS
KMBF...... 970 3,608 1,696 294 20,563 0 0 3,722 3,269 36,880
KIMBF..... 0 0 0 0 0 0 0 0 0 0
KDIF........ 2,914 0 342 824 0 0 0 10,186 0 32,343
KHYF........ 9,037 61,504 316 651 25,979 0 0 10,675 9,774 211,231
KGSF........ 8,161 0 717 386 0 0 0 0 2,418 11,682
KIF......... 2,707 5,979 989 620 9,766 0 0 10,529 1,075 69,686
KSTIS
KCATF..... 0 0 0 0 0 0 0 5,528 0 5,528
KNYTF..... 0 0 0 0 0 0 0 0 0 0
KFLTF..... 0 0 0 0 0 0 0 0 0 0
KTXTF..... 0 0 0 0 0 0 0 0 0 0
KOHTF..... 0 0 0 0 0 0 0 0 0 0
KMITF..... 0 0 0 0 0 0 0 0 0 0
KNJTF..... 0 0 0 0 0 0 0 0 0 0
KPATF..... 0 0 0 0 0 0 0 0 0 0
KP
KCRF...... 1,102** 0 0 1,102** 0 0 0 1,102 ** 0 3,306**
KUSMF..... 0 0 0 0 0 0 0 0 0 0
KSIGF..... 0 0 0 0 0 0 0 0 0 0
KARGF....... 144 0 612 0 0 0 0 144 0 7,086
KBCF........ 0 0 272 0 0 0 0 0 5,655 5,927
KGIF........ 1,665 0 273 0 0 0 0 488 1,200 5,927
</TABLE>

- ---------------

* Includes 70 Class B Shares

** Class B Shares Only

As of May 31, 1995, no person is known to the Funds to own beneficially more
than five percent of the shares of any class of any Fund, except as shown in
Exhibit A.

ITEM 2. SELECTION OF INDEPENDENT AUDITORS

A majority of the members of each Board who are not "interested" persons of the
Fund has selected Ernst & Young LLP, independent auditors, to audit the books
and records of the Fund for the current fiscal year. This firm has served in
this capacity for each Fund since the Fund was organized and has no direct or
indirect financial interest in a Fund except as independent auditors. The
selection of Ernst & Young LLP as independent auditors of each Fund is being
submitted to the shareholders for ratification. A representative of Ernst &

9
<PAGE> 14

Young LLP is expected to be present at the Meeting and will be available to
respond to any appropriate questions raised at the Meeting and may make a
statement.

BOARD OF TRUSTEES RECOMMENDATION

The Board of each Fund recommends that shareholders vote FOR the ratification of
the selection of independent auditors.

ITEM 3. NEW INVESTMENT MANAGEMENT AGREEMENT

INTRODUCTION

Kemper Financial Services, Inc. ("KFS") is the investment adviser and manager
for each Fund. The indirect parent of KFS, which is Kemper Corporation
("Kemper"), has entered into an Agreement and Plan of Merger dated as of May 15,
1995 (the "Merger Agreement"), with Zurich Insurance Company ("Zurich"),
Insurance Partners, L.P. ("IP"), Insurance Partners Offshore (Bermuda), L.P.
("IP Bermuda" and, together with IP, "Insurance Partners") and ZIP Acquisition
Corp. ("ZIP"), whereby ZIP will be merged with and into Kemper and Kemper will
continue as the surviving corporation (the "Kemper merger"). In connection with
the Kemper merger, Kemper has agreed to sell KFS to KFS Acquisition Corp., a
wholly-owned, indirect subsidiary of Zurich, by merging KFS and KFS Acquisition
Corp. (the "KFS Sale"), with the surviving corporation ("New KFS") continuing
with the name "Kemper Financial Services, Inc." The terms of the KFS Sale are
set forth in a separate Agreement and Plan of Merger among Kemper, KFS, KFC and
KFS Acquisition Corp. dated May 15, 1995 (the "KFS Merger Agreement"). It is
currently contemplated that the KFS Sale will occur immediately before or
immediately after the Kemper merger, although it is possible that the KFS Sale
could be deferred until a later date. (The Kemper merger and related KFS Sale
are hereinafter referred to together as the "Merger").

Consummation of the Kemper merger would constitute an "assignment," as that term
is defined in the Investment Company Act of 1940 (the "1940 Act"), of each
Fund's current investment management agreement with KFS. As required by the 1940
Act, each current investment management agreement provides for its automatic
termination in the event of its assignment. In anticipation of the Merger, a new
investment management agreement ("management agreement") between each Fund and
KFS or New KFS (which may be referred to as KFS' successor) is being proposed
for approval by shareholders of each Fund. A copy of the form of the new
management agreement is attached hereto as Exhibit B. THE NEW MANAGEMENT
AGREEMENT FOR EACH FUND IS ON THE SAME TERMS AS THE CURRENT MANAGEMENT
AGREEMENT.

BOARD OF TRUSTEES RECOMMENDATION

The Board of each Fund met on May 5, 1995, May 31, 1995 and June 15, 1995 to
consider the Merger and its anticipated effects upon KFS and the investment
management and other services provided to the Funds by KFS and its affiliates.
On June 15, 1995 the Board of each Fund, including a majority of the trustees
who are not parties to such agreement or interested persons of any such party,

10
<PAGE> 15

voted to approve the new management agreement and to recommend it to
shareholders for their approval.

For information about each Board's deliberations and the reasons for its
recommendation, please see "Board of Trustees Evaluation" near the end of this
Item 3.

The Board of each Fund recommends that shareholders vote FOR approval of the new
management agreement.

INVESTMENT MANAGEMENT AGREEMENT

Each current and new management agreement provides that the Fund's investment
manager will act as investment adviser, manage the Fund's investments,
administer its business affairs, furnish offices, necessary facilities and
equipment, provide clerical, bookkeeping and administrative services, provide
shareholder and information services and permit any of its officers or employees
to serve without compensation as trustees or officers of the Fund if duly
elected to such positions. Under each management agreement, the Fund agrees to
assume and pay the charges and expenses of its operations including, by way of
example, the compensation of the trustees other than those affiliated with the
investment manager, charges and expenses of independent auditors, of legal
counsel, of any transfer or dividend disbursing agent, of any registrar of the
Fund and of the custodian (including fees for safekeeping of securities), costs
of calculating net asset value, all costs of acquiring and disposing of
portfolio securities, interest, if any, on obligations incurred by the Fund,
costs of share certificates, membership dues in the Investment Company Institute
or any similar organization, reports and notices to shareholders, other like
miscellaneous expenses and all taxes and fees to federal, state or other
governmental agencies. KFS from time to time, at its own expense, uses the
services of Kemper Investment Management Company Limited ("KIMCO"), 1 Fleet
Place, London EC4M 7RQ, a wholly owned subsidiary of KFS, with respect to
foreign investments for each Fund that makes foreign investments, including
analysis, research, execution and trading services. It is expected that the
investment manager would continue to use KIMCO (or its successor) after
consummation of the Merger.

Listed below is the annual management fee rate as a percentage of average daily
net assets payable under the management agreement for each Fund except KSCF.
KSCF pays at a base annual management fee rate of .65% of average daily net
assets, subject to upward or downward adjustment from .35% to .95% of average
daily net assets on the basis of the investment performance of the Class A
Shares of the Fund compared with the performance of the Standard & Poor's 500
Stock Index. (See Exhibit B for more information regarding the computation of

11
<PAGE> 16

KSCF's management fee). Exhibit E shows the management fees paid by each Fund to
KFS for the Fund's most recently completed fiscal year.

<TABLE>
<CAPTION>
KBCF KIMBF
KDIF KARGF
KGF KICPF
KHYF KSTIS
APPLICABLE ASSETS KIF KTEC KUSMF KMBF
($000) KGIF KTRF KSIGF KGSF KCRF
- ---------------------------------- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
$0 - $250,000..................... .75 % .58 % .55% .45 % .40 %
$250,000 - $1,000,000............. .72 .55 .52 .43 .38
$1,000,000 - $2,500,000........... .70 .53 .50 .41 .35
$2,500,000 - $5,000,000........... .68 .51 .48 .40 .32
$5,000,000 - $7,500,000........... .65 .48 .45 .38 .30
$7,500,000 - $10,000,000.......... .64 .46 .43 .36 .28
$10,000,000 - $12,500,000......... .63 .44 .41 .34 .26
Over $12,500,000.................. .62 .42 .40 .32 .25
</TABLE>

The expenses of KIF and KGIF, and of other investment companies investing in
foreign securities, can be expected to be higher than for investment companies
investing primarily in domestic securities since the costs of operation are
higher, including custody and transaction costs for foreign securities and
investment management fees.

Except for KMBF, KGSF and KCATF, each management agreement provides that the
Fund's investment manager will reimburse the Fund should the operating expenses
of the Fund, including the investment management fee, but excluding taxes,
interest, distribution fees, extraordinary expenses and brokerage commissions or
transaction costs, and any other properly excludable expenses, exceed on an
annual basis the applicable state expense limitations. The Funds believe that
the most restrictive state expense limitation currently in effect would require
that such operating expenses not exceed 2.5% of the first $30 million of average
daily net assets, 2% of the next $70 million and 1.5% of average daily net
assets over $100 million. Under that state expense limitation, custodian costs
attributable to foreign securities that are in excess of similar domestic
custodian costs are excluded from operating expenses. As to KMBF, KGSF and
KCATF, each management agreement provides that the Fund's investment manager
will reimburse the Fund should operating expenses of the Fund exceed on an
annual basis the following levels: for KMBF and KGSF, 1% of average daily net
assets; and for KCATF, 1.5% of the first $30 million of average daily net assets
and 1% of average daily net assets over $30 million. For this purpose, operating
expenses include the investment management fee but exclude interest, taxes,
extraordinary expenses, brokerage commissions and transaction costs and
distribution fees. The investment management fee and the expense limitation are
computed based upon average daily net assets of each Fund.

Each management agreement provides that the Fund's investment manager shall not
be liable for any error of judgment or of law, or for any loss suffered by the
Fund in connection with the matters to which the management agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of the Fund's investment manager in the performance of

12
<PAGE> 17

its obligations and duties or by reason of its reckless disregard of its
obligations and duties under the management agreement.

Each management agreement may be terminated for such Fund or series thereof
without penalty upon sixty (60) days written notice by either party, or by a
majority vote of the outstanding shares of the Fund or series thereof, and
automatically terminates in the event of its assignment.

The new management agreement for each Fund will be dated as of the date of the
consummation of the Kemper merger. The Kemper merger is expected to occur in the
fourth quarter of 1995, but in no event later than February 28, 1996. The new
management agreement will be in effect for an initial term ending on the same
date as would the current management agreement but for the Kemper merger, and
may continue thereafter from year to year if specifically approved at least
annually by vote of "a majority of the outstanding voting securities" of such
Fund, as defined under the 1940 Act, or by the Board and, in either event, the
vote of a majority of the trustees who are not parties to the agreement or
interested persons of any such party, cast in person at a meeting called for
such purpose.

KFS has acted as investment adviser and manager for each Fund since each Fund,
except KGSF, commenced public offering of its shares as shown below. Also shown
is the date of each current management agreement, the date when the current
management agreement was last approved by the trustees and the shareholders of
each Fund, the purpose of the last submission to shareholders of the current
management agreement and the date to which the current management agreement
continues.

<TABLE>
<CAPTION>
COMMENCEMENT APPROVAL OF CURRENT CURRENT
OF DATE OF AGREEMENT BY AGREEMENT
INVESTMENT CURRENT ------------------------- CONTINUED BY
FUND OPERATIONS AGREEMENT TRUSTEES SHAREHOLDERS TRUSTEES TO
- ------------- ------------ --------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C>
KTEC......... 09/07/48 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KTRF......... 03/02/64 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KGF.......... 04/04/66 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KSCF......... 02/20/69 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KICPF........ 04/15/74 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KNTIS
KMBF....... 04/20/76 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KIMBF...... 11/01/94 11/01/94 07/13/94 10/31/94(c) 03/01/96
KDIF......... 06/23/77 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KHYF......... 01/26/78 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KGSF......... 10/01/79 (a) 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KIF.......... 05/21/86 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KSTIS
KCATF...... 02/17/83 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KNYTF...... 12/31/85 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KFLTF...... 04/25/91 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KTXTF...... 11/01/91 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KOHTF...... 03/22/93 05/28/94 01/25/95 05/25/94(b)(e) 03/01/96
KMITF...... 03/15/95 05/28/94 12/08/94 03/15/95(c) 03/01/96
KNJTF...... 03/15/95 05/28/94 12/08/94 03/15/95(c) 03/01/96
KPATF...... 03/15/95 05/28/94 12/08/94 03/15/95(c) 03/01/96
</TABLE>

13
<PAGE> 18

- ---------------
(a) Date when KFS assumed investment management responsibilities.
(b) The current management agreement was last submitted to shareholders for
approval of an amendment thereto.
(c) The current management agreement was last submitted to shareholders for
approval by the initial shareholder (i.e., KFS) immediately prior to the
commencement of the public offering of shares.
(d) The current management agreement was amended as of 5/28/94 by the Board to
reduce the management fee schedule.
(e) On September 9, 1994, the Boards approved new investment management
agreements with KFS in anticipation of the termination of the current
agreements because of a proposed merger involving Kemper and Conseco, Inc.
(the "Conseco/Kemper Merger"). As with the Merger, consummation of the
Conseco/Kemper Merger would have constituted an "assignment" and, therefore,
a termination of each management agreement. In anticipation of the
Conseco/Kemper Merger and in order to assure that KFS could continue to
serve as investment manager to the Funds, new agreements were approved by
the Boards and submitted to shareholders for approval. By agreement of
Kemper and Conseco, Inc., the Conseco/Kemper Merger did not occur and,
therefore, the new agreements were not voted upon by shareholders.

INFORMATION CONCERNING ZURICH AND THE MERGER

The following information concerning Zurich and Insurance Partners has been
provided to the Funds by Zurich and Insurance Partners, respectively. The
information concerning the Merger has been provided to the Funds by Kemper.

Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of the Zurich Insurance
Group. Zurich and the Zurich Insurance Group provide an extensive range of
insurance products and services, while having branch offices and subsidiaries in
more than 40 countries throughout the world. Zurich Insurance Group is
particularly strong in the insurance of international companies and
organizations. Over the past few years, Zurich's global presence, particularly
in the United States, has been strengthened by means of selective acquisitions.
IP and IP Bermuda are parallel investment partnerships established to
participate jointly in acquisitions, recapitalizations, demutualizations and
other structured transactions in the insurance industry. (IP and IP Bermuda are
together referred to as "Insurance Partners"). Insurance Partners was formed by
Centre Reinsurance Holdings Limited (a subsidiary of Zurich), Keystone, Inc.
(formerly the Robert M. Bass Group, Inc.) and The Chase Manhattan Corporation.
IP is located at 201 Main Street, Fort Worth, TX 76102 and IP Bermuda is located
at 41 Cedar Avenue, Hamilton HM-EX, Bermuda. ZIP is a newly-formed
majority-owned subsidiary of Zurich. ZIP is approximately 80% owned by Zurich
Holding Company of

14
<PAGE> 19

America, Inc. (which, in turn, is a wholly-owned subsidiary of Zurich) and
13.274% and 6.726% owned by IP and IP Bermuda, respectively. ZIP is located at
1400 American Lane, Schaumburg, IL 60196. KFS Acquisition Corp. is a
newly-formed wholly-owned subsidiary of Zurich Holding Company of America, Inc.
Prior to consummation of the KFS sale, New KFS will be registered as an
investment adviser under the Investment Advisers Act of 1940. KFS Acquisition
Corp., a Delaware corporation, and Zurich Holding Company of America, Inc., a
Delaware corporation, are both located at 1400 American Lane, Schaumburg, IL
60196.

Under the Merger Agreement, ZIP will merge with and into Kemper, with Kemper as
the surviving corporation. Each share of Kemper common stock will be converted
in the Kemper merger into the right to receive $49.50 cash, for an aggregate
acquisition price of approximately $2.1 billion. The closing of the Kemper
merger will take place on the third business day after all the closing
conditions are satisfied, but not later than February 28, 1996. It is expected
that the Kemper merger will close in the fourth quarter of 1995. However, if the
closing conditions are satisfied prior to January 4, 1996, ZIP may elect to
delay the closing of the Kemper merger to a later date (not later than January
4, 1996). It is currently contemplated that contemporaneously with the Kemper
merger closing (either immediately before or immediately after) Kemper will sell
KFS to Zurich by merging KFS and KFS Acquisition Corp., with the surviving
corporation ("New KFS") continuing with the name "Kemper Financial Services,
Inc." It is possible, however, that the Kemper merger could be consummated, but
that the KFS Sale could be deferred until a later date (not later than January
4, 1996). Immediately prior to the KFS Sale, KFS will cause those of its
wholly-owned subsidiaries designated by Zurich to be merged with and into,
direct or indirect, wholly-owned subsidiaries of New KFS (each of which may
later be referred to as the successor to such KFS subsidiaries). The
consideration for the KFS Sale is $900 million although, at the election of
Zurich, it may be increased to $1 billion.

It is further contemplated that prior to the Merger: (1) an employee stock
ownership plan will acquire from KFC approximately 55% of the voting common
stock of a new corporation ("Newco") formed to acquire Kemper's securities
brokerage segment, principally Kemper Securities, Inc. ("KSI"); (2) non-voting
common stock representing an approximately 1% equity interest in Newco will be
distributed to the management of KSI; and (3) the balance of Newco's voting
common stock will be distributed to the holders of Kemper common stock (the "KSI
ESOP Sale").

It is further contemplated that prior to the Merger: (1) KFS will transfer the
net cash proceeds from the sale of State Street Boston Corporation stock owned
by KFS (approximately $105 million) to Kemper; (2) KFS will transfer $50 million
in cash to Kemper; (3) KFS will transfer to Kemper the proceeds of its sale of
Supervised Services Company (approximately $23 million); and (4) at the written
request of ZIP, KFS or any of its subsidiaries will dividend or otherwise
transfer cash to Kemper in such amounts as ZIP may reasonably request.

To confirm and clarify certain contractual relationships between Kemper and
Lumbermens Mutual Casualty Company ("Lumbermens") prior to, as a result of

15
<PAGE> 20

and following the Merger, Lumbermens, Zurich, Insurance Partners, ZIP, Kemper
and KFS entered into a letter agreement dated May 15, 1995 (the "Lumbermens
Agreement"). The Lumbermens Agreement, among other things, (1) permits the
continued use of the "Kemper" name by Kemper and KFS (or its successor) and (2)
obligates New KFS to reimburse Lumbermens for certain amounts that may be due to
Lumbermens by Kemper, if Kemper has not paid such amounts. As of March 31, 1995,
the total potential liability was $35.2 million.

The Lumbermens Agreement provides that, to the extent permitted by law,
Lumbermens intends to continue to engage KFS (or its successor), or its
subsidiaries, for at least three years to provide investment management services
for not less than 80% of the investment assets of Lumbermens (excluding benefit
plan assets held in trust) managed by KFS or its subsidiaries as of May 15,
1995. In connection therewith, the Lumbermens Agreement permits Lumbermens, and
Lumbermens intends, contemporaneously with the KFS Sale to invest in New KFS an
aggregate amount of up to $100 million or such lesser amount as is necessary to
purchase (1) either 9.9% of the shares of common stock of New KFS or an amount
of convertible preferred stock of New KFS that is convertible into 9.9% of the
shares of New KFS and (2) pro rata with Zurich, all other equity and debt
securities purchased from New KFS by Zurich. In the event of such investment,
Lumbermens will receive representation on the Board of Directors of New KFS that
is proportionate to Lumbermens' equity interest in New KFS; but in any event, at
least one individual designated by Lumbermens will be elected to the Board of
Directors of New KFS. It is currently contemplated that Lumbermens would
designate Mr. David B. Mathis for election to the Board of Directors of New KFS
(see "Other Information -- KFS"). The address of Lumbermens is: One Kemper
Drive, Long Grove, Illinois 60049. If the percentage of Lumbermens' investment
assets managed by New KFS drops below 50% of Lumbermens' investment assets
(excluding benefit plan assets held in trust), then Zurich or New KFS may
purchase Lumbermens investment in New KFS at fair market value. On the seventh
anniversary of the closing of the KFS Sale, Lumbermens will have the right to
demand that all its shares of New KFS be registered under the Securities Act of
1933.

Zurich has informed the Funds that as of May 31, 1995, no stockholder of Zurich,
either individually or as a "group" (as defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended), is known to beneficially own more
than 10% of the outstanding shares of Zurich's voting securities. KFS informed
the Funds that, as of May 31, 1995, KFS shared power to vote and dispose of
189,980 preferred shares of Centre Reinsurance Holdings Limited, a Zurich
affiliate, which were held by various non-investment company clients of KFS.

The common stockholders of Kemper will be voting on the Kemper merger. The
Merger is subject to various conditions such as governmental and insurance
regulatory approvals and filings and consummation of the KSI ESOP Sale. Neither
the Kemper merger nor the KFS Sale is subject to financing, although each may
involve financing. Zurich has guaranteed the obligations of ZIP and Insurance
Partners to consummate the Kemper merger and has guaranteed the obligations of
KFS Acquisition Corp. to consummate the KFS Sale.

16
<PAGE> 21

It is a condition to the closing of the Merger that all directors and officers
of Kemper and its subsidiaries (including KFS), whose resignations have been
requested by ZIP, not less than ten days prior to the closing, shall have
resigned or been removed from office, effective as of the closing. No such
resignations have been requested nor are currently contemplated for KFS and its
subsidiaries.

The Merger Agreement also provides as a condition to the closing of the Merger
that the shareholders of registered investment companies for which Kemper or any
subsidiary acts as investment adviser or sub-adviser (the "KFS Advised Funds")
representing at least 90% of the total net assets of the KFS Advised Funds as of
April 30, 1995 shall have approved the new management agreements (the "90%
condition"). At that date, net assets of the KFS Advised Funds totalled
approximately $42 billion. If, for example, a "majority" (as defined under
"Miscellaneous") of the shares of each of enough KFS Advised Funds to total at
least $38 billion (90% of $42 billion) were voted to approve new management
agreements, then the 90% condition would be satisfied. If the shareholders of a
particular Fund do not approve the new management agreement, Kemper, Zurich and
Insurance Partners nevertheless intend to proceed with the Merger (assuming all
conditions precedent have been satisfied or waived, including the 90%
condition). In that event, the Board of such Fund would take such action as it
deemed to be in the best interests of its shareholders, including, if necessary,
seeking exemptive relief from the SEC so that KFS (or its successor) could
provide investment management services to the Fund on an interim basis. If the
Merger is not consummated for any reason, then the current management agreement
with each Fund will continue.

BOARD OF TRUSTEES EVALUATION

On April 10, 1995, the Board of each Fund was informed that Kemper had entered
into an agreement in principle with an investor group led by Zurich pursuant to
which Kemper would be acquired by the investor group in a merger transaction and
KFS would be sold. Thereafter, each Board was given Zurich financial reports and
other information regarding Zurich. In addition, counsel to the Funds and the
independent trustees prepared and distributed an analysis of the Boards'
fiduciary obligations. At a special meeting on May 5, 1995, the trustees
discussed the initial information provided about Zurich and reviewed their
fiduciary obligations. Zurich senior management personnel, who were present by
invitation, presented a review of matters including Zurich's history, strategy
and general plans. There was extended discussion of, and questioning about,
Zurich's plans for KFS and the Funds, some of which were to be addressed in
definitive merger documents (which had not yet been executed). Each Board agreed
at that time to hold another special meeting for further consideration of the
Merger and its effect on the Funds. Prior to that meeting, and from time to time
thereafter, each Board received a variety of materials concerning Zurich and the
Merger. The definitive merger documents were signed on May 15, 1995 and the
special Board meeting was held on May 31, 1995. There was further discussion of,
and questioning about, the terms of the Merger and Zurich's plans for New KFS
and the Funds, including the financial aspects of the Merger and proforma
financial statements of New KFS. As a result of their investigation and
consideration of the Merger and the new management agreements, at its meeting on
June 15, 1995, the Board of each Fund voted to approve the new management

17
<PAGE> 22

agreement and to recommend it to the shareholders of the Fund for their
approval.

During its deliberations, each Board used outside assistance in its analysis of
financial and other aspects of the Merger to help evaluate the potential effects
upon KFS and the Funds. Throughout the review process the independent trustees
of each Board had the assistance of legal counsel.

Each Board obtained from KFS and Zurich information regarding the respective
organizations, the Merger, and the future plans of the parties. Included in the
information furnished to and discussed with the Boards were financial statements
and other representations of financial condition of Zurich and certain of its
subsidiaries, independent reports and analyses regarding Zurich and pro forma
financial statements of New KFS giving effect to the Merger. The New KFS pro
forma financial statements reflected anticipated borrowings by New KFS of $650
million, the sale of State Street Boston Corporation stock holdings and transfer
of the proceeds thereof, the $50 million dividend to Kemper and the sale of
Supervised Services Company and transfer of the proceeds thereof.

In connection with their deliberations, the Boards of the Funds obtained certain
assurances from Zurich, including the following:

- - Zurich looks upon New KFS as a core business in a core strategic market and
expects it to be an important part of Zurich's global asset management
strategy. With that focus, Zurich will devote to New KFS and its affairs all
attention and resources that are necessary to provide for each Fund top
quality investment management, shareholder, administrative and product
distribution services.

- - The Merger will not result in any change in any Fund's investment objectives
or policies.

- - The Merger is not expected to result in any adverse change in the investment
management or operations of the Funds, or the investment personnel managing
such Funds; Zurich neither plans nor proposes to make any material change in
the composition of senior management or personnel of KFS, except to fill
certain open positions; and Zurich neither plans nor proposes to make any
adverse change in the manner in which investment advisory services are
rendered to each Fund.

- - Zurich is committed to the continuance, without interruption, of services of
the type and quality currently provided by KFS and its subsidiaries, or
superior thereto.

- - Zurich plans to maintain or enhance the KFS facilities and organization.

- - The KFS senior management and the Boards will be involved in decisions
materially affecting the KFS organization as it relates to the Funds.

- - In order to retain and attract key personnel, Zurich intends for New KFS to
maintain overall compensation and performance incentive policies and practices
at market levels or better.

Zurich, Kemper and KFS assured each Board that they intend to comply with
Section 15(f) of the 1940 Act. Section 15(f) provides a non-exclusive safe
harbor for an investment adviser to an investment company or any of its
affiliated

18
<PAGE> 23

persons to receive any amount or benefit in connection with a change in control
of the investment adviser so long as two conditions are met. First, for a period
of three years after the transaction, at least 75% of the board members of the
investment company must not be interested persons of such investment adviser.
The Board of each Fund presently consists of nine trustees, two of whom, Messrs.
David B. Mathis and Stephen B. Timbers, are interested persons of KFS. The same
nine trustees are also proposed for election to the Board of each Fund at the
Meeting. (See Item 1 -- "Election of Board of Trustees"). Accordingly, the
composition of the Board of each Fund, currently and as proposed, would be in
compliance with this provision of Section 15(f)*. Second, an "unfair burden"
must not be imposed upon the investment company as a result of such transaction
or any express or implied terms, conditions or understandings applicable
thereto. The term "unfair burden" is defined in Section 15(f) to include any
arrangement during the two-year period after the transaction whereby the
investment adviser, or any interested person of any such adviser, receives or is
entitled to receive any compensation, directly or indirectly, from the
investment company or its shareholders (other than fees for bona fide investment
advisory or other services) or from any person in connection with the purchase
or sale of securities or other property to, from or on behalf of the investment
company (other than bona fide ordinary compensation as principal underwriter for
such investment company). Zurich, Kemper and KFS are not aware of any express or
implied term, condition, arrangement or understanding that would impose an
"unfair burden" on any Fund as a result of the Merger. Zurich, Kemper and KFS
have agreed that they, and their affiliates, will take no action that would have
the effect of imposing an "unfair burden" on any Fund as a result of the Merger.
Zurich and Kemper have undertaken to pay the costs of preparing and distributing
proxy materials to and of holding the meetings of the Funds' shareholders as
well as other fees and expenses in connection with the Merger, including the
fees and expenses of legal counsel to the Funds and the independent trustees and
for other outside assistance to help analyze the Merger from a financial
perspective.

In connection with each Board's approval of the new management agreement, the
Board considered that the terms of the Merger Agreement and the KFS Merger
Agreement do not require any change in the Fund's investment objective or
policies, the investment management or operation of the Fund, or the investment
personnel managing the Fund. If, after the Merger, changes in New KFS are
proposed that might materially affect its services to a Fund, the Fund's Board
will consider the effect of those changes and take such action as it deems
advisable under the circumstances.

In evaluating each new management agreement, each Board took into account that
the new management agreement for each Fund, including the terms relating to the
services to be provided and the fees and expenses payable by such Fund, is on
the same terms as the current management agreement. Each Board noted that, in
previously approving the continuation of the current management agreements, the
Board had considered a number of factors, including the nature and quality of
services provided by KFS; investment performance, both of the

- ---------------

* After consummation of the Merger and subject to compliance with Section 15(f),
it is expected that
a senior executive of Zurich will be proposed to be nominated to each Board.

19
<PAGE> 24

Fund itself and relative to that of competitive investment companies; investment
management fees and expense ratios of the Fund and competitive investment
companies; KFS profitability from managing the Funds; fall-out benefits to KFS
from its relationship to the Funds, including revenues derived from services
provided to the Funds by affiliates of KFS; and the potential benefits to KFS
and to the Funds and their shareholders of receiving research services from
broker/dealer firms in connection with the allocation of portfolio transactions
to such firms.

The Board discussed the Merger, the financial condition of Zurich and the pro
forma financial statements of New KFS with the senior management of KFS and
Zurich and among themselves. Zurich senior management personnel and
representatives advised the Board that Zurich expects the operating cash flows
from New KFS to be more than sufficient to service debt and pay for operating
and other expenses. The Board also considered that Zurich is a large,
well-established company with substantial resources and, as noted above, has
undertaken to devote such resources as are necessary to provide each Fund with
top quality services.

As a result of their investigation and consideration of the Merger and the new
management agreements, at its meeting on June 15, 1995, the Board of each Fund
voted to approve the new management agreement and to recommend it to the
shareholders of the Fund for their approval.

The Board of each Fund recommends that shareholders vote FOR approval of the new
management agreement.

ITEM 4. NEW RULE 12B-1 DISTRIBUTION PLAN
(FOR CLASS B AND CLASS C SHAREHOLDERS ONLY)

INTRODUCTION

Rule 12b-1 under the 1940 Act (the "Rule"), provides, among other things, that
an investment company (mutual fund) may bear expenses of distributing its shares
only pursuant to a plan (a "Rule 12b-1 Plan") adopted in accordance with the
Rule. Kemper Distributors, Inc. ("KDI"), acting as principal underwriter and
distributor for each Fund, distributes each Fund's Class B Shares and Class C
Shares pursuant to a Rule 12b-1 Plan.

Consummation of the Kemper merger may constitute an "assignment," as that term
is defined in the 1940 Act, of each Fund's Rule 12b-1 Plan. Each Fund's Rule
12b-1 Plan provides for its automatic termination in the event of its
assignment. In anticipation of the Merger, a new Rule 12b-1 Plan is being
submitted for shareholder approval of each Fund's Class B and Class C
shareholders. THE NEW RULE 12B-1 PLAN IS ON THE SAME TERMS AS THE FUND'S CURRENT
RULE 12B-1 PLAN. A form of the new Rule 12b-1 Plan for each Fund is attached
hereto as Exhibit C. NO CHANGE IN FEES IS BEING PROPOSED.

On June 15, 1995, the Board of each Fund, including a majority of the "non-
interested" trustees, voted to approve the new Rule 12b-1 Plan for each Fund,
and directed that it be submitted to the Class B and Class C shareholders of
each Fund at the Meeting, along with a recommendation that such shareholders
approve such Rule 12b-1 Plan.

20
<PAGE> 25

If the new Rule 12b-1 Plan is approved by a class, it will become effective for
that class and will replace the current Rule 12b-1 Plan upon consummation of the
Kemper merger. If the shareholders of a class of a Fund do not approve the new
Rule 12b-1 Plan, the Board of that Fund would consider appropriate action.

DESCRIPTION OF THE NEW RULE 12B-1 PLAN

As noted above, a form of the new Rule 12b-1 Plan is attached as Exhibit C and
this summary is qualified in its entirety by reference to Exhibit C. THE TERMS
OF THE NEW RULE 12B-1 PLAN DESCRIBED BELOW ARE THE SAME AS IN THE CURRENT RULE
12B-1 PLAN FOR EACH FUND.

Under each Fund's Rule 12b-1 Plan, KDI receives a distribution fee, payable as
an expense of the Class B Shares and the Class C Shares, which KDI uses to pay
for distribution services for those classes. KDI bears all the expenses of
providing such services, including the payment of any commissions or
distribution fees. 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 SEC.
KDI may enter into related selling group agreements with various broker-dealers,
including affiliates of KDI, that provide distribution services to investors.
KDI also may provide some of the distribution services. (See "Other Information
- -- Underwriter" below.) Before February 1, 1995, KFS served as each Fund's
principal underwriter. On February 1, 1995, KFS assigned and transferred to KDI,
and KDI assumed, all of the rights, interests, liabilities, duties and
obligations of KFS under the underwriting agreement with each Fund (which
agreement also constitutes the Fund's Rule 12b-1 Plan for Class B and Class C
Shares). Such assignment and assumption did not constitute an "assignment" under
the 1940 Act, since there was no change of control because KDI is a wholly-owned
subsidiary of KFS.

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
below. Banks are currently prohibited under the Glass-Steagall Act from
providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. Management does not believe that termination of a
relationship with a bank would result in any material adverse consequences to a
Fund.

Class B Shares. Each Fund's Class B Shares are sold to the public at net asset
value with a contingent deferred sales charge ("CDSC"), and automatic conversion
to Class A after a specified period of time. KDI receives a fee from each Fund,
payable monthly, at the annual rate of .75 of 1% of average daily net assets of
each Fund attributable to Class B Shares. This fee is accrued daily as an

21
<PAGE> 26

expense of Class B Shares. KDI also receives any CDSC. KDI currently compensates
firms for sales of Class B Shares at a commission rate of 3.75%.

Class C Shares. Each Fund's Class C Shares are sold to the public at net asset
value without a CDSC. KDI receives a fee from each Fund, payable monthly for as
long as the shares are owned, at the annual rate of .75 of 1% 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 pays firms for sales of
Class C Shares a distribution fee, payable quarterly, at an annual rate of .75
of 1% of net assets attributable to Class C Shares maintained and serviced by
the firm. A firm becomes eligible for the distribution fee based upon assets in
accounts in the month of purchase and the fee continues until terminated by KDI
or a Fund.

The table below shows, as to the Rule 12b-1 Plan for the Class B Shares and the
Class C Shares of each Fund, the date adopted, the date of last amendment (if
any), the date last approved by the trustees and the date to which it continues.

<TABLE>
<CAPTION>
CLASS B RULE 12B-1 PLAN
----------------------------------------------
DATE APPROVAL DATE
FUND ADOPTED BY TRUSTEES CONTINUED TO
- ---------------------------- -------- ----------- ------------
<S> <C> <C> <C>
KTEC........................ 05/31/94 01/25/95(b)(d) 03/1/96
KTRF........................ 05/31/94 01/25/95(b)(d) 03/1/96
KGF......................... 05/31/94 01/25/95(b)(d) 03/1/96
KSCF........................ 05/31/94 01/25/95(b)(d) 03/1/96
KICPF....................... 05/31/94 01/25/95(b)(d) 03/1/96
KNTIS
KMBF...................... 05/31/94 01/25/95(b)(d) 03/1/96
KIMBF..................... 11/01/94 01/25/95 03/1/96
KDIF........................ 05/31/94 01/25/95(b)(d) 03/1/96
KHYF........................ 05/31/94 01/25/95(b)(d) 03/1/96
KGSF........................ 05/31/94 01/25/95(b)(d) 03/1/96
KIF......................... 05/31/94 01/25/95(b)(d) 03/1/96
KSTIS
KCATF..................... 05/31/94 01/25/95(b)(d) 03/1/96
KNYTF..................... 05/31/94 01/25/95(b)(d) 03/1/96
KFLTF..................... 05/31/94 01/25/95(b)(d) 03/1/96
KTXTF..................... 05/31/94 01/25/95(b)(d) 03/1/96
KOHTF..................... 05/31/94 01/25/95(b)(d) 03/1/96
KMITF..................... 03/15/95 12/08/94(c) 03/1/96
KNJTF..................... 03/15/95 12/08/94(c) 03/1/96
KPATF..................... 03/15/95 12/08/94(c) 03/1/96
KP
KCRF...................... 12/01/91(a) 09/09/94(d) 12/01/95
KUSMF..................... 12/01/91(a) 01/25/95(b)(d) 03/1/96
KSIGF..................... 12/01/91(a) 01/25/95(b)(d) 03/1/96
KARGF....................... 05/31/94 01/25/95(b)(d) 03/1/96
KBCF........................ 05/31/94 01/25/95(b)(d) 03/1/96
KGIF........................ 05/31/94 01/25/95(b)(d) 03/1/96
</TABLE>

22
<PAGE> 27

<TABLE>
<CAPTION>
CLASS C RULE 12B-1 PLAN
----------------------------------------------
DATE APPROVAL DATE
FUND ADOPTED BY TRUSTEES CONTINUED TO
- ---------------------------- -------- ----------- ------------
<S> <C> <C> <C>
KTEC........................ 05/31/94 01/25/95(b)(d) 03/1/96
KTRF........................ 05/31/94 01/25/95(b)(d) 03/1/96
KGF......................... 05/31/94 01/25/95(b)(d) 03/1/96
KSCF........................ 05/31/94 01/25/95(b)(d) 03/1/96
KICPF....................... 05/31/94 01/25/95(b)(d) 03/1/96
KNTIS
KMBF...................... 05/31/94 01/25/95(b)(d) 03/1/96
KIMBF..................... 11/01/94 01/25/95 03/1/96
KDIF........................ 05/31/94 01/25/95(b)(d) 03/1/96
KHYF........................ 05/31/94 01/25/95(b)(d) 03/1/96
KGSF........................ 05/31/94 01/25/95(b)(d) 03/1/96
KIF......................... 05/31/94 01/25/95(b)(d) 03/1/96
KSTIS
KCATF..................... 05/31/94 01/25/95(b)(d) 03/1/96
KNYTF..................... 05/31/94 01/25/95(b)(d) 03/1/96
KFLTF..................... 05/31/94 01/25/95(b)(d) 03/1/96
KTXTF..................... 05/31/94 01/25/95(b)(d) 03/1/96
KOHTF..................... 05/31/94 01/25/95(b)(d) 03/1/96
KMITF..................... 03/15/95 12/08/94(c) 03/1/96
KNJTF..................... 03/15/95 12/08/94(c) 03/1/96
KPATF..................... 03/15/95 12/08/94(c) 03/1/96
KP
KCRF...................... 05/31/94 09/09/94(d) 12/01/95
KUSMF..................... 05/31/94 01/25/95(b)(d) 03/1/96
KSIGF..................... 05/31/94 01/25/95(b)(d) 03/1/96
KARGF....................... 05/31/94 01/25/95(b)(d) 03/1/96
KBCF........................ 05/31/94 01/25/95(b)(d) 03/1/96
KGIF........................ 05/31/94 01/25/95(b)(d) 03/1/96
</TABLE>

- ---------------
(a) Amended effective May 27, 1994 to redesignate "Initial Shares" as Class B
Shares.

(b) Trustee approval of continuation of Rule 12b-1 Plan with KDI. Assignment of
Rule 12b-1 Plan from KFS to KDI was previously approved by trustees on
December 8, 1994.

(d) On September 9, 1994, the Boards approved new Rule 12b-1 Plans with KFS in
anticipation of the termination of the current Rule 12b-1 Plans because of a
proposed merger involving Kemper and Conseco, Inc. (the "Conseco/Kemper
Merger"). As with the Merger, consummation of the Conseco/Kemper Merger
would have constituted an "assignment" and, therefore, a termination of each
Rule 12b-1 Plan. In anticipation of the Conseco/Kemper Merger new 12b-1
Plans were approved by the Boards and submitted to shareholders for
approval. By agreement of Kemper and Conseco, Inc., the Conseco/Kemper
Merger did not occur and, therefore, the new 12b-1 Plans were not voted upon
by shareholders.

23
<PAGE> 28

The table below shows the distribution fees paid by each Fund to KFS (as
predecessor to KDI) for its Class B Shares and Class C Shares for the most
recent fiscal year of that Fund. Information is not provided for KIMBF, KMITF,
KNJTF and KPATF because they recently commenced operations and do not yet have
fiscal year data.

<TABLE>
<CAPTION>
FISCAL CLASS B RULE 12B-1 PLAN FEES CLASS C RULE 12B-1 PLAN FEES
FUND YEAR END PAID TO KFS BY FUND ($000) PAID TO KFS BY FUND ($000)
- ------------ -------- ---------------------------- ----------------------------
<S> <C> <C> <C>
KTEC........ 10/31/94 $ 4 $0
KTRF........ 10/31/94 $ 3,909 $3
KGF......... 09/30/94 $ 1,794 $2
KSCF........ 09/30/94 $ 390 $1
KICPF....... 10/31/94 $ 31 $1
KNTIS
KMBF...... 09/30/94 $ 30 $1
KDIF........ 10/31/94 $ 922 $1
KHYF........ 09/30/94 $ 2,493 $3
KGSF........ 10/31/94 $ 19 $1
KIF......... 10/31/94 $ 48 $1
KSTIS
KCATF..... 08/31/94 $ 3 $0
KNYTF..... 08/31/94 $ 2 $0
KFLTF..... 08/31/94 $ 1 $0
KTXTF..... 08/31/94 $ 0 $0
KOHTF..... 08/31/94 $ 0 $0
KP
KCRF...... 07/31/94 $ 1,790 $0
KUSMF..... 07/31/94 $ 23,535 $0
KSIGF..... 07/31/94 $ 2,044 $0
KARGF....... 08/31/94 $ 3 $1
KBCF........ 10/31/94 $ 4 $0
KGIF........ 12/31/94 $ 146 $0
</TABLE>

The new Rule 12b-1 Plan will be in effect for an initial term ending on the same
date as would the current Rule 12b-1 Plan but for the Kemper merger and may
continue thereafter from year to year for a class if specifically approved at
least annually by vote of "a majority of the outstanding voting securities" of
that class, as defined under the 1940 Act, or by the Board, including, in either
event, the vote of a majority of the "non interested" trustees, cast in person
at a meeting called for such purpose.

Pursuant to the new Rule 12b-1 Plan, KDI will prepare reports to the Board of a
Fund on a quarterly basis for the Fund's Class B Shares and Class C Shares
showing the amounts paid to the various firms and such other information as from
time to time the Board may reasonably request. The Rule requires the Board to
review such reports at least quarterly.

In approving the new Rule 12b-1 Plan, the Board of each Fund determined, as with
the current Rule 12b-1 Plan, that there is a reasonable likelihood that the

24
<PAGE> 29

new Rule 12b-1 Plan would benefit the Fund and its shareholders. In doing so,
each Board considered several factors, including that the new Rule 12b-1 Plan
would (i) enable investors to choose the purchasing option best suited to their
individual situations, thereby encouraging current shareholders to make
additional investments in each Fund and attracting new investors and assets to
the Funds to the benefit of each Fund and its shareholders, (ii) facilitate
distribution of each Fund's shares, (iii) help maintain the competitive position
of each Fund in relation to other funds that have implemented or are seeking to
implement similar distribution arrangements; and (iv) permit possible economies
of scale through increased Fund size.

BOARD OF TRUSTEES RECOMMENDATION

As a result of its consideration of the foregoing factors, the Board of each
Fund voted to approve the new Rule 12b-1 Plans and to submit them to the
shareholders for their approval.

The Board of each Fund recommends that shareholders vote FOR approval of the new
Rule 12b-1 Plan.

OTHER INFORMATION

KFS

KFS is a wholly owned subsidiary of Kemper Financial Companies, Inc., ("KFC"), a
financial services holding company. Kemper, an insurance and financial services
holding company, owns more than 99% of the voting securities of KFC. The address
of KFS is 120 South LaSalle Street, Chicago, Illinois 60603. The address of KFC
and Kemper is One Kemper Drive, Long Grove, Illinois 60049.

Since June 30, 1993, no trustee or nominee for election as a trustee of any Fund
purchased or sold securities, or as of May 31, 1995, beneficially owned in the
aggregate, more than 1% of the outstanding securities of KFC, Kemper or Zurich.
As of May 31, 1995, none of the non-interested trustees, or non-interested
nominees, beneficially owned any securities of KFC, Kemper or Zurich.

The investment companies to which KFS renders investment management services,
and the related management fees, are identified in Exhibit D.

The names, addresses and principal occupations of the principal executive
officer and the directors of KFS are as follows:

<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATION
- ----------------------------- --------------------------------------
<S> <C>
James R. Boris, Director Chairman and Chief Executive Officer,
77 West Wacker Drive Kemper Securities, Inc. and Executive
Chicago, Illinois 60601 Vice President, Kemper
David B. Mathis, Director Chairman and Chief Executive Officer,
One Kemper Drive Kemper
Long Grove, Illinois 60049
</TABLE>

25
<PAGE> 30

<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATION
- ----------------------------- --------------------------------------
<S> <C>
John E. Neal, Director President and Chief Operating Officer,
120 South LaSalle Street KFS
Chicago, Illinois 60603
John E. Peters, Director Senior Executive Vice President, KFS
120 South LaSalle Street
Chicago, Illinois 60603
Stephen B. Timbers, Chairman, President and Chief Operating Officer,
Chief Executive Officer and Kemper; Chairman, Chief Executive
Director Officer and Chief Investment Officer,
120 South LaSalle Street KFS
Chicago, Illinois 60603
</TABLE>

Upon consummation of the KFS Sale, it is expected that Messrs. Mathis, Neal,
Peters and Timbers and one or more senior executive officers of Zurich will
become directors of New KFS.

CUSTODIAN AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary Trust Company
("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as custodian, and
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02210, as sub-custodian, have custody of all securities and cash of each Fund
maintained in the United States. The Chase Manhattan Bank, N.A., Chase MetroTech
Center, Brooklyn, New York 11245, as custodian, has custody of all securities
and cash of the Funds held outside 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 the Funds. IFTC is also each Fund's transfer
agent and dividend-paying agent. Prior to February 1, 1995, IFTC was owned
equally by KFS and DST Systems, Inc., a company that is not affiliated with KFS.
On January 31, 1995, KFS and DST Systems, Inc. sold IFTC to State Street Boston
Corporation. Pursuant to a services agreement with IFTC, Kemper Service Company
("KSVC"), an affiliate of KFS, serves as "Shareholder Service Agent."

IFTC receives an annual fee as custodian for each Fund, payable monthly, at a
rate of $.10 per $1,000 of average monthly net assets of the Fund plus certain
transaction charges and out-of-pocket expense reimbursement. IFTC receives as
transfer agent, and pays to KSVC, annual account fees of $6 per account (a
maximum of $8 for KMBF, KSTIS and KCRF accounts) plus account set up,
maintenance, transaction and out-of-pocket expense reimbursement. IFTC's fee is
reduced by certain earnings credits in favor of the Funds.

For the most recently completed fiscal year the Funds incurred custodian and
transfer agent fees to IFTC and IFTC remitted shareholder service fees to KSVC
as set forth in Exhibit E. It is anticipated that KSVC (or its successor) will
continue to provide transfer agent services after consummation of the Merger.

ADMINISTRATIVE SERVICES. Various financial services firms, such as broker-dealer
firms or banks ("firms"), provide information and administrative services and
facilities for their customers or clients who are shareholders of the Funds
pursuant to agreements with KDI. Before February 1, 1995, KFS served as each
Fund's administrator. KDI has entered into an administrative services agreement

26
<PAGE> 31

with each Fund ("administrative agreements") to provide information and
administrative services to Fund shareholders. Such administrative services and
assistance may include, but are not limited to, establishing and maintaining
shareholder accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Funds and their special
features, and such other 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 the annual rate of up to .25 of 1%
of average daily net assets of the Fund. KDI then pays each firm a service fee
at an annual rate of up to .25 of 1% of net assets of those accounts in each
Fund that it maintains and services, in accordance with the schedule set forth
in Exhibit E. The fees are calculated monthly and payable quarterly until
terminated by KDI or the Fund. Firms to which service fees may be paid include
broker-dealers affiliated with KDI.

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 the Funds. Currently, however,
the administrative services fee payable to KDI is based only upon Fund assets in
accounts for which there is a firm listed on a Fund's records 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 the Funds while this procedure is
in effect will depend upon the proportion of Fund assets in accounts for which
there is a firm of record, as well as (for KARGF, KDIF, KGIF, KGSF, KHYF, KICPF,
KNTIS and KSTIS) the date when shares representing such assets were purchased.
The Board of a Fund may, in the future, approve basing the fee to KDI on all
Fund assets or increasing the fee to .25 of 1% of average daily net assets
without regard to the date of purchase.

Set forth in Exhibit E are the administrative services fees paid by each Fund to
KFS (as predecessor to KDI) during the most recent fiscal year and the effective
rate at which each Fund paid administrative services fees. It is anticipated
that KDI (or its successor) will continue to provide administrative services
after consummation of the Merger.

UNDERWRITER. KDI, acting as principal underwriter for each Fund, prepares and
distributes literature relating to the Fund and its investment performance and
circulates advertising and public relations material. Each Fund pays for
registering its shares with the SEC, while KDI pays the cost of qualifying and
maintaining the qualification of the Fund's shares for sale under the securities
laws of the various states. Before February 1, 1995, KFS served as each Fund's
principal underwriter. It is expected that KDI (or its successor) will continue
to serve as each Fund's underwriter after consummation of the Merger.

Class A Shares. Each Fund's Class A Shares are sold to the public at an offering
price which is the net asset value plus a sales commission equal to a percentage
of the offering price ranging from 5.75% down to 0% for KBCF, KGF, KIF, KSCF,
KTEC and KTRF; from 4.50% down to 0% for KDIF, KGIF, KGSF, KHYF,

27
<PAGE> 32

KICPF, KNTIS, KSTIS and KP-KUSMF; and from 3.50% down to 0% for KARGF and
KP-KSIGF, depending upon the aggregate purchase price involved. Class A Shares
of KCRF are not subject to a sales commission, but are available only on
exchange or conversion from Class B Shares. KDI receives no compensation from
the Funds as principal underwriter for Class A Shares. The Fund receives in all
cases the full net asset value of the shares sold and KDI retains the sales
commission, from which it allows commissions to financial services firms and
pays costs of distribution.

Set forth in Exhibit E as to each Fund during its most recent fiscal year are
the commissions retained by KFS (as predecessor to KDI) and allowed by KFS as
commissions to financial services firms affiliated with KFS.

Class B and C Shares. See Item 4 -- New Rule 12b-1 Distribution Plan.

Class I Shares. Each Fund's Class I Shares are sold at net asset value without a
front-end sales load and are not subject to a CDSC, distribution fee or service
fee. Class I Shares are offered only for purchase by affiliated employee benefit
plans and certain institutional investors.

ALLOCATION OF PORTFOLIO TRANSACTIONS. KFS is the investment manager for the
Funds and KFS and its affiliates also furnish investment management services to
other clients including the KFS Advised Funds, Kemper and the Kemper insurance
companies. KFS is the sole shareholder of Kemper Asset Management Company and
Kemper Investment Management Company Limited. These three entities share some
common research and trading facilities. At times investment decisions may be
made to purchase or sell the same investment securities for one or more Fund and
for one or more of the other clients advised by KFS. When two or more of such
clients are simultaneously engaged in the purchase or sale of the same security,
the transactions are allocated as to amount and price in a manner considered
equitable to each and so that each receives, to the extent practicable, the
average price of such transactions.

National securities exchanges have established limitations governing the maximum
number of options in each class that 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 available to a Fund. On the other hand, the ability of a
Fund to participate in volume transactions may produce better execution for the
Fund in some cases. The Board of each Fund believes that the benefits of KFS'
organization outweigh any limitations that may arise from simultaneous
transactions.

KFS, in effecting purchases and sales of portfolio securities for the account of
a Fund, implements the Fund's policy of seeking best execution of orders, which
includes best net prices, except to the extent that KFS 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

28
<PAGE> 33

professional services, which include execution, clearance procedures, wire
service quotations and statistical and other research information provided to a
Fund and KFS. Any research benefits derived are available for all clients,
including clients of affiliated companies. Since statistical and other research
information is only supplementary to research efforts of KFS and still must be
analyzed and reviewed by its staff, the receipt of research information is not
expected to materially reduce its expenses. In selecting among firms believed to
meet the criteria for handling a particular transaction, KFS may give
consideration to those firms that have sold or are selling shares of the Kemper
Mutual Funds, as well as to those firms that provide market, statistical and
other research information to the Fund and KFS. KFS is not authorized to pay
higher commissions or in the case of principal trades, higher prices, to firms
that provide such services, except as provided below. The Fund may purchase
instruments issued by banks that are receiving service payments or commissions;
however, no preferences will be given in making such portfolio purchases. Money
market instruments are normally purchased in principal transactions directly
from the issuer or from an underwriter or market maker. There are normally no
brokerage commissions paid for such purchases. Purchases from underwriters
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers include the spread between the
bid and ask prices.

KFS may in certain instances be permitted to pay higher brokerage commissions
solely for receipt of market, statistical and other research services. Subject
to Section 28(e) of the Securities Exchange Act of 1934 and procedures adopted
by the Board of a Fund, except for KCRF, KUSMF and KSIGF, a Fund could pay to a
firm that provides research services to KFS a commission for effecting a
securities transaction for the Fund in excess of the amount other firms would
have charged for the transaction. A Fund could do this if KFS determines in good
faith that the greater commission is reasonable in relation to the value of the
research services provided by the executing firm viewed in terms either of a
particular transaction or KFS's overall responsibilities to a particular Fund or
other clients. Not all such research services may be useful or of value in
advising a particular Fund. Research benefits will be available for all clients
of KFS and its subsidiaries. In addition, the investment management fee paid by
the Fund to KFS is not reduced because KFS receives these research services.

Set forth in Exhibit E are the total brokerage commissions paid by each Fund for
its most recently completed fiscal year, as well as the percentage of such
amounts that was allocated to broker-dealer firms on the basis of research
information or on the basis of sales of Kemper Mutual Fund shares.

MISCELLANEOUS

GENERAL

The cost of preparing, printing and mailing the enclosed proxy, accompanying
notice and proxy statement and all other costs in connection with solicitation
of proxies will be paid by Kemper and Zurich, including any additional
solicitation made by letter, telephone or telegraph. In addition to solicitation
by mail, certain officers and representatives of the Funds, officers and
employees of KFS and certain financial services firms and their representatives,
who will receive no

29
<PAGE> 34

extra compensation for their services, may solicit proxies by telephone,
telegram or personally. In addition, Kemper and Zurich may retain a firm to
solicit proxies on behalf of each Fund's Board and the boards of the other KFS
Advised Funds, the fee for which will be borne by Kemper and Zurich. A COPY OF
YOUR FUND'S ANNUAL REPORT AND ANY MORE RECENT SEMI-ANNUAL REPORT ARE AVAILABLE
WITHOUT CHARGE UPON REQUEST BY WRITING TO THE FUND, 120 SOUTH LASALLE STREET,
CHICAGO, ILLINOIS 60603 OR BY CALLING 1-800-621-1048.

PROPOSALS OF SHAREHOLDERS

As Massachusetts business trusts, the Funds are not required to hold annual
shareholder meetings, but each will hold special meetings as required or deemed
desirable. Since the Funds do not hold regular meetings of shareholders, the
anticipated date of the next special shareholders meeting cannot be provided.
Any shareholder proposal that may properly be included in the proxy solicitation
material for a special shareholder meeting must be received by the applicable
Fund no later than four months prior to the date when proxy statements are
mailed to shareholders.

OTHER MATTERS TO COME BEFORE THE MEETING

The Boards of Trustees of the Funds are not aware of any matters that will be
presented for action at the Meeting other than the matters set forth herein.
Should any other matters requiring a vote of shareholders arise, the proxy in
the accompanying form will confer upon the person or persons entitled to vote
the shares represented by such proxy the discretionary authority to vote the
shares as to any such other matters in accordance with their best judgment in
the interest of the Fund.

VOTING, QUORUM

Each share of a Fund is entitled to one vote on each matter submitted to a vote
of the holders of that class of shares of such Fund at the Meeting; no shares
have cumulative voting rights.

Each valid proxy will be voted in accordance with the instructions on the proxy
and as the persons named in the proxy determine on such other business as may
come before the Meeting. If no instructions are given, the proxy will be voted
FOR the election of the persons who have been nominated as trustees for such
Fund and FOR Items 2, 3 and 4. Shareholders who execute proxies may revoke them
at any time before they are voted, either by writing to the Fund or in person at
the time of the Meeting. Proxies given by telephone or electronically
transmitted instruments may be counted if obtained pursuant to procedures
designed to verify that such instructions have been authorized.

Item 1 (election of trustees) requires a plurality vote of the shares of each
Fund. This means that the nine nominees receiving the largest number of votes
will be elected. Item 2 (ratification of selection of independent auditors)
requires the affirmative vote of a majority of the shares voting on the matter.
Item 3 (approval of new investment management agreement) and Item 4 (approval of
new Rule 12b-1 Plan) require the affirmative vote of a "majority of the
outstanding voting securities" of the applicable Fund. The term "majority of the
outstanding

30
<PAGE> 35

voting securities" as defined in the 1940 Act means: the affirmative vote of the
lesser of (1) 67% of the voting securities of the Fund present at the meeting if
more than 50% of the outstanding shares of the Fund are present in person or by
proxy or (2) more than 50% of the outstanding shares of the Fund.

On Items 1 and 2, each Fund will vote in the aggregate and not by series or
class. On Item 3, each Fund will vote in the aggregate except, in the case of
KNTIS, KSTIS and KP, each series will vote separately. On Item 4, the Class B
Shares and the Class C Shares of each Fund (or in the case of KNTIS, KSTIS and
KP, of each series) will vote separately by class.

The Declaration of Trust of each Fund provides that the presence at a
shareholder meeting in person or by proxy of at least 30% of the shares of a
Fund constitutes a quorum for that Fund. Thus, the meeting for a particular Fund
could not take place on its scheduled date if less than 30% of the shares of
that Fund were represented. If, by the time scheduled for the meeting, a quorum
of shareholders of a Fund is not present or if a quorum is present but
sufficient votes in favor of any of the items are not received, the persons
named as proxies may propose one or more adjournments of the meeting for that
Fund to permit further soliciting of proxies from its shareholders. Any such
adjournment will require the affirmative vote of a majority of the shares of the
Fund as to which the meeting is being adjourned present (in person or by proxy)
at the session of the meeting to be adjourned. The persons named as proxies will
vote in favor of any such adjournment if they determine that such adjournment
and additional solicitation are reasonable and in the interest of the respective
Fund's shareholders.

In tallying shareholder votes, abstentions and "broker non-votes" (i.e., shares
held by brokers or nominees as to which (i) instructions have not been received
from the beneficial owners or persons entitled to vote and (ii) the broker or
nominee does not have discretionary voting power on a particular matter) will be
counted for purposes of determining whether a quorum is present for purposes of
convening the Meeting. On Item 1, abstentions and broker non-votes will have no
effect; the nine nominees receiving the largest number of votes will be elected.
On Item 2, abstentions and broker non-votes will not be counted as "votes cast"
and will have no effect on the result of the vote. On Items 3 and 4 abstentions
and broker non-votes will be considered to be both present at the Meeting and
issued and outstanding and, as a result, will have the effect of being counted
as voted against the Items.

The Board of Trustees of each Fund recommends an affirmative vote on all items.

PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY. NO POSTAGE IS
REQUIRED IF MAILED IN THE UNITED STATES.

By order of the Boards of Trustees,
Philip J. Collora
Secretary

31
<PAGE> 36

EXHIBIT A

HOLDERS OF MORE THAN 5% OF
ANY CLASS OF A FUND'S SHARES

<TABLE>
<CAPTION>
NUMBER
OF % OF
FUND NAME AND ADDRESS SHARES CLASS
- ------------------------- --------------------------------------- --------- -----
<S> <C> <C> <C>
Kemper Total Return Fund Harriet Rust Brown, trustee 26,272 6.95
-- Class C Harriet Rust Brown Rev. Tr.
645 Constitution Avenue, N.E.
Washington, DC 20002
Kemper Income and Capital Lincoln Trust Co. Cust FBO 342,608 9.04
Preservation Fund Grace Starmack IRA
-- Class B P.O. Box 5831
Denver, CO 80217
-- Class C James A. Casciotti, trustee under 8,323 8.58
will of Cyrus C. Convery FBO
Suzanne Peterson
321 Willings Alley
Philadelphia, PA 19106
National Financial Svcs. Corp. 7,476 7.71
One World Financial Center
200 Liberty Street
New York, NY 10281
IFTC 6,935 7.15
IRA Alto Eugene Duck
5012 Alvin Dark Avenue
Baton Rouge, LA 70820
Kemper National Tax-Free Gokul C. Singhal & Renu Singhal 153,370 16.18
Income Series 12821 Topping Meadows
-- Kemper Intermediate St. Louis, MO 63131
Municipal Bond Fund
-- Class A
-- Class B Kemper Financial Services 35,945 17.42
120 S. LaSalle Street
Chicago, IL 60603
Ronald Rach & Marilyn Rach 34,254 16.60
5737 S. Mason
Chicago, IL 60638
William C. Grabitz 20,369 9.87
700 S. Paulina, Apt. 926
Chicago, IL 60612
Irmgard V. Alba 12,823 6.21
1825 Shoreline Drive, #306
Alameda, CA 94501
Lloyd G. Haddad and Marilyn H. Haddad 12,511 6.06
trustees of Haddad Tr. No. 83AB
5415 Rudgate Court
Rockford, IL 61114
</TABLE>

A-1
<PAGE> 37

<TABLE>
<CAPTION>
NUMBER
OF % OF
FUND NAME AND ADDRESS SHARES CLASS
- ------------------------- --------------------------------------- --------- -----
<S> <C> <C> <C>
- -- Class C Kemper Financial Services 35,945 52.57
120 S. LaSalle Street
Chicago, IL 60603
Orsolina Gigante 7,911 11.57
232 Thayer Street
River Vale, NJ 07675
Anthony B. Gigante 7,911 11.57
232 Thayer Street
River Vale, NJ 07675
Kemper Municipal Bond Billy R. Hefley 13,205 14.77
Fund RR3 Box 433
-- Class C Amarillo, TX 79107
Frances A. Hefley 5,216 5.83
P.O. Box 188
Wheeler, TX 79096
Kemper Diversified Income Transcorp Cust FBO 19,198 5.53
Fund Garrett E. Dobbs IRA
-- Class C 7103 S. Revere Parkway
Englewood, CO 80112
Kemper High Yield Fund Patterson & Co. 1,032,467 80.31
-- Class I PNB Personal Trust Acctg.
P.O. Box 7829
Philadelphia, PA 19101
MAC & Co. 253,089 19.69
P.O. Box 926
Pittsburgh, PA 15230
Kemper U.S. Government PaineWebber for the benefit of 13,311 6.47
Securities Fund Helen Yurchyk and William J.
-- Class C Yurchyk
556 S. Schenley Avenue
Youngstown, OH 44509
Kemper International Fund Kemper Financial Services 1,900,253 5.71
-- Class C Profit Sharing Plan
120 S. LaSalle Street
Chicago, IL 60603
Kemper State Tax-Free Evan Backs and Donna M. Backs, trustees 9,178 39.10
Income Series 2323 E. Austin
-- Kemper California Fresno, CA 93726
Tax-Free Income Fund
-- Class C
Waldo Pike 6,996 29.80
1608 Los Robles Drive
Bakersfield, CA 93306
George H. Peterson 1,823 7.77
5147 Joseph Lane
Sanjose, CA 95188
Jerry Willard and Sharon Willard 1,414 6.03
22412 Citation Street
Tehachapi, CA 93561
</TABLE>

A-2
<PAGE> 38

<TABLE>
<CAPTION>
NUMBER
OF % OF
FUND NAME AND ADDRESS SHARES CLASS
- ------------------------- --------------------------------------- --------- -----
<S> <C> <C> <C>
-- Kemper New York Beatrice Schwartz and Esther Schwartz 16,129 5.37
Tax-Free Income Fund 1280 E. 22nd Street
-- Class B Brooklyn, NY 11229
Helen J. Shulman 16,068 5.35
14 Oak Street
Binghamton, NY 13905
Janet Gutenplan 15,470 5.15
270-10K Grand Central Parkway
Floral Park, NY 11005
-- Class C PaineWebber for the Benefit of Le Boeuf 9,913 58.50
A La Mode
539 E. 81st Street
New York, NY 10028
Richard A. Raykowski 1,574 9.29
13830 Indian Falls Road
Akron, NY 14001
Kemper Financial Services 1,476 8.71
120 S. LaSalle Street
Chicago, IL 60603
PaineWebber for the Benefit of 965 5.70
Brian Borakove and Fred Borakove
16 Dover Court
Holbrook, NY 11741
Richard V. Olson and Joanne P. Olson 882 5.20
2210 Cypress Street
Wantagh, NY 11793
-- Kemper Florida Tax- Noah B. Jones and 13,412 7.34
Free Income Fund William G. Hann
-- Class B 3663 58th Avenue, North #737
St. Petersburg, FL 33714
Laura T. Dugas 12,389 6.78
261 Village Beach West
Santa Rosa Beach, FL 62459
W. Foster Dugas and Pamela L. Dugas 9,970 5.46
570 Woodland Bayou Drive
Santa Rosa Beach, FL 32459
-- Class C Marion A. Schuma 4,963 57.29
387 Winchester Place
Longwood, FL 32779
Kemper Financial Services 1,571 42.63
120 S. LaSalle Street
Chicago, IL 60603
-- Kemper Texas Tax- Felix Immel and Estella Immel 2,879 8.32
Free Income Fund 231 Shadyview
-- Class B San Antonio, TX 78201
Clara Voigt 2,607 7.54
P.O. Box 1
Taylor, TX 76574
</TABLE>

A-3
<PAGE> 39

<TABLE>
<CAPTION>
NUMBER
OF % OF
FUND NAME AND ADDRESS SHARES CLASS
- ------------------------- --------------------------------------- --------- -----
<S> <C> <C> <C>
Oron Lee Schuch Executive of the 2,061 5.96
Estate of Frances S. Barton
3714 Vista Del Arroyo Drive
San Angelo, TX 76904
-- Class C Billy Heeley 12,921 29.12
RR3 Box 433
Amarillo, TX 79107
Karen Anne McCarty 5,437 12.26
8125 Raintree Place
Austin, TX 78759
-- Kemper Ohio Tax-Free John M. Wilson and Patricia W. Wilson, 170,439 6.44
Income Fund trustees of the John M. &
-- Class A Patricia Wilson Trust
P.O. Box 386
Aurora, OH 44202
-- Class B National Securities Corp. 28,192 6.78
1001 Fourth Avenue
Suite 2200
Seattle, WA 98154
Jerome M. McKeever, trustee for the 21,390 5.15
benefit of Catherine McKeever
1375 Queen Anne's Gate
Westlake, OH 44145
-- Class C Jay M. Simpson and Valerie Stocklin 4,963 31.64
7825 N. Dixie, Suite A
Dayton, OH 45414
Elton W. Geist Trust 2,241 14.28
12550 Lake Avenue, Suite 205
Lakewood, OH 44107
John R. Bender 2,129 13.57
645 Georgetown Avenue
Elyria, OH 44035
Ben R. Brown and Louise B. Brown 1,279 8.15
1664 River Road
Maumee, OH 43537
Jeffery J. Smith and Nanette E. Smith 1,086 6.92
7872 Bennington Drive
Cincinnati, OH 45241
-- Kemper Michigan James Rubingh and Gertrude Rubingh, 15,552 9.79
Tax-Free Income Fund trustees for the Rubingh Family Trust
-- Class A RR 1 Box 142
Ellsworth, MI 49729
Milton E. Melder 14,114 8.89
1133 Southlawn
East Lansing, MI 48823
Kathryn E. Zabel, trustee for the 13,853 8.72
Kathryn E. Zabel Trust
4143 Cummings Ct., NW
Grand Rapids, MI 49504
</TABLE>

A-4
<PAGE> 40

<TABLE>
<CAPTION>
NUMBER
OF % OF
FUND NAME AND ADDRESS SHARES CLASS
- ------------------------- --------------------------------------- --------- -----
<S> <C> <C> <C>
Kemper Financial Services 11,799 7.43
120 S. LaSalle Street
Chicago, IL 60603
-- Class B Kemper Financial Services 11,779 19.27
120 S. LaSalle Street
Chicago, IL 60603
James W. Shadowens 10,267 16.80
P.O. Box 1032
Fowlerville, MI 48836
Karen L. Pearce 8,678 14.20
1383 Williamsburg
Flint, MI 48507
Florence M. Hardy and George L. Morris, 8,239 13.48
trustees of the Clinton P. Hardy Trust
46 Radnor Cir.
Grosse Pointe Farms, MI 48236
Jane Broecker and Herbert A. Broecker 5,187 8.49
9616 Alger Drive
Brighton, MI 48116
W. Dale Wassell and Ann M. Wassell 5,181 8.48
13999 Cranston
Livonia, MI 48154
Carolyn L. Barth 4,894 8.01
1011 S. Renaud Road
Grosse Pointe Woods, MI 48236
Janet M. Taylor 4,699 7.69
558 Mallard Street
Rochester Hills, MI 48309
-- Class C Kemper Financial Services 11,782 96.61
120 S. LaSalle Street
Chicago, IL 60603
-- Kemper New Jersey Robert Chinery, Jr. 103,685 48.19
Tax-Free Income Fund 720 Woodchuck Lane
-- Class A Toms River, NJ 08755
Gruntal and Co. 22,602 10.50
14 Wall Street
New York, NY 10005
Agnes B. Cywinski, trustee for the 14,350 6.67
benefit of Agnes B. Cywinski
18 Springfield Ave., Apt. 13B
Cranford, NJ 07016
Robert L. Vignolo 12,577 5.85
842 Kimball Avenue
Westfield, NJ 07090
Kemper Financial Services 11,795 5.48
120 S. LaSalle Street
Chicago, IL 60603
</TABLE>

A-5
<PAGE> 41

<TABLE>
<CAPTION>
NUMBER
OF % OF
FUND NAME AND ADDRESS SHARES CLASS
- ------------------------- --------------------------------------- --------- -----
<S> <C> <C> <C>
-- Class B Kemper Financial Services 11,772 9.32
120 S. LaSalle Street
Chicago, IL 60603
Sylvia Beaton 9,823 7.77
719 S. Street
Point Pleasant, NJ 08742
George F. Kays and 9,218 7.29
Jane C. Kays
26 Meyers Road
Branchville, NJ 07826
Christine I. Podilchuk and 8,474 6.71
Richard J. Mammone
182 Beaumonte Way
Bridgewater, NJ 08807
- -- Class C Kemper Financial Services 11,777 85.89
120 S. LaSalle Street
Chicago, IL 60603
Michael Galeotafiore and Pina 1,928 14.06
Galeotafiore
411 MacArthur Drive
Brick, NJ 08724
-- Kemper Pennsylvania Kemper Financial Services 11,797 17.12
Tax-Free Income Fund 120 S. LaSalle Street
-- Class A Chicago, IL 60603
Hilda M. Bender, Bruce H. 8,565 12.43
Klink and Margaret E. Klink
2065 W. End Road
Bath, PA 18014
Margaret McDowell Walker 7,375 10.70
1337 Yahres Road
Sharon, PA 14146
Henry G. Evans and 6,998 10.16
Catherine M. Evans
3640 Mt. Hickory Blvd.
Hermitage, PA 16148
F. J. Diemedio and 5,236 7.60
Dora A. Diemedio
207 W. Evergreen Street
West Grove, PA 19390
Robert J. Reichlin and 5,014 7.28
Claire H. Reichlin
4 Conshohocken St., Apt. 604
Bala Cynwyd, PA 19004
Harold Hacker and Margaret L. Hacker 4,309 6.25
214 Walton Road
Lock Haven, PA 17745
-- Class B Parker Hunter Inc. 12,888 18.12
FBO Hilda Spedding
409 Canterbury Trail
Cranberry Township, PA 16066
</TABLE>

A-6
<PAGE> 42

<TABLE>
<CAPTION>
NUMBER
OF % OF
FUND NAME AND ADDRESS SHARES CLASS
- ------------------------- --------------------------------------- --------- -----
<S> <C> <C> <C>
Kemper Financial Services 11,778 16.56
120 S. LaSalle Street
Chicago, IL 60603
Chester J. Nanartowicz 5,678 7.98
347 Oxford Road
Norristown, PA 19401
William J. Fenwick 5,102 7.17
214th 5th Street
McDonald, PA 15057
John W. Crist 5,086 7.15
343 Rittenhouse Road
Royersford, PA 10468
Catherine Czarnota 4,040 5.68
401 Werner Avenue
Glenolden, PA 19036
Walter G. Knopp 3,974 5.59
2113 Blairmont Drive
Pittsburgh, PA 15241
Olga Y. Hyde 3,899 5.48
3300 Darby Road, #4108
Haverford, PA 19041
-- Class C Kemper Financial Services 11,779 99.27
120 S. LaSalle Street
Chicago, IL 60603
Kemper Portfolios Davis Iron Works Inc. P/S Plan 181,474 9.22
-- Kemper Cash Reserves FBO Frank G. Nehr
-- Class C 3885 Lakefront Street
Waterford, MI 49328
Lincoln Trust Co. Cust. 112,171 5.70
FBO Vaclav J. Jasek IRA
P.O. Box 58131
Denver, CO 80217
-- Kemper U.S. Mortgage Debra L. Mullins 8,751 5.70
Fund 3410 Ravens Crest Drive
-- Class C Plainsboro, NJ 08536
PaineWebber for the benefit of 7,683 5.01
William E. Wunne
600 Amethyst Street
New Orleans, LA 70124
-- Kemper Short- Fenna Construction Inc. 44,048 14.05
Intermediate 13631 Balsam Lane, N.
Government Fund Dayton, MN 55327
-- Class C
Kemper Adjustable Rate Kern County Treasurer 1,296,564 7.56
U.S. Government Fund 1115 Truxtun Avenue
-- Class A Bakersfield, CA 93301
IFTC CUST FBO 953,725 5.56
Fundminder Inc.
127 W. 10th, 11th Fl.
Kansas City, MO 64105
</TABLE>

A-7
<PAGE> 43

<TABLE>
<CAPTION>
NUMBER
OF % OF
FUND NAME AND ADDRESS SHARES CLASS
- ------------------------- --------------------------------------- --------- -----
<S> <C> <C> <C>
-- Class B Builders Prime Window and Supply 35,003 5.84
PS 401K Forfeiture Account
2nd and Merion
Bridgeport, PA 19405
-- Class C Ann K. McClowry and Daniel 8,768 11.16
Durkin & Anthony F. Durkin
7627 W. 160 Place
Tinley Park, IL 60477
Raymond James & Assoc. Inc. 6,424 8.18
Peter B. Elder IRA
66 Stockmar Drive
Basking Ridge, NJ 07920
Patrick S. Orr 6,231 7.93
Construction Co. Profit-Sharing Plan
3167 Canyon Oaks Terrace
Chico, CA 95928
Mary Arel and Ted Arel 5,495 6.99
7 Chestnut Lane
Colchester, VT 05446
Sterling Trust Co. 5,495 6.99
P.O. Box 15677
Waco, TX 76702
Junior Junction Inc. 4,569 5.82
1400 Noyes at York
Utica, NY 13502
Investors Fiduciary Tr. Co. Tr. 4,410 5.61
IRA Jack L. Jones
7524 Linde Lane
Fort Wayne, IN 46815
Gail A. Middleton 4,384 5.58
RR 1 Box 161
Jeffersonville, VT 05464-9606-61
Kemper Blue Chip Fund Rick G. Gass 2,504 5.73
-- Class C 8436 Quail Hill Road
Maple Grove, MN 55311
Joseph V. Boykin, Jr. 2,185 5.00
Profit Sharing Plan
700 W. Grace Street, Suite 204
Richmond, VA 23220
Kemper Global Income Fund Kemper Financial Services 1,829 14.99
-- Class C 120 S. LaSalle Street
Chicago, IL 60603
Uma Rao, Desiraju Pramil Rao 1,476 12.10
and Desiraju Kavitha Rao
11009 Ruthledge Drive
Gaithersburg, MD 20878
</TABLE>

A-8
<PAGE> 44

<TABLE>
<CAPTION>
NUMBER
OF % OF
FUND NAME AND ADDRESS SHARES CLASS
- ------------------------- --------------------------------------- --------- -----
<S> <C> <C> <C>
Vincent P. Drnevich and 840 6.88
Roxanne M. Drnevich,
trustees of the Vincent P. and
Roxanne M. Drnevich Caring Trust
3309 Elkhart Street
W. Lafayette, IN 47906
</TABLE>

A-9
<PAGE> 45

EXHIBIT B

FORM OF
INVESTMENT MANAGEMENT AGREEMENT

AGREEMENT made this day of , 199 , by and between KEMPER
, a Massachusetts business trust (the "Fund"), and
KEMPER FINANCIAL SERVICES, INC., a Delaware corporation (the "Adviser").

WHEREAS, the Fund is an open-end management investment company registered under
the Investment Company Act of 1940, the shares of beneficial interest ("Shares")
of which are registered under the Securities Act of 1933;

WHEREAS, the Fund is authorized to issue Shares in separate series or portfolios
with each representing the interests in a separate portfolio of securities and
other assets;

WHEREAS, the Fund wants to retain the Adviser under this Agreement to render
investment advisory and management services to the portfolios of the Fund known
as (the "Initial Portfolio[s]"), together with any other Fund
portfolios which may be established later and served by the Adviser hereunder,
being herein referred to collectively as the "Portfolios" and individually
referred to as a "Portfolio"; and

WHEREAS, the Adviser is willing to render such investment advisory and
management services for the Initial Portfolio[s];

NOW THEREFORE, in consideration of the mutual covenants hereinafter contained,
it is hereby agreed by and between the parties hereto as follows:

1. The Fund hereby employs the Adviser to act as the investment adviser for the
Initial Portfolio[s] and other Portfolios hereunder and to manage the investment
and reinvestment of the assets of each such Portfolio in accordance with the
applicable investment objectives and policies and limitations, and to administer
the affairs of each such Portfolio to the extent requested by and subject to the
supervision of the Board of Trustees of the Fund for the period and upon the
terms herein set forth, and to place orders for the purchase or sale of
portfolio securities for the Fund's account with brokers or dealers selected by
it; and, in connection therewith, the Adviser is authorized as the agent of the
Fund to give instructions to the Custodian of the Fund as to the deliveries of
securities and payments of cash for the account of the Fund. In connection with
the selection of such brokers or dealers and the placing of such orders, the
Adviser is directed to seek for the Fund best execution of orders. Subject to
such policies as the Board of Trustees of the Fund determines, the Adviser shall
not be deemed to have acted unlawfully or to have breached any duty, created by
this Agreement or otherwise, solely by reason of its having caused the Fund to
pay a broker or dealer an amount of commission for effecting a securities
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction, if the Adviser determined in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage

B-1
<PAGE> 46

and research services provided by such broker or dealer viewed in terms of
either that particular transaction or the Adviser's overall responsibilities
with respect to the clients of the Adviser as to which the Adviser exercises
investment discretion. The Fund recognizes that all research services and
research that the Adviser receives or generates are available for all clients,
and that the Fund and other clients may benefit thereby. The investment of funds
shall be subject to all applicable restrictions of the Agreement and Declaration
of Trust and By-Laws of the Fund as may from time to time be in force.

The Adviser accepts such employment and agrees during such period to render such
services, to furnish office facilities and equipment and clerical, bookkeeping
and administrative services for the Fund, to permit any of its officers or
employees to serve without compensation as trustees or officers of the Fund if
elected to such positions and to assume the obligations herein set forth for the
compensation herein provided. The Adviser shall for all purposes herein provided
be deemed to be an independent contractor and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the Fund
in any way or otherwise be deemed an agent of the Fund. It is understood and
agreed that the Adviser, by separate agreements with the Fund, may also serve
the Fund in other capacities.

2. In the event that the Fund establishes one or more portfolios other than the
Initial Portfolio[s] with respect to which it desires to retain the Adviser to
render investment advisory and management services hereunder, it shall notify
the Adviser in writing. If the Adviser is willing to render such services, it
shall notify the Fund in writing whereupon such portfolio or portfolios shall
become a Portfolio or Portfolios hereunder.

3. For the services and facilities described in Section 1, the Fund will pay to
the Adviser at the end of each calendar month, an investment management fee for
each Portfolio computed by applying the following annual rates to the applicable
average daily net assets of the Portfolio:

[See table on page 11 of proxy statement for each Fund's management fee and page
B-7 for a description of the computation of KSCF's fee.]

The fee as computed above shall be computed separately for, and charged as an
expense of, each Portfolio based upon the average daily net assets of such
Portfolio. 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.

4. The services of the Adviser to the Fund under this Agreement are not to be
deemed exclusive, and the Adviser shall be free to render similar services or
other services to others so long as its services hereunder are not impaired
thereby.

5. In addition to the fee of the Adviser, the Fund shall assume and pay any
expenses for services rendered by a custodian for the safekeeping of the Fund's
securities or other property, for keeping its books of account, for any other
charges of the custodian, and for calculating the net asset value of the Fund as

B-2
<PAGE> 47

provided in the prospectus of the Fund. The Adviser shall not be required to pay
and the Fund shall assume and pay the charges and expenses of its operations,
including compensation of the trustees (other than those affiliated with the
Adviser), charges and expenses of independent auditors, of legal counsel, of any
transfer or dividend disbursing agent, and of any registrar of the Fund, costs
of acquiring and disposing of portfolio securities, interest, if any, on
obligations incurred by the Fund, costs of share certificates and of reports,
membership dues in the Investment Company Institute or any similar organization,
costs of reports and notices to shareholders, other like miscellaneous expenses
and all taxes and fees payable to federal, state or other governmental agencies
on account of the registration of securities issued by the Fund, filing of trust
documents or otherwise. The Fund shall not pay or incur any obligation for any
expenses for which the Fund intends to seek reimbursement from the Adviser as
herein provided without first obtaining the written approval of the Adviser. The
Adviser shall arrange, if desired by the Fund, for officers or employees of the
Adviser to serve, without compensation from the Fund, as trustees, officers or
agents of the Fund if duly elected or appointed to such positions and subject to
their individual consent and to any limitations imposed by law.

If expenses borne by the Fund for those Portfolios which the Adviser manages in
any fiscal year (including the Adviser's fee, but excluding interest, taxes,
fees incurred in acquiring and disposing of portfolio securities, distribution
services fees, extraordinary expenses* and any other expenses excludable under
state securities law limitations) exceed any applicable limitation arising under
state securities laws, the Adviser will reduce its fee or reimburse the Fund for
any excess to the extent required by such state securities laws. If for any
month the expenses of the Fund properly chargeable to the income account shall
exceed 1/12 of the percentage of average net assets allowable as expenses, the
payment to the Adviser for that month shall be reduced and if necessary the
Adviser shall make a refund payment to the Fund so that the total net expense
will not exceed such percentage. As of the end of the Fund's fiscal year,
however, the foregoing computations and payments shall be readjusted so that the
aggregate compensation payable to the Adviser for the year is equal to the
percentage calculated in accordance with Section 3 hereof of the average net
asset value as determined as described herein throughout the fiscal year,
diminished to the extent necessary so that the total of the aforementioned
expense items of the Fund shall not exceed the expense limitation. The aggregate
of repayments, if any, by the Adviser to the Fund for the year shall be the
amount necessary to limit the said net expense to said percentage in accordance
with the foregoing.

The net asset value for each Portfolio shall be calculated in accordance with
the provisions of the Fund's prospectus or as the trustees may determine in
accordance with the provisions of the Investment Company Act of 1940. On

- ---------------

* The expense limitations for certain operating expenses are different for KMBF,
KCATF and KGSF as described below than that italicized above in the form
agreement.

KMBF and KGSF -- 1% of average daily net assets.

KCATF -- 1.5% of average daily net assets up to $30 million and 1% of
average daily net assets over $30 million.

B-3
<PAGE> 48

each day when net asset value is not calculated, the net asset value of a
Portfolio shall be deemed to be the net asset value of such Portfolio as of the
close of business on the last day on which such calculation was made for the
purpose of the foregoing computations.

6. Subject to applicable statutes and regulations, it is understood that
trustees, officers or agents of the Fund are or may be interested in the Adviser
as officers, directors, agents, shareholders or otherwise, and that the
officers, directors, shareholders and agents of the Adviser may be interested in
the Fund otherwise than as a trustee, officer or agent.

7. The Adviser shall not be liable for any error of judgment or of law or for
any loss suffered by the Fund in connection with the matters to which this
Agreement relates, except loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Adviser in the performance of its
obligations and duties or by reason of its reckless disregard of its obligations
and duties under this Agreement.

8. This Agreement shall become effective with respect to the Initial
Portfolio[s] on the date hereof and shall remain in full force until ,
199 , unless sooner terminated as hereinafter provided. This Agreement shall
continue in force from year to year thereafter with respect to each Portfolio,
but only as long as such continuance is specifically approved for each Portfolio
at least annually in the manner required by the Investment Company Act of 1940
and the rules and regulations thereunder; provided, however, that if the
continuation of this Agreement is not approved for a Portfolio, the Adviser may
continue to serve in such capacity for such Portfolio in the manner and to the
extent permitted by the Investment Company Act of 1940 and the rules and
regulations thereunder.

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 the Adviser on sixty (60) days written notice to the other party. The Fund
may effect termination with respect to any Portfolio by action of the Board of
Trustees or by vote of a majority of the outstanding voting securities of such
Portfolio.

This Agreement may be terminated with respect to any Portfolio 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 such Portfolio in the event
that it shall have been established by a court of competent jurisdiction that
the Adviser or any officer or director of the Adviser has taken any action which
results in a breach of the covenants of the Adviser set forth herein.

The terms "assignment" 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 the Adviser to
receive payments on any unpaid balance of the compensation described in Section
3 earned prior to such termination.

B-4
<PAGE> 49

9. 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.

10. 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.

11. 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 the Adviser for recovery of that portion of the
investment management fee (or any other liability of the Fund arising hereunder)
allocated to a particular Portfolio, whether in accordance with the express
terms hereof or otherwise, the Adviser shall have recourse solely against the
assets of that Portfolio to satisfy such claim and shall have no recourse
against the assets of any other Portfolio for such purpose.

12. This Agreement shall be construed in accordance with applicable federal law
and (except as to Section 11 hereof which shall be construed in accordance with
the laws of The Commonwealth of Massachusetts) the laws of the State of
Illinois.

13. 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.

B-5
<PAGE> 50

IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to be
executed as of the day and year first above written.

[FUND]

By:

Title:

ATTEST:

Title:

KEMPER FINANCIAL SERVICES, INC.

By:

Title:

ATTEST:

Title:

B-6
<PAGE> 51

DESCRIPTION OF MANAGEMENT FEE SCHEDULE FOR
KEMPER SMALL CAPITALIZATION EQUITY FUND

As compensation for the services and facilities furnished, KSCF pays a base
annual investment management fee, payable monthly, at the rate of .65 of 1% of
the average daily net assets of the Fund. This base fee is subject to upward or
downward adjustment on the basis of the investment performance of the Fund's
Class A shares as compared with the performance of the Standard & Poor's 500
Stock Index (the "Index").

The Fund will pay an additional monthly fee at the rate of 1/12 of .05% of such
average daily net assets for the preceding twelve months for each percentage
point (fractions to be prorated) by which the Fund's Class A shares performance
exceeds that of the Index for the immediately preceding twelve months; provided
that such additional monthly fee shall not exceed 1/12 of .30% of the average
daily net assets. Conversely, the compensation payable by the Fund will be
reduced by the rate of 1/12 of .05% of such average daily net assets for each
percentage point (fractions to be prorated) by which the Fund's Class A shares
performance falls below that of the Index, provided that such reduction in the
monthly fee shall not exceed 1/12 of .30% of the average net assets. The total
fee on an annual basis can range from .35% to .95% of average daily net assets.

The Fund's Class A shares investment performance during any twelve month period
is measured by the percentage difference between (i) the opening net asset value
of one Class A share of the Fund and (ii) the sum of the closing net asset value
of one Class A share of the Fund plus the value of any income and capital gain
dividends on such Class A share during the period treated as if reinvested in
Class A shares of the Fund at the time of distribution. The performance of the
Index is measured by the percentage change in the Index between the beginning
and the end of the twelve month period with cash distributions on the securities
which comprise the Index being treated as reinvested in the Index at the end of
each month following the payment of the dividend.

Each monthly calculation of the incentive portion of the fee may be illustrated
as follows: if over the preceding twelve month period the adjusted net asset
value applicable to one Class A share went from $10.00 to $11.00 (10%
appreciation) and the Index, after adjustment, went from 100 to 104 (or only
4%), the entire incentive compensation would have been earned by KFS. On the
other hand, if the Index rose from 100 to 110 (10%), no incentive fee would have
been payable. A rise in the Index from 100 to 116 (16%) would have resulted in
the minimum monthly fee of 1/12 of .35%.

Since the computation is not cumulative from year to year, an additional
management fee may be payable with respect to a particular year, although the
Fund's Class A shares' performance over some longer period of time may be less
favorable than that of the Index. Conversely, a lower management fee may be
payable in a year in which the Fund's Class A shares' performance is less
favorable than that of the Index, although the Fund's Class A shares'
performance over a longer period of time might be better than that of the Index.

B-7
<PAGE> 52

EXHIBIT C

FORM OF
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT

AGREEMENT made this day of , 199 , between KEMPER
, 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 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

C-1
<PAGE> 53

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 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.

C-2
<PAGE> 54

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 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

C-3
<PAGE> 55

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 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 , 199 ; 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

C-4
<PAGE> 56

(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.

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.

C-5
<PAGE> 57

15. This Agreement shall be construed in accordance with applicable federal law
and (except as to Section 14 hereof which shall be construed in accordance with
the laws of The Commonwealth of Massachusetts) the laws of the State of
Illinois.

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.

IN WITNESS WHEREOF, the Fund and KDI have caused this Agreement to be executed
as of the day and year first above written.

[FUND]

By:

Title:

ATTEST:

Title:

KEMPER DISTRIBUTORS, INC.

By:

Title:

ATTEST:

Title:

C-6
<PAGE> 58

EXHIBIT D

FUNDS AND MANAGEMENT FEES

<TABLE>
<CAPTION>
TOTAL NET ASSETS* MANAGEMENT
FUND (MILLIONS) FEE**
- -------------------------------------------------------------------- -----------
<S> <C> <C>
</TABLE>

<TABLE>
<S> <C> <C>
Kemper Technology Fund............................ $ 786 A
Kemper Total Return Fund.......................... 2,842 A
Kemper Growth Fund................................ 2,269 A
Kemper Small Capitalization Equity Fund........... 655 F
Kemper Income and Capital Preservation Fund....... 548 B
Kemper National Tax-Free Income Series
1. Kemper Municipal Bond Fund................... 3,634 C
2. Kemper Intermediate Municipal Bond Fund...... 13 B
Kemper Diversified Income Fund.................... 768 A
Kemper High Yield Fund............................ 3,517 A
Kemper U.S. Government Securities Fund............ 4,889 C
Kemper International Fund......................... 369 D
Kemper International Bond Fund.................... 7 D
Kemper State Tax-Free Income Series
1. Kemper California Tax-Free Income Fund....... 1,139 B
2. Kemper New York Tax-Free Income Fund......... 329 B
3. Kemper Florida Tax-Free Income Fund.......... 123 B
4. Kemper Texas Tax-Free Income Fund............ 16 B
5. Kemper Ohio Tax-Free Income Fund............. 31 B
6. Kemper Michigan Tax-Free Income Fund......... 2 B
7. Kemper New Jersey Tax-Free Income Fund....... 4 B
8. Kemper Pennsylvania Tax-Free Income Fund..... 2 B
Kemper Portfolios
1. Kemper Cash Reserves Fund.................... 214 E
2. Kemper U.S. Mortgage Fund.................... 3,652 B
3. Kemper Short-Intermediate Government Fund.... 250 B
Kemper Adjustable Rate U.S. Government Fund....... 150 B
Kemper Blue Chip Fund............................. 155 A
Kemper Global Income Fund......................... 172 D
Kemper Money Market Fund.......................... G
1. Money Market Portfolio....................... 3,998
2. Government Securities Portfolio.............. 586
3. Tax-Exempt Portfolio......................... 738
Cash Equivalent Fund
1. Money Market Portfolio....................... 3,451 H
2. Government Securities Portfolio.............. 1,687 H
Cash Equivalent Fund
1. Tax-Exempt Portfolio......................... 1,020 H
Tax-Exempt California Money Market Fund........... 94 H
Cash Account Trust................................ H
1. Money Market Portfolio....................... 397
2. Government Securities Portfolio.............. 150
3. Tax-Exempt Portfolio......................... 70
Investors Cash Trust***
1. Government Securities Portfolio.............. 197 0.15%
2. Treasury Portfolio........................... 67 0.15%
</TABLE>

D-1
<PAGE> 59

<TABLE>
<CAPTION>
TOTAL NET ASSETS* MANAGEMENT
FUND (MILLIONS) FEE**
- -------------------------------------------------------------------- -----------
<S> <C> <C>
Tax-Exempt New York Money Market Fund............. 15 H
Kemper High Income Trust.......................... 200 0.85%
Kemper Intermediate Government Trust.............. 278 0.80%
Kemper Municipal Income Trust..................... 672 0.55%
Kemper Multi-Market Income Trust.................. 215 0.85%
Kemper Strategic Municipal Income Trust........... 126 0.60%
The Growth Fund of Spain, Inc. ................... 221 1.00%
Kemper Strategic Income Fund...................... 45 0.85%
Kemper Investors Fund
1. Money Market Portfolio....................... 65 0.50%
2. Total Return Portfolio....................... 626 0.55%
3. High Yield Portfolio......................... 265 0.60%
4. Equity Portfolio............................. 336 0.60%
5. Government Securities Portfolio.............. 96 0.55%
6. International Portfolio...................... 125 0.75%
7. Small Capitalization Equity Portfolio........ 18 0.65%
Kemper Target Equity Fund
1. Kemper Retirement Fund Series I.............. 105 0.50%
2. Kemper Retirement Fund Series II ............ 172 0.50%
3. Kemper Retirement Fund Series III ........... 123 0.50%
4. Kemper Retirement Fund Series IV ............ 151 0.50%
5. Kemper Retirement Fund Series V.............. 134 0.50%
6. Kemper Retirement Fund Series VI............. 3 0.50%
7. Kemper Worldwide 2004 Fund................... 30 0.60%
Sterling Funds
1. Equity Fund.................................. 0 I
2. Total Return Fund............................ 0 I
3. U.S. Government Securities Fund.............. 0 J
4. Municipal Bond Fund.......................... 0 J
5. Government Money Market Fund................. 0 K
</TABLE>

- ---------------
* Total Net Assets, in millions, as of May 31, 1995.

** Scheduled annual management fees payable to KFS as a percentage of average
daily net assets.

*** KFS has agreed to temporarily absorb or pay operating expenses of the
Investors Cash Trust portfolios to the extent, if any, that such expenses
exceed 0.80% of average daily net assets of such portfolios.

(A) .58 of 1% of the first $250 million, .55 of 1% of the next $750 million, .53
of 1% of the next $1.5 billion, .51 of 1% of the next $2.5 billion, .48 of
1% of the next $2.5 billion, .46 of 1% of the next $2.5 billion, .44 of 1%
of the next $2.5 billion and .42 of 1% thereafter.

(B) .55 of 1% of the first $250 million, .52 of 1% of the next $750 million, .50
of 1% of the next $1.5 billion, .48 of 1% of the next $2.5 billion, .45 of
1% of the next $2.5 billion, .43 of 1% of the next $2.5 billion, .41 of 1%
of the next $2.5 billion and .40 of 1% thereafter. KFS is currently waiving
its management fee for Kemper Intermediate Municipal Bond Fund, Kemper

D-2
<PAGE> 60

Michigan Tax-Free Income Fund, Kemper New Jersey Tax-Free Income Fund and
Kemper Pennsylvania Tax-Free Income Fund.

(C) .45 of 1% of the first $250 million, .43 of 1% of the next $750 million, .41
of 1% of the next $1.5 billion, .40 of 1% of the next $2.5 billion, .38 of
1% of the next $2.5 billion, .36 of 1% of the next $2.5 billion, .34 of 1%
of the next $2.5 billion and .32 of 1% thereafter.

(D) .75 of 1% of the first $250 million, .72 of 1% of the next $750 million, .70
of 1% of the next $1.5 billion, .68 of 1% of the next $2.5 billion, .65 of
1% of the next $2.5 billion, .64 of 1% of the next $2.5 billion, .63 of 1%
of the next $2.5 billion and .62 of 1% thereafter.

(E) .40 of 1% of the first $250 million, .38 of 1% of the next $750 million, .35
of 1% of the next $1.5 billion, .32 of 1% of the next $2.5 billion, .30 of
1% of the next $2.5 billion, .28 of 1% of the next $2.5 billion, .26 of 1%
of the next $2.5 billion and .25 of 1% thereafter.

(F) Base investment management fee of .65 of 1% of average daily net assets plus
or minus an incentive fee based upon the investment performance of the fund
as compared with the performance of the Standard & Poor's 500 Stock Index
which may result in a total fee ranging from .35 of 1% to .95 of 1%.

(G) .50% of the first $215 million; .375% of the next $335 million; .30% of the
next $250 million; .25% thereafter (on the identified series in the
aggregate).

(H) .22% of the first $500 million; .20% of the next $500 million; .175% of the
next $1 billion; .16% of the next $1 billion; .15% thereafter (on the
identified series in the aggregate). KFS has agreed to temporarily absorb
operating expenses of the Cash Account Trust portfolios to the extent, if
any, that such expenses exceed the following percentages of average daily
net assets: Money Market Portfolio (1.00%), Government Securities Portfolio
(0.90%) and Tax-Exempt Portfolio (0.80%). In addition, from time to time,
KFS may voluntarily absorb certain additional expenses of the Cash Account
Trust portfolios. KFS has also agreed to temporarily absorb or pay
operating expenses of Tax-Exempt New York Money Market Fund to the extent,
if any, that such expenses exceed 0.80% of average net assets of the Fund.

(I) .80% of the first $250 million; .79% of the next $750 million; .77% of the
next $1.5 billion; .75% thereafter.

(J) .65% of the first $250 million; .64% of the next $750 million; .62% of the
next $1.5 billion; .60% thereafter.

(K) .50% of the first $250 million; .49% of the next $750 million; .47% of the
next $1.5 billion; .45% thereafter.

D-3
<PAGE> 61

EXHIBIT E

FEES AND EXPENSES
<TABLE>
<CAPTION>
KTEC KTRF KGF KSCF KICPF
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Fiscal Year End........................................... 10/31/94 10/31/94 9/30/94 9/30/94 10/31/94
Management Fees Paid to KFS............................... $3,296,000 10,997,000 9,634,000 3,746,000 2,734,000
Effective Management Fee Rate............................. .54% .53 .52 .71 .50
Custodian, Transfer Agent Fees Paid by Fund to IFTC....... $ 643,000 5,775,000 5,388,000 1,595,000 860,000
Shareholder Service Fees Paid by IFTC to KSVC............. $ 613,000 5,646,000 5,284,000 1,561,000 840,000
Administrative Service Fees Paid by Fund to KFS........... $ 874,000 4,848,000 4,182,000 1,190,000 821,000
Maximum Administrative Service Fee Rate Payable Based on
Assets Acquired Prior to 10/1/93......................... .25% .25 .25 .25 .15
Maximum Administrative Service Fee Rate Payable Based on
Assets Acquired On or After 10/1/93...................... .25% .25 .25 .25 .25
Effective Administrative Service Fee Rate................. .14% .23 .23 .23 .15
Commissions Retained by KFS............................... $ 43,000 523,000 489,000 182,000 261,000
Commissions Allowed to Affiliates of KFS.................. $ 38,000 693,000 591,000 243,000 179,000
Brokerage Commissions Paid by Fund........................ $1,644,000 7,705,000 7,110,000 2,782,000 1,168,000
Percent of Brokerage Commissions Paid by Fund Allocated on
Basis of Research/Sales.................................. 85% 81 98 86 0

<CAPTION>
KDIF KHYF KGSF KIF KARGF
--------- ---------- ---------- --------- ---------
<S> <C> <C>
Fiscal Year End........................................... 10/31/94 9/30/94 10/31/94 10/31/94 8/31/94
Management Fees Paid to KFS............................... 3,226,000 13,201,000 22,103,000 2,666,000 1,022,000(a)
Effective Management Fee Rate............................. .62 .52 .38 .75 .45(a)
Custodian, Transfer Agent Fees Paid by Fund to IFTC....... 1,098,000 3,057,000 6,384,000 1,135,000 429,000
Shareholder Service Fees Paid by IFTC to KSVC............. 1,062,000 2,916,000 5,831,000 1,146,000 424,000
Administrative Service Fees Paid by Fund to KFS........... 979,000 4,164,000 8,762,000 739,000 379,000
Maximum Administrative Service Fee Rate Payable Based on
Assets Acquired Prior to 10/1/93......................... .15 .15 .15 .25 .15
Maximum Administrative Service Fee Rate Payable Based on
Assets Acquired On or After 10/1/93...................... .25 .25 .25 .25 .25
Effective Administrative Service Fee Rate................. .19 .17 .15 .21 .17
Commissions Retained by KFS............................... 115,000 665,000 820,000 213,000 64,000
Commissions Allowed to Affiliates of KFS.................. 125,000 679,000 693,000 386,000 218,000
Brokerage Commissions Paid by Fund........................ 2,938,000 20,105,000 1,071,000 2,655,000 0
Percent of Brokerage Commissions Paid by Fund Allocated on
Basis of Research/Sales.................................. 1 0 4 98 0

<CAPTION>
KBCF KGIF
--------- --------
Fiscal Year End........................................... 10/31/94 12/31/94
Management Fees Paid to KFS............................... 1,072,000 864,000
Effective Management Fee Rate............................. .63 .75
Custodian, Transfer Agent Fees Paid by Fund to IFTC....... 632,000 263,000
Shareholder Service Fees Paid by IFTC to KSVC............. 625,000 261,000
Administrative Service Fees Paid by Fund to KFS........... 409,000 199,000
Maximum Administrative Service Fee Rate Payable Based on
Assets Acquired Prior to 10/1/93......................... .25 .15
Maximum Administrative Service Fee Rate Payable Based on
Assets Acquired On or After 10/1/93...................... .25 .25
Effective Administrative Service Fee Rate................. .24 .17
Commissions Retained by KFS............................... 64,000 15,000
Commissions Allowed to Affiliates of KFS.................. 68,000 37,000
Brokerage Commissions Paid by Fund........................ 565,000 0
Percent of Brokerage Commissions Paid by Fund Allocated on
Basis of Research/Sales.................................. 98 0
</TABLE>

- ---------------

(a) KFS waived its management fee and absorbed certain operating expenses for
KARGF through December 31, 1992. Thereafter, the management fee and
operating expenses were gradually instituted. If the fee waiver had not been
in effect, KFS would have received an additional $139,000 from KARGF for the
fiscal year ended 8/31/95.

E-1
<PAGE> 62

EXHIBIT E

<TABLE>
<CAPTION>
KNTIS(A) KSTIS(D) KP
----------- ------------------------------------------------------- ------------------------------------
KMBF KCATF KNYTF KFLTF KTXTF KOHTF KCRF KUSMF KSIGF
----------- --------- --------- ------- ------- ------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal Year
End............ 9/30/94 8/31/94 8/31/94 8/31/94 8/31/94 8/31/94 7/31/94 7/31/94 7/31/94
Management Fees
Paid to KFS.... $15,291,000 6,827,000 1,959,000 712,000 2,000(b) 0(c) 1,464,000 28,093,000 1,617,000
Effective
Management Fee
Rate........... .39% .54 .55 .55 .01(b) 0(c) .53 .56 .57
Custodian,
Transfer Agent
Fees Paid by
Fund to IFTC... $ 1,975,000 481,000 176,000 46,000 3,000 3,000 932,000 7,620,000 720,000
Shareholder
Service Fees
Paid by IFTC to
KSVC........... $ 1,888,000 503,000 186,000 64,000 9,000 13,000 913,000 7,344,000 714,000
Administrative
Service Fees
Paid by Fund to
KFS............ $ 4,340,000 1,266,000 365,000 133,000 15,000 0(c) 688,000 11,664,000 689,000
Maximum
Administrative
Service Fee
Rate Payable
Based on Assets
Acquired Prior
to 10/1/93..... .10% .10 .10 .10 .10 .10 .25 .25 .25
Maximum
Administrative
Service Fee
Rate Payable
Based on Assets
Acquired On or
After
10/1/93........ .25% .25 .25 .25 .25 .25 .25 .25 .25
Effective
Administrative
Service Fee
Rate........... .11% .10 .10 .10 .11 0(c) .23 .24
Commissions
Retained by
KFS............ $ 638,000 166,000 74,000 32,000 11,000 14,000 0 6,000 1,000
Commissions
Allowed to
Affiliates of
KFS............ $ 2,519,000 534,000 52,000 22,000 12,000 98,000 0 0 1,000
Brokerage
Commissions
Paid by Fund... $ 4,657,000 0 534,000 320,000 27,000 68,000 0 835,000 15,000
Percent of
Brokerage
Commissions
Paid by Fund
Allocated on
Basis of
Research/Sales... 2% 0 1 1 1 6 0 9 0
</TABLE>

- ---------------
(a) Commencing November 1, 1994, Kemper Intermediate Municipal Bond Fund began
offering shares. The Fund's first fiscal year end will be September 30,
1995.

(b) KFS waived its management fee and absorbed certain operating expenses for
KTXTF through December 31, 1992. Thereafter, the operating expenses were
gradually reinstated and the management fee was instituted in 1994. If the
fee waiver had not been in effect, KFS would have received an additional
$77,000 from KTXTF for the fiscal year ended 8/31/94.

(c) KFS waived its management fee and absorbed certain operating expenses for
KOHTF through June 30, 1994. Thereafter, the management fee and other
operating expenses are being gradually reinstated. If the fee waiver had not
been in effect, KFS would have received an additional $107,000 from KOHTF
for the fiscal year ended 8/31/94.

(d) Commencing March 15, 1995, KMITF, KNJIF and KPATF began offering shares. The
Funds first fiscal year end will be August 31, 1995.

E-2
<PAGE> 63

THANK YOU FOR MAILING YOUR PROXY CARD PROMPTLY!

We appreciate your continuing support and look
forward to serving your future investment needs.
<PAGE> 64

KEMPER MUTUAL FUNDS

KEMPER INTERNATIONAL AND GLOBAL FUNDS
Kemper Global Income Fund
Kemper International Fund

KEMPER CAPITAL GROWTH FUNDS
Kemper Growth Fund
Kemper Small Capitalization Equity Fund
Kemper Technology Fund

KEMPER CAPITAL GROWTH AND INCOME FUNDS
Kemper Blue Chip Fund
Kemper Total Return Fund

KEMPER TAX-FREE INCOME FUNDS
Kemper Intermediate Municipal Bond Fund
Kemper Municipal Bond Fund
Kemper State Tax-Free Income 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

KEMPER INCOME FUNDS
Kemper Adjustable Rate U.S. Government Fund
Kemper Diversified Income Fund
Kemper High Yield Fund
Kemper Income and Capital Preservation Fund
Kemper Short-Intermediate Government Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund

KEMPER PORTFOLIOS
Kemper Cash Reserves Fund
Kemper Short-Intermediate Government Fund
Kemper U.S. Mortgage Fund

[RECYCLE LOGO] Printed on recycled paper K795-A

<PAGE> 65
<TABLE>
<S><C>
For Withhold For All
1. To elect the following as trustees: All All Except
/ / / / / /

01) David W. Belin, 02) Lewis A. Burnham, 03) Donald L. Dunaway, 04) Robert B. Hoffman, 05) Donald R. Jones,
06) David B. Mathis, 07) Shirley D. Peterson, 08) Stephen B. Timbers, 09) William P. Sommers

---------------------------------------------------------------------------------------------------------
To withhold authority to vote on any individual nominee(s), please print the number(s) on the line above.

2. Ratify or reject the selection of For Against Abstain
/ / / / / /
Ernst & Young LLP as the Fund's independent auditors for
the current fiscal year.

3. Approve or disapprove a new investment management agreement / / / / / /
with Kemper Financial Services, Inc. or its successor on
the same terms as the current agreement.

4. [For Class B and Class C shareholders only,] Approve or / / / / / /
disapprove a new Rule 12b-1 distribution plan with Kemper
or its successor on the same terms as the plan.

Signature(s) (All registered owners of accounts shown to the left must sign. If signing for
a corporation, estate or trust, please indicate your capacity or title.)

X
- ----------------------------------------------------------------------------------------
Signature Date

PLEASE VOTE YOUR PROXY CARD TODAY!

</TABLE>

<PAGE> 66
PLEASE VOTE PROMPTLY!

Your vote is needed! Please vote on the reverse side of this form and sign in
the space provided. Return your completed proxy in the enclosed envelope
today.

You may receive additional proxies for your other accounts with Kemper.
These are not duplicates; you should sign and return each proxy card in
order for your votes to be counted. Please return them as soon as possible to
help save the cost of additional mailings.

The signers of this proxy hereby appoint Stephen B. Timbers and Donald L.
Dunaway, and each of them, attorneys and proxies, with power of substitution in
each, to vote all shares for the signers at the special meeting of shareholders
to be held September 19, 1995, and at any adjournments thereof, as specified
herein, and in accordance with their best judgement, on any other business that
may properly come before this meeting. If no specification is made herein, all
shares will be voted "FOR" the proposals set forth on this proxy.

The proxy is solicited by the Board of the Fund which recommends a vote "FOR"
all matters.