STATEMENT OF ADDITIONAL INFORMATION
February 1, 1999, as revised May 3, 1999
TAX-EXEMPT CALIFORNIA MONEY MARKET FUND
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-231-8568
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the prospectus of Tax-Exempt California Money Market
Fund (the "Fund") dated February 1, 1999. The prospectus may be obtained without
charge from the Fund by calling the number listed above or the firm from which
the prospectus was obtained, and is also available, along with other related
materials, on the SEC's Internet web site (http://www.sec.gov).
TABLE OF CONTENTS
MUNICIPAL SECURITIES.......................................................2
INVESTMENT RESTRICTIONS....................................................5
INVESTMENT MANAGER AND SHAREHOLDER SERVICES................................7
PORTFOLIO TRANSACTIONS....................................................10
PURCHASE AND REDEMPTION OF SHARES.........................................11
DIVIDENDS, NET ASSET VALUE AND TAXES......................................13
PERFORMANCE...............................................................14
OFFICERS AND TRUSTEES.....................................................17
SPECIAL FEATURES..........................................................18
SHAREHOLDER RIGHTS........................................................20
APPENDIX -- RATINGS OF INVESTMENTS........................................22
The financial statements appearing in the Fund's 1998 Annual Report to
Shareholders are incorporated herein by reference. The Fund's Annual Report to
Shareholders accompanies this Statement of Additional Information.
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MUNICIPAL SECURITIES
The two principal classifications of Municipal Securities consist of "general
obligation" and "revenue" issues. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Industrial development bonds held by the
Fund are in most cases revenue bonds and are not payable from the unrestricted
revenues of the issuer. Among other types of instruments, the Fund may purchase
tax-exempt commercial paper, warrants and short-term municipal notes such as tax
anticipation notes, bond anticipation notes, revenue anticipation notes,
construction loan notes and other forms of short-term loans. Such notes are
issued with a short-term maturity in anticipation of the receipt of tax
payments, the proceeds of bond placements or other revenues.
The Fund may purchase securities which provide for the right to resell them to
an issuer, bank or dealer at an agreed upon price or yield within a specified
period prior to the maturity date of such securities. Such a right to resell is
referred to as a "Standby Commitment." Securities may cost more with Standby
Commitments than without them. Standby Commitments will be entered into solely
to facilitate portfolio liquidity. A Standby Commitment may be exercised before
the maturity date of the related Municipal Security if the Fund's investment
manager revises its evaluation of the creditworthiness of the underlying
security or of the entity issuing the Standby Commitment. The Fund's policy is
to enter into Standby Commitments only with issuers, banks or dealers, which are
determined by the Fund's investment manager to present minimal credit risks. If
an issuer, bank or dealer should default on its obligation to repurchase an
underlying security, the Fund might be unable to recover all or a portion of any
loss sustained from having to sell the security elsewhere. For purposes of
valuing the Fund's securities at amortized cost, the maturity of Municipal
Securities will not be considered shortened by any Standby Commitment to which
such security is subject.
The Fund may invest in certain Municipal Securities having rates of interest
that are adjusted periodically or that "float" continuously according to
formulae intended to minimize fluctuations in values of the instruments
("Variable Rate Notes"). The interest rate on Variable Rate Notes ordinarily is
determined by reference to or is a percentage of a bank's prime rate, the 90 day
U.S. Treasury bill rate, the rate of return on commercial paper or bank
certificates of deposit, or some similar objective standard. Generally, the
changes in the interest rate on Variable Rate Notes reduce the fluctuation in
the market value of such notes. Accordingly, as interest rates decrease or
increase, the potential for capital appreciation or capital depreciation is less
than for fixed rate obligations. Variable Rate Loan Participations are similar
to Variable Rate Notes except they are made available through a commercial bank,
which arranges the tax-exempt loan. Variable Rate Notes and Variable Rate Loan
Participations typically are bought and sold among institutional investors. The
Fund currently intends to invest a substantial portion of its assets in Variable
Rate Notes and Variable Rate Loan Participations. Variable Rate Demand Notes
have a demand feature which entitles the purchaser to resell the securities at
par value. The rate of return on Variable Rate Demand Notes also varies
according to some objective standard, such as an index of short-term tax-exempt
rates. Variable rate instruments with a demand feature enable the Fund to
purchase instruments with a stated maturity in excess of one year. The Fund
determines the maturity of variable rate instruments in accordance with Rule
2a-7, which allows the Fund to consider certain of such instruments as having
maturities shorter than the maturity date on the face of the instrument.
The Fund may purchase high quality Certificates of Participation in trusts that
hold Municipal Securities. A Certificate of Participation gives the Fund an
undivided interest in the Municipal Security in the proportion that the Fund's
interest bears to the total principal amount of the Municipal Security. These
Certificates of Participation may be variable rate or fixed rate with remaining
maturities of one year or less. A Certificate of Participation may be backed by
an irrevocable letter of credit or guarantee of a financial institution that
satisfies rating agencies as to the credit quality of the Municipal Security
supporting the payment of principal and interest on the Certificate of
Participation. Payments of principal and interest would be dependent upon the
underlying Municipal Security and may be guaranteed under a letter of credit to
the extent of such credit. The quality rating by a rating service of an issue of
Certificates of Participation is based primarily upon the rating of the
Municipal Security held by the trust and the credit rating of the issuer of any
letter of credit and of any other guarantor providing credit support to the
issue. The Fund's investment manager considers these factors as well as others,
such as any quality ratings issued by the rating services identified above, in
reviewing the credit risk presented by a Certificate of Participation and in
determining whether the Certificate of Participation is appropriate for
investment by the Fund. The Fund's investment manager anticipates that, for most
publicly offered Certificates of Participation, there will be a liquid secondary
market or there may be demand features enabling the Fund to readily sell its
Certificates of Participation prior to maturity to the issuer or a third party.
As to those instruments with demand features, the Fund intends to exercise its
right to demand payment from the issuer of the demand feature only upon a
default under the terms of the Municipal Security, as needed to provide
liquidity to meet redemptions, or to maintain a high quality investment
portfolio.
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The Fund may purchase and sell Municipal Securities on a when-issued or delayed
delivery basis. A when-issued or delayed delivery transaction arises when
securities are bought or sold for future payment and delivery to secure what is
considered to be an advantageous price and yield to the Fund at the time it
enters into the transaction. In determining the maturity of portfolio securities
purchased on a when-issued or delayed delivery basis, the Fund will consider
them purchased on the date when it commits itself to the purchase.
A security purchased on a when-issued basis, like all securities held in the
Fund's portfolio, is subject to changes in market value based upon changes in
the level of interest rates and investors' perceptions of the creditworthiness
of the issuer. Generally such securities will appreciate in value when interest
rates decline and depreciate in value when interest rates rise. Therefore if, in
order to achieve higher interest income, the Fund remains substantially fully
invested at the same time that it has purchased securities on a when-issued
basis, there will be a greater possibility that the net asset value of the
Fund's shares will vary from $1.00 per share, since the value of a when-issued
security is subject to market fluctuation and no interest accrues to the
purchaser prior to settlement of the transaction. See "Net Asset Value."
The Fund will only make commitments to purchase Municipal Securities on a
when-issued or delayed delivery basis with the intention of actually acquiring
the securities, but the Fund reserves the right to sell these securities before
the settlement date if deemed advisable. The sale of securities may result in
the realization of gains that are not exempt from federal or State of California
income tax.
Yields on Municipal Securities are dependent on a variety of factors, including
the general conditions of the money market and the municipal bond market, and
the size, maturity and rating of the particular offering. The ratings of Moody's
and S&P represent their opinions as to the quality of the Municipal Securities
that they undertake to rate. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, Municipal
Securities with the same maturity, coupon and rating may have different yields.
In seeking to achieve its investment objective, the Fund may invest all or any
part of its assets in Municipal Securities that are industrial development
bonds. Moreover, although the Fund does not currently intend to do so on a
regular basis, it may invest more than 25% of its assets in Municipal Securities
which are repayable out of revenue streams generated from economically related
projects or facilities, if such investment is deemed necessary or appropriate by
the Fund's investment manager. To the extent that the Fund's assets are
concentrated in Municipal Securities payable from revenues on economically
related projects and facilities, the Fund will be subject to the peculiar risks
presented by such projects to a greater extent than it would be if the Fund's
assets were not so concentrated.
Municipal Securities that the Fund may purchase include, without limitation,
debt obligations issued to obtain funds for various public purposes, including
the construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, public utilities, schools,
streets, and water and sewer works. Other public purposes for which Municipal
Securities may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and obtaining funds to loan to other public
institutions and facilities.
Municipal Securities, such as industrial development bonds, are issued by or on
behalf of public authorities to obtain funds for purposes including privately
operated airports, housing, conventions, trade shows, ports, sports, parking or
pollution control facilities or for facilities for water, gas, electricity or
sewage and solid waste disposal. Such obligations, which may include lease
arrangements, are included within the term Municipal Securities if the interest
paid thereon qualifies as exempt from federal income tax. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues.
Examples of Municipal Securities which are issued with original maturities of
one year or less are short-term tax anticipation notes, bond anticipation notes,
revenue anticipation notes, construction loan notes, pre-refunded municipal
bonds, warrants and tax-free commercial paper.
Tax anticipation notes typically are sold to finance working capital needs of
municipalities in anticipation of receiving property taxes on a future date.
Bond anticipation notes are sold on an interim basis in anticipation of a
municipality issuing a longer term bond in the future. Revenue anticipation
notes are issued in expectation of receipt of other types of revenue such as
those available under the Federal Revenue Sharing Program. Construction loan
notes are instruments insured by the Federal Housing Administration with
permanent financing by "Fannie Mae" (the Federal National Mortgage Association)
or "Ginnie Mae" (the Government National Mortgage Association) at the end of the
project construction period. Pre-refunded municipal bonds are bonds that are not
yet refundable, but for which securities have been placed in escrow to refund an
original municipal bond issue when it becomes refundable. Tax-free commercial
paper is an unsecured promissory obligation
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issued or guaranteed by a municipal issuer. The Fund may purchase other
Municipal Securities similar to the foregoing that are or may become available,
including securities issued to pre-refund other outstanding obligations of
municipal issuers.
The federal bankruptcy statutes relating to the adjustments of debts of
political subdivisions and authorities of states of the United States provide
that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material and adverse changes in
the rights of holders of obligations issued by such subdivisions or authorities.
Litigation challenging the validity under state constitutions of present systems
of financing public education has been initiated or adjudicated in a number of
states, and legislation has been introduced to effect changes in public school
finances in some states. In other instances there has been litigation
challenging the issuance of pollution control revenue bonds or the validity of
their issuance under state or federal law, which litigation ultimately could
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
The following information as to certain California risk factors is given to
investors because the Fund concentrates its investments in California State and
local municipal securities. Such information constitutes only a brief summary,
does not purport to be a complete description, and is based upon information
from official statements relating to securities offerings of the state of
California and various California issuers.
As described in the Fund's prospectus, the Fund will invest in bonds issued by
the State of California or its political subdivisions. The Fund is therefore
subject to various statutory, political and economic factors unique to the State
of California. Discussed below are some of the more significant factors that
could affect the ability of the bond issuers to repay interest and principal on
California securities owned by the Fund. The information is derived from various
public sources, all of which are available to investors generally, and which the
Fund believes to be accurate.
The State of California's economy continues to improve. As one of the last
states to emerge from the recession, California is now leading the country in
job growth. The State's employment make-up shift from defense and aerospace
industries to technology, multimedia, and trade has lead the State through this
recovery. The unemployment rate is trending down; personal income continues to
increase; deficit borrowing has ceased; and the State is attempting to replenish
its thin reserves.
On an unaudited basis, California finished FY98 with an operating surplus in its
General Fund of approximately $2.2 billion, 4% of General Fund revenues. Some of
this surplus has been added to the State's Special Fund for Economic
Uncertainties (SFEU), bringing the balance of that fund to $1.8 billion as of
June 30, 1998, 3.2% of General Fund revenues. This marks the third year in a row
in which the SFEU had a positive balance and the State did not have to rely on
deficit borrowing.
After much debate and many revisions, the State adopted its FY99 budget on
August 21, 1998, one and a half months late. The favorable financial position of
the State created a budget stalemate over the issue of how to spend the large
surplus. The adopted FY99 budget reflects General Fund revenues totaling $57.0
billion, a 4.2% increase over FY98, and expenditures totaling $57.3 billion, up
7.3% over FY98. The projected short fall in revenues will be covered by a draw
down of the SFEU. The State projects to end FY99 with a SFEU balance of $1.25
billion, 2% of General Fund revenues. Expenditure increases are focused on
education and incarceration spending. Governor Wilson also signed State
legislation which provides for over $1.4 billion in tax cuts. The central
element is the phasing in of a 75% reduction in the State's motor vehicle
license fee; this will eventually amount to $1 billion annual savings for
taxpayers.
California continues to lead the nation in terms of job growth. The State added
377,500 nonfarm jobs in the last twelve months. In September, 1998, the State
added 35,500 jobs, 51% of the 69,000 jobs added nationwide. The growth in jobs
is concentrated in high technology industries, specifically: computer software,
electronics manufacturing, and motion picture production. This growth has
brought the State's unemployment rate down to the 1997 average of 6.3% versus
4.9% for the national average. In September, 1998, the State's unemployment rate
was 5.8%; the national average was 4.5%. Personal income grew by 7% in 1998 over
1997.
California's per capita personal income for 1997 was $26,570, 104% of the
national average. California's per capita income, as a percent of the national
average, declined from 115% in 1985 to a low of 103% in 1994. In 1995 the ratio
increased to 104%, where it remained in 1996 and 1997.
International trade is a strong part of the State's economy. Recent economic
turmoil in Asia has led to decreases in trade with these countries, however,
California has experienced trade increases with Europe and NAFTA countries.
These offsetting
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measures have led to no change in Made-In-California exports during the first
six months of 1998 over the same period in 1997.
California is one of the largest issuers of municipal debt with $25 billion of
debt outstanding. The size of the State and its wealth levels lessen the impact
that debt of that magnitude could have. The State's debt per capita is $773,
122% of the national average. Debt service as a percent of per capita income is
3%, 110% of the national average. In FY97, annual debt service as a percent of
General Fund expenditures was a manageable 4%. California currently has $15.2
billion of authorized but unissued debt for infrastructure needs in schools and
for transportation projects. This backlog reflects the recent proposal for $9.2
billion of bonds that passed in the November 3, 1998 election.
The State's cash flow position has improved dramatically in the last year.
California has ceased its practice of relying on interfund borrowing to offset
cash flow volatility between fiscal years. As of June 30, 1998 the State had no
outstanding loans from internal borrowable resources. This compares to the $1.2
billion that the State had outstanding as of June 30, 1997. Improving financial
conditions allow the State to rely less on this source of temporary cash flow
relief; this is also evidenced by the decrease in borrowing in the note market.
California issued $1.7 billion of Revenue Anticipation Notes in September, 1998
for FY99. This represents a 57% decrease in cash flow borrowing from FY98.
California is benefiting from a strong economy which has lead to improved
finances, specifically an improved cash flow position.
As of December 29, 1998, all outstanding general obligation bonds of the State
of California were rated Aa3 by Moody's and A+ by S&P.
In recent years, California voters have approved a number of changes to the
State constitution that have limited the ability of State and local issuers to
raise revenues and adjust appropriations.
In 1978, California voters approved Proposition 13 which added Article XIII A to
the California Constitution. Article XIII A changed the definition of assessed
property value and placed restrictions on a taxing entity's ability to increase
real property taxes. In 1979, voters also approved Proposition 4, the so-called
Gann Initiative, which added Article XIII B to the California Constitution. The
purpose of Article XIII B was to limit the annual appropriations of the State
and any local government unit to the level of appropriations for the prior year,
as adjusted for changes in cost of living, population and services required.
Article XIII B also specified that debt service obligations incurred prior to
January 1, 1979 were excluded from the appropriations limits.
In the general elections of 1986, 1988, 1990 and 1996, California voters
approved various measures that amended Article XIII A and XIII B and added
Article XIII C and XIII D to the State Constitution. Propositions 58 and 60
clarified the definitions of "purchased property" and "change of ownership"
found in Article XIII A. Proposition 98, in addition to guaranteeing a percent
of State funding for public schools, modified Article XIII B to permit excess
State revenues to be transferred to public schools and community colleges rather
than returned to taxpayers. Proposition 111 amended Article XIII B to ease
restrictions on certain expenditure categories in calculating the annual
appropriation ceiling. Article XIII C and XIII D place additional requirements
on revenue raising abilities of local government units. Finally, on November 5,
1996, California voters approved Proposition 218, called the "Right to Vote on
Taxes Act." This constitutional amendment restricts local governments' ability
to raise or extend taxes without voter consent, places restrictions on the
ability to charge certain fees and assessments, and makes it easier for voters
to use the initiative process to reduce or repeal existing taxes.
Future voter initiatives, if proposed and adopted, could further modify Articles
XIII A, XIII B, XIII C, and XIII D and place increased pressures on the State
and local entities' ability to raise revenue and adjust appropriations.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions which cannot be changed
without approval by holders of a majority of its outstanding voting shares. As
defined in the Investment Company Act of 1940 (the "1940 Act"), this means the
lesser of the vote of (a) 67% of the Fund's shares present at a meeting where
more than 50% of the outstanding shares are present in person or by proxy; or
(b) more than 50% of the Fund's shares.
The Fund has elected to be classified as a diversified series of an open-end
investment company, but will not be subject to additional requirements that are
more restrictive than the 1940 Act.
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In addition, as a matter of fundamental policy, the Fund may not:
1. Purchase securities or make investments other than in accordance with its
investment objective and policies.
2. Purchase securities (other than securities of the United States Government,
its agencies or instrumentalities or of a state or its political
subdivisions) if as a result of such purchase more than 25% of the Fund's
total assets would be invested in any one industry.
3. Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as
a result, more than 5% of the Fund's total assets would be invested in
securities of that issuer, except that up to 25% of the value of the Fund's
total assets may be invested without regard to this 5% limitation. For
purposes of this limitation, the Fund will regard the entity which has the
primary responsibility for the payment of interest and principal as the
issuer
4. Invest more than 10% of its total assets in illiquid securities, including
repurchase agreements maturing in more than seven days.
5. Invest more than 5% of the Fund's total assets in industrial development
bonds sponsored by companies which with their predecessors have less than
three years' continuous operation.
6. Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objective and
policies).
7. Borrow money except from banks for temporary purposes (but not for the
purpose of purchase of investments) and then only in an amount not to
exceed one-third of the value of the Fund's total assets (including the
amount borrowed) in order to meet redemption requests which otherwise might
result in the untimely disposition of securities; or pledge the Fund's
securities or receivables or transfer or assign or otherwise encumber them
in an amount to exceed 10% of the Fund's net assets to secure borrowings.
Reverse repurchase agreements made by the Fund are permitted within the
limitations of this paragraph. The Fund will not purchase securities or
make investments while reverse repurchase agreements or borrowings are
outstanding.
8. Make short sales of securities or purchase securities on margin, except to
obtain such short-term credits as may be necessary for the clearance of
transactions.
9. Write, purchase or sell puts, calls or combinations thereof, although the
Fund may purchase Municipal Securities subject to Standby Commitments,
Variable Rate Demand Notes or Repurchase Agreements in accordance with its
investment objective and policies.
10. Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and
together own more than 5% of the securities of such issuer.
11. Invest for the purpose of exercising control or management of another
issuer.
12. Invest in commodities or commodity futures contracts or in real estate
except that the Fund may invest in Municipal Securities secured by real
estate or interests therein and securities of issuers which invest or deal
in real estate.
13. Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in Municipal Securities of issuers which
invest in or sponsor such programs.
14. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
15. Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of portfolio securities.
16. Issue senior securities as defined in the Investment Company Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund may
invest more than 25% of its total assets in industrial development bonds. The
Fund did not borrow money as permitted by investment restriction number 7 during
its latest fiscal year, and it has no present intention of borrowing during the
current year.
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INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The investment objective of the Fund is maximum current income that is exempt
from federal and State of California income taxes to the extent consistent with
stability of capital. The Fund pursues its objective primarily through a
professionally managed, diversified portfolio of short-term high quality
municipal obligations, the income from which is exempt from federal and State of
California income taxes. The Fund is a money market mutual fund that has been
designed to provide investors with professional management of short-term
investment dollars. The Fund pools individual and institutional investors' money
which it uses to buy tax-exempt money market instruments. Because the Fund
combines its shareholders' money, it can buy and sell large blocks of
securities, which reduces transaction costs and maximizes yields. The Fund is
managed by investment professionals who analyze market trends to take advantage
of changing conditions. Its investments are subject to price fluctuations
resulting from rising or declining interest rates and are subject to the ability
of the issuers of such investments to make payment at maturity. Because of their
short maturities, liquidity and high quality, money market instruments, such as
those in which the Fund invests, are generally considered to be among the safest
available. There can be no assurance that the Fund will achieve its objective or
that it will maintain a net asset value of $1.00 per share.
Under normal market conditions, the Fund attempts to invest 100%, and will
invest at least 80%, of its total assets in tax-exempt debt obligations issued
by or on behalf of the State of California and other states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities ("Municipal Securities")
and will invest at least 65% of its total assets in tax-exempt obligations of
the State of California and its political subdivisions ("California Municipal
Securities"). In compliance with the position of the staff of the Securities and
Exchange Commission, the Fund does not consider "private activity" bonds as
described in "Dividends, Net Asset Value and Taxes" as Municipal Securities for
purposes of the 80% limitation. This is a fundamental policy so long as the
staff maintains its position, after which it would become non-fundamental.
Dividends to the extent of interest income received on California Municipal
Securities will be exempt from both federal and State of California income tax
provided at least 50% of the Fund's total assets are invested in California
Municipal Securities. Such dividend income may be subject to local taxes. See
"Dividends, Net Asset Value and Taxes." The Fund's assets will consist of
Municipal Securities, temporary investments, as described below, and cash.
The Fund will invest only in Municipal Securities that at the time of purchase:
(a) are rated within the two highest ratings of municipal securities (Aaa or Aa)
assigned by Moody's Investors Service, Inc. ("Moody's") or (AAA or AA) assigned
by Standard & Poor's Corporation ("S&P"); (b) are guaranteed or insured by the
U.S. Government as to the payment of principal and interest; (c) are fully
collateralized by an escrow of U.S. Government securities; (d) have at the time
of purchase Moody's short-term municipal securities rating of MIG-2 or higher or
a municipal commercial paper rating of P-2 or higher, or S&P's municipal
commercial paper rating of A-2 or higher; (e) are unrated, if longer term
municipal securities of that issuer are rated within the two highest rating
categories by Moody's or S&P; or (f) are determined by the investment manager to
be at least equal in quality to one or more of the above ratings. In addition,
the Fund limits its investment to securities that meet the quality and
diversification requirements of Rule 2a-7 under the Investment Company Act of
1940 ("1940 Act"). See "Net Asset Value."
Except as otherwise indicated, the investment objective of the Fund and the
investment policies set forth in the three preceding paragraphs are not
fundamental and may be changed without the affirmative vote of a majority of the
outstanding shares of the Fund, as defined below.
From time to time, a significant portion of the Fund's securities is supported
by credit and liquidity enhancements from third party banks and other financial
institutions, and as a result, changes in the credit quality of these
institutions could cause losses to the Fund and affect its share price.
From time to time, as a defensive measure or when acceptable short-term
Municipal Securities are not available, the Fund may invest in taxable
"temporary investments" that include: obligations of the U.S. Government, its
agencies or instrumentalities; debt securities rated within the two highest
grades by Moody's or S&P; commercial paper rated in the two highest grades by
either of such rating services; certificates of deposit of domestic banks with
assets of $1 billion or more; and any of the foregoing temporary investments
subject to repurchase agreements. Under a repurchase agreement the Fund acquires
ownership of a security from a broker-dealer or bank that agrees to repurchase
the security at a mutually agreed upon time and price (which price is higher
than the purchase price), thereby determining the yield during the Fund's
holding period. Repurchase agreements with broker-dealer firms will be limited
to obligations of the U.S. Government, its agencies or instrumentalities.
Maturity of the securities subject to repurchase may exceed one year. Interest
income from temporary investments is taxable to shareholders as ordinary income.
Although the Fund is permitted to invest in taxable securities, it is the Fund's
primary intention to generate income dividends that are not subject to federal
or State of California income taxes. See "Dividends, Net Asset Value and Taxes."
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The Fund may also engage in "reverse repurchase agreements," that are repurchase
agreements in which the Fund, as the seller of securities, agrees to repurchase
them at an agreed upon time and price. Reverse repurchase agreements will only
be used by the Fund to raise cash on a temporary basis to meet redemptions when
it would like to retain the Municipal Securities in its portfolio and it expects
to be able to repurchase them in a short time with funds from maturing
investments and from net sales of Fund shares. Use of reverse repurchase
agreements, because of the lower transaction costs involved, is often preferable
to a regular sale and later repurchase of the securities.
The Fund may borrow money, including through reverse repurchase agreements, for
temporary purposes, but not for the purpose of purchase of investments, in an
amount up to one-third of the value of the Fund's total assets and may pledge up
to 10% of the Fund's net assets to secure borrowings. The Fund will not purchase
illiquid securities, including repurchase agreements maturing in more than seven
days, if, as a result thereof, more than 10% of the Fund's total assets valued
at the time of the transaction would be invested in such securities. Up to 25%
of the total assets of the Fund may be invested at any time in debt obligations
of a single issuer or of issuers in a single industry, although the Fund may
invest without limitation in Municipal Securities the income on which may be
derived from projects of a single type.
The Fund must meet the diversification requirements of Rule 2a-7 under the 1940
Act. Rule 2a-7 provides that a single state money fund shall not, as to 75% of
its assets, invest more than 5% of its assets in the securities of an individual
issuer, provided that the fund may not invest more than 5% of its assets in the
securities of an individual issuer unless the securities are First Tier
Securities (as defined in Rule 2a-7). This allows the Fund, as to 25% of its
assets, to invest more than 5% of its assets in the securities of an individual
issuer. Since the Fund is concentrated in securities issued by the state of
California or entities within the state and may invest a significant percentage
of its assets in the securities of a single issuer, an investment in the Fund
may be subject to more risk than an investment in other types of money market
funds.
The Fund has adopted certain fundamental investment restrictions which cannot be
changed without approval by holders of a majority of its outstanding voting
shares. As defined in the 1940 Act, this means the lesser of the vote of (a) 67%
of the shares of the Fund present at a meeting where more than 50% of the
outstanding shares are present in person or by proxy; or (b) more than 50% of
the outstanding shares of the Fund.
Master/Feeder Fund Structure. The Board of Trustees has the discretion to retain
the current distribution arrangements for the Fund while investing in a master
fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
INVESTMENT MANAGER AND SHAREHOLDER SERVICES
Investment Manager. Scudder Kemper Investments, Inc. ("Scudder Kemper" or the
"Adviser"), 345 Park Avenue, New York, New York, is the Fund's investment
manager. Scudder Kemper is approximately 70% owned by Zurich Financial Services,
Inc., a newly formed global insurance and financial services company. The
balance of the Adviser is owned by its officers and employees. Pursuant to an
investment management agreement, Scudder Kemper acts as the Fund's investment
adviser, manages its investments, administers its business affairs, furnishes
office facilities and equipment, provides clerical, and administrative services
and permits any of its officers or employees to serve without compensation as
trustees or officers of the Fund if elected to such positions. The Fund pays the
expenses of its operations, including the fees and expenses of independent
auditors, counsel, custodian and transfer agent and the cost of share
certificates, reports and notices to shareholders, costs of calculating net
asset value and maintaining all accounting records thereto, brokerage
commissions or transaction costs, taxes, registration fees, the fees and
expenses of qualifying the Fund and its shares for distribution under federal
and state securities laws and membership dues in the Investment Company
Institute or any similar organization.
The agreement provides that 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 the agreement relates, except a 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 the agreement.
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The investment management agreement continues in effect from year to year so
long as its continuation is approved at least annually by a majority vote of the
trustees who are not parties to such agreement or interested persons of any such
party except in their capacity as trustees of the Fund, cast in person at a
meeting called for such purpose, and by the shareholders or the Board of
Trustees. It may be terminated at any time upon 60 days notice by either party,
or by a majority vote of the outstanding shares, and will terminate
automatically upon assignment.
At December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder") and Zurich Insurance Company ("Zurich") formed a new
global organization by combining Scudder with Zurich Kemper Investments, Inc., a
former subsidiary of Zurich and the former investment manager to each Fund, and
Scudder changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owned approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.
Because the transaction between Scudder and Zurich resulted in the assignment of
the Fund's investment management agreement with ZKI, the agreement was deemed to
be automatically terminated upon consummation of the transaction. In
anticipation of the transaction, however, a new investment management agreement
between the Fund and Scudder Kemper was approved by the Fund's Board of Trustees
and shareholders. The new investment management agreement was effective as of
December 31, 1997 and will be in effect for an initial term ending on the same
date as would the previous investment management agreement with ZKI.
The Fund's investment management agreement is on substantially similar terms as
the investment management agreement terminated by the transaction, except that
Scudder Kemper is the new investment adviser to the Fund.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in Scudder Kemper) and the financial services businesses of B.A.T Industries
p.l.c. ("B.A.T") were combined to form a new global insurance and financial
services company known as Zurich Financial Services, Inc. By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, each Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement with Scudder Kemper, which is substantially identical to the current
investment management agreement, except for the date of execution and
termination. This agreement became effective upon the termination of the then
current investment management agreement and was approved by shareholders at a
special meeting that concluded in December 1998.
For the services and facilities furnished, the Fund pays a monthly investment
management fee on a graduated basis of 1/12 of the following annual fee: 0.22%
of the first $500 million of average daily net assets, 0.20% of the next $500
million, 0.175% of the next $1 billion, 0.16% of the next $1 billion and 0.15%
of average daily net assets over $3 billion. Pursuant to the investment
management agreement, the Fund paid the Adviser, including the former investment
manager, fees of $306,000, $127,000 and $232,000 for the fiscal years ended
September 30, 1998, 1997 and 1996, respectively.
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), a
subsidiary of Scudder Kemper, is responsible for determining the daily net asset
value per share of the Fund and maintaining all accounting records related
hereto. Currently, SFAC receives no fee for its services to the Fund, however,
subject to Board approval, at some time in the future, SFAC may seek payment for
its services under this agreement.
Distributor. Pursuant to a distribution services agreement ("distribution
agreement"), Kemper Distributors, Inc. ("KDI"), an affiliate of the Adviser,
serves as distributor, administrator and principal underwriter to the Fund to
provide information and services for existing and potential shareholders. The
distribution agreement provides that KDI shall act as agent for the Fund in the
sale of its shares and shall appoint various firms to provide a cash management
service for their customers or clients through the Fund. The firms are to
provide such office space and equipment, telephone facilities, personnel and
sales literature distribution as is necessary or appropriate for providing
information and services to the firms' clients and prospective clients. The Fund
has adopted a plan in accordance with Rule 12b-1 of the Investment Company Act
of 1940 (the "12b-1 Plan"). The rule regulates the manner in which an investment
company may, directly or indirectly, bear the expenses of distributing its
shares. The Fund pays for the prospectus and shareholder reports to be set in
type and printed for existing shareholders, and KDI pays for the printing and
distribution of copies thereof used in connection with the offering of shares to
prospective investors. KDI pays for supplementary sales literature and
advertising. For its services as distributor, and pursuant to the 12b-1 Plan,
the Fund pays KDI an annual distribution services fee, payable monthly, of .33%
of average daily net assets of the Fund. The distribution agreement and the
12b-1 Plan continue in effect from year to year so long as its continuation is
approved at least annually by a majority of the trustees who are not parties to
such agreement or interested persons of the Fund and who have no direct or
indirect financial interest in the agreement or in any agreement related
thereto.
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The distribution agreement automatically terminates in the event of its
assignment and may be terminated at any time without penalty by the Fund or by
KDI upon 60 days' written notice. Termination by the Fund may be by vote of a
majority of the Board of Trustees, or a majority of the Trustees who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the agreement, or a majority vote of the outstanding shares. The fee
payable pursuant to the 12b-1 Plan may not be increased without shareholder
approval and all material amendments must in any event be approved by the Board
of Trustees in the manner described above with respect to the continuation of
the 12b-1 Plan. If additional Portfolios are authorized by the Board of
Trustees, the provisions concerning the continuation, amendment and termination
of the distribution services agreement and the 12b-1 Plan will be on a Portfolio
by Portfolio basis.
KDI has related administration services and selling group agreements with
various broker-dealer firms to provide cash management and other services for
the Fund shareholders. Such services and assistance may include, but are not
limited to, establishing and maintaining shareholder accounts and records,
processing purchase and redemption transactions, providing automatic investment
in Fund shares of client account balances, answering routine inquiries regarding
the Fund, assisting clients in changing account options, designations and
addresses, and such other services as may be agreed upon from time to time and
as may be permitted by applicable statute, rule or regulation. KDI also has
services agreements with banking firms to provide the above listed services,
except for certain distribution services which the banks may be prohibited from
providing, for their clients who wish to invest in the Fund. KDI also may
provide some of the above services for the Fund. KDI normally pays the firms at
an annual rate ranging from .15% to .33% of average net assets of those accounts
that they maintain and service. KDI may elect to keep a portion of the total
administration fee to compensate itself for functions performed for the Fund or
to pay for sales materials or other promotional activities.
For the fiscal year ended September 30, 1998, the Fund incurred distribution
fees of $465,000. Of such amount, KDI remitted $462,000 to various firms
pursuant to the related services agreements. For the fiscal year ended September
30, 1998, KDI incurred underwriting, distribution and administrative expenses in
the approximate amounts noted: service fees to firms $462,000; advertising and
literature $0; and marketing and sales expenses $37,000; for a total of
$499,000. A portion of the aforesaid marketing, sales and operating expenses
could be considered overhead expense; however, KDI has made no attempt to
differentiate between expenses that are overhead and those that are not.
Certain trustees or officers of the Fund are also directors or officers of the
Adviser and KDI as indicated under "Officers and Trustees."
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, as custodian,
has custody of all securities and cash of the Fund. It attends to the collection
of principal and income, and payment for and collection of proceeds of
securities bought and sold by the Fund. Investors Fiduciary Trust Company
("IFTC") is the transfer agent of the Fund (see "Purchase of Shares" in the
prospectus). Pursuant to a services agreement with IFTC, Kemper Service Company
("KSvC"), an affiliate of the Adviser, serves as "Shareholder Service Agent" of
the Fund and, as such, performs all of IFTC's duties as transfer agent and
dividend paying agents. IFTC receives, as transfer agent, and pays to KSvC as
follows: prior to January 1, 1999, annual account fees of a maximum of $13 per
account plus out-of-pocket expense reimbursement; and, effective January 1,
1999, annual account fees of $14.00 ($23.00) for retirement accounts) plus
account set-up charges, annual fees associated with the contingent deferred
sales charges (Class B shares only), an asset based fee of 0.02%, and
out-of-pocket expense reimbursement. For the fiscal year ended September 30,
1998, IFTC remitted fees in the amount of $125,000 to KSvC as Shareholder
Service Agent.
Independent Auditors and Reports to Shareholders. The Fund's independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Fund's annual financial statements, review certain
regulatory reports and the Fund's federal income tax return, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Fund. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
Legal Counsel. Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street,
Chicago, Illinois 60601, serves as legal counsel to the Fund.
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to pursue the Fund's
investment objective in relation to movements in the general level of interest
rates, to invest money obtained from the sale of Fund shares, to reinvest
proceeds from maturing portfolio securities and to meet redemptions of Fund
shares. These transactions may increase or decrease the yield of the Fund
depending upon management's ability to correctly time and execute such
transactions. Since the Fund's assets will be invested in short-term Municipal
Securities, its portfolio will turn over several times a year. However, since
securities with
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maturities of less than one year are excluded from required portfolio turnover
rate calculations, the Fund's turnover rate for reporting purposes will be zero.
The primary objective of the Adviser in placing orders for the purchase and sale
of securities for the Fund is to obtain the most favorable net results taking
into account such factors as price, commission where applicable, size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Adviser seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through its familiarity with commissions charged
on comparable transactions, as well as by comparing commissions paid by a Fund
to reported commissions paid by others. The Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Adviser's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Fund. The term "research, market and statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Adviser is authorized when placing portfolio transactions for the Fund to
pay a brokerage commission in excess of that which another broker might charge
for executing the same transaction solely on account of the receipt of research,
market or statistical information. In effecting transactions in over-the-counter
securities, orders are placed with the principal market makers for the security
being traded unless, after exercising care, it appears that more favorable
results are available elsewhere.
In selecting among firms believed to meet the criteria for handling a particular
transaction, the Adviser may give consideration to those firms that have sold or
are selling shares of a Fund managed by the Adviser.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through Scudder Investor Services, Inc.,
("SIS"), a corporation registered as a broker-dealer and a subsidiary of the
Adviser. SIS will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. SIS will not receive any commission, fee or other
remuneration from the Fund for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Adviser, it is the opinion
of the Adviser that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Fund and not all such information is used by
the Adviser in connection with the Fund. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Fund.
The Trustees for the Fund review from time to time whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
Money market instruments are normally purchased in principal transactions
directly from the issuer or from an underwriter or market maker. There usually
are no brokerage commissions paid by the Fund for such purchases and none have
been paid during the Fund's last three fiscal years. Purchases from underwriters
will include a commission or concession paid by the issuer to the underwriter,
and purchases from dealers serving as market makers will include the spread
between the bid and asked prices.
PURCHASE AND REDEMPTION OF SHARES
Fund shares are sold at their net asset value next determined after an order and
payment are received in the form described in the Fund's prospectus. The minimum
initial investment is $1,000 and the minimum subsequent investment is $100 but
such minimum amounts may be changed at any time. See the prospectus for certain
exceptions to these minimums. The Fund may waive the minimum for purchases by
trustees, directors, officers or employees of the Fund or the Adviser and its
affiliates. An investor wishing to open an account should use the Account
Information Form available from the Fund or financial services firms. Orders for
the purchase of shares that are accompanied by a check drawn on a foreign bank
(other than a check drawn on a Canadian bank in U.S. Dollars) will not be
considered in proper form and will not be processed unless and until the Fund
determines that it has received payment of the proceeds of the check. The time
required for such a determination will vary and cannot be determined in advance.
Upon receipt by the Fund's Shareholder Service Agent (see "Purchase of Shares"
in the prospectus) of a request for redemption in proper form, shares will be
redeemed by the Fund at the applicable net asset value as described in the
Fund's prospectus. A shareholder may elect to use either the regular or
expedited redemption procedures.
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The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange ("Exchange") is
closed other than customary weekend and holiday closings or during any period in
which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of the Fund's investments is
not reasonably practicable or (ii) it is not reasonably practicable for the Fund
to determine the value of its net assets, or (c) for such other periods as the
Securities and Exchange Commission may by order permit for protection of the
Fund's shareholders.
Although it is the Fund's present policy to redeem in cash, if the Board of
Trustees determines that a material adverse effect would be experienced by the
remaining shareholders if payment were made wholly in cash, the Fund will pay
the redemption price in whole or in part by a distribution of portfolio
securities in lieu of cash, in conformity with the applicable rules of the
Securities and Exchange Commission, taking such securities at the same value
used to determine net asset value, and selecting the securities in such manner
as the Board of Trustees may deem fair and equitable. If such a distribution
occurs, shareholders receiving securities and selling them could receive less
than the redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be so liquid as a redemption
entirely in cash. The Fund has elected to be governed by Rule 18f-1 under the
Investment Company Act of 1940 pursuant to which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net assets of
the Fund during any 90-day period for any one shareholder of record.
Telephone Redemptions. If the proceeds of the redemption are $50,000 or less and
the proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor, guardian and custodial account
holders, provided the trustee, executor, guardian or custodian is named in the
account registration. Other institutional account holders and guardian account
holders may exercise this special privilege of redeeming shares by telephone
request or written request without signature guarantee subject to the same
conditions as individual account holders, and subject to the limitations on
liability described under "General" above, provided that this privilege has been
pre-authorized by the institutional account holder or guardian account holder by
written instruction to the Shareholder Service Agent with signatures guaranteed.
Shares purchased by check or through certain ACH transactions may not be
redeemed under this privilege of redeeming shares by telephone request until
such shares have been owned for at least 10 days. This privilege of redeeming
shares by telephone request or by written request without a signature guarantee
may not be used to redeem shares held in certificated form and may not be used
if the shareholder's account has had an address change within 30 days of the
redemption request. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the telephone
redemption privilege although investors can still redeem by mail. The Fund
reserves the right to terminate or modify this privilege at any time.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by a federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to 11:00 a.m. Chicago time will result in
shares being redeemed that day and normally the proceeds will be sent to the
designated account that day. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-231-8568 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum. To change the designated account to receive wire
redemption proceeds, send a written request to the Shareholder Service Agent
with signatures guaranteed as described above, or contact the firm through which
shares of the Fund were purchased. Shares purchased by check or through certain
ACH transactions may not be redeemed by wire transfer until the shares have been
owned for at least 10 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege. The Fund reserves the right to
terminate or modify this privilege at any time.
Expedited Redemptions by Draft. Upon request, shareholders will be provided with
drafts to be drawn on the Fund ("Redemption Checks"). These Redemption Checks
may be made payable to the order of any person for not more than $5 million.
Shareholders should not write Redemption Checks in an amount less than $250
since a $10 service fee will be charged as described below. When a Redemption
Check is presented for payment, a sufficient number of full and fractional
shares in the shareholder's account will be redeemed as of the next determined
net asset value to cover the amount of the Redemption Check. This will enable
the shareholder to continue earning dividends until the Fund receives the
Redemption Check. A shareholder wishing to use this method of redemption must
complete and file an Account Information Form which is available from the Fund
or firms through which shares were purchased. Redemption Checks should not be
used to close an
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account since the account normally includes accrued but unpaid dividends. The
Fund reserves the right to terminate or modify this privilege at any time. This
privilege may not be available through some firms that distribute shares of the
Fund. In addition, firms may impose minimum balance requirements in order to
obtain this feature. Firms may also impose fees to investors for this privilege
or establish variations of minimum check amounts if approved by the Fund.
Unless one signer is authorized on the Account Information Form, Redemption
Checks must be signed by all account owners. Any change in the signature
authorization must be made by written notice to the Shareholder Service Agent.
Shares purchased by check or through certain ACH transactions may not be
redeemed by Redemption Check until the shares have been owned for at least 10
days. Shareholders may not use this procedure to redeem shares held in
certificated form. The Fund reserves the right to terminate or modify this
privilege at any time.
The Fund may refuse to honor Redemption Checks whenever the right of redemption
has been suspended or postponed, or whenever the account is otherwise impaired.
A $10 service fee will be charged when a Redemption Check is presented to redeem
Fund shares in excess of the value of a Fund account or in an amount less than
$250; when a Redemption Check is presented that would require redemption of
shares that were purchased by check or certain ACH transactions within 10 days;
or when "stop payment" of a Redemption Check is requested. Firms may charge
different service fees.
DIVIDENDS, NET ASSET VALUE AND TAXES
Dividends. Dividends are declared daily and paid monthly. Shareholders will
receive dividends in additional shares unless they elect to receive cash.
Dividends will be reinvested monthly in shares of the Fund normally on the
fifteenth day of each month, if a business day, otherwise on the next business
day. The Fund will pay shareholders who redeem their entire accounts all unpaid
dividends at the time of redemption not later than the next dividend payment
date. Upon written request to the Shareholder Service Agent, a shareholder may
elect to have Fund dividends invested without sales charge in shares of another
Kemper Fund offering this privilege at the net asset value of such other fund.
See "Special Features -- Exchange Privilege" for a list of such other Kemper
Funds. To use this privilege of investing Fund dividends in shares of another
Kemper Fund, shareholders must maintain a minimum account value of $1,000 in
this Fund.
The Fund calculates its dividends based on its daily net investment income. For
this purpose, net investment income consists of (a) accrued interest income plus
or minus amortized original issue discount or premium, (b) plus or minus all
short-term realized gains and losses on investments and (c) minus accrued
expenses. Expenses of the Fund are accrued each day. Since the Fund's
investments are valued at amortized cost, there will be no unrealized gains or
losses on such investments. However, should the net asset value so computed
deviate significantly from market value, the Board of Trustees could decide to
value the investments at market value and then unrealized gains and losses would
be included in net investment income above.
Net Asset Value. Fund shares are sold at their net asset value next determined
after an order and payment are received in the form described under "Purchase of
Shares." The net asset value of a Fund share is calculated by dividing the total
assets of the Fund less its liabilities by the total number of shares
outstanding. The net asset value per share of the Fund is determined on each day
the New York Stock Exchange is open for trading, at 11:00 a.m., 3:00 p.m. and
8:00 p.m. Chicago time, and on each other day on which there is a sufficient
degree of trading in the Fund's investments that its net asset value might be
affected, except that the net asset value will not be computed on a day on which
no orders to purchase shares were received and no shares were tendered for
redemption. Orders received by dealers or other financial services firms prior
to the 8:00 p.m. determination of net asset value for the Fund and received by
Kemper Distributors, Inc. ("KDI"), the primary administrator, distributor and
principal underwriter for the Funds, prior to the close of its business day can
be confirmed at the 8:00 p.m. determination of net assets value for that day.
Such transactions are settled by payment of Federal Funds in accordance with
procedures established by KDI. Redemption orders received in connection with the
administration of checkwriting programs by certain dealers or other financial
services firms prior to the determination of the Fund's net asset value also may
be processed on a confirmed basis, in accordance with the procedures established
by KDI. The Fund seeks to maintain a net asset value of $1.00 per share.
The Fund values its portfolio instruments at amortized cost, which does not take
into account unrealized capital gains or losses. This involves initially valuing
an instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the effect of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Fund would
receive if it sold the instrument. Calculations are made to compare the value of
the Fund's investments valued at amortized cost with market-based values.
Market-based valuations are obtained by using actual quotations provided by
market makers, estimates of market value, or values obtained from yield data
relating to classes of money market instruments published by reputable sources
at the mean between the bid and asked prices for the
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instruments. If a deviation of 1/2 of 1% or more were to occur between the net
asset value per share calculated by reference to market-based values and the
Fund's $1.00 per share net asset value, or if there were any other deviation
that the Board of Trustees of the Fund believed would result in a material
dilution to shareholders or purchasers, the Board of Trustees would promptly
consider what action, if any, should be initiated. If the Fund's net asset value
per share (computed using market-based values) declined, or were expected to
decline, below $1.00 (computed using amortized cost), the Board of Trustees of
the Fund might temporarily reduce or suspend dividend payments in an effort to
maintain the net asset value at $1.00 per share. As a result of such reduction
or suspension of dividends or other action by the Board of Trustees, an investor
would receive less income during a given period than if such a reduction or
suspension had not taken place. Such action could result in investors receiving
no dividend for the period during which they hold their shares and receiving,
upon redemption, a price per share lower than that which they paid. On the other
hand, if the Fund's net asset value per share (computed using market-based
values) were to increase, or were anticipated to increase above $1.00 (computed
using amortized cost), the Board of Trustees of the Fund might supplement
dividends in an effort to maintain the net asset value at $1.00 per share.
Taxes. Interest on indebtedness that is incurred to purchase or carry shares of
a mutual fund which distributes exempt-interest dividends during the year is not
deductible for federal income tax purposes. Further, the Fund may not be an
appropriate investment for persons who are "substantial users" of facilities
financed by industrial development bonds held by the Fund or are "related
persons" to such users; such persons should consult their tax advisers before
investing in the Fund.
The "Superfund Act of 1986" (the "Superfund Act") imposes a separate tax on
corporations at a rate of 0.12 percent of the excess of such corporation's
"modified alternative minimum taxable income" over $2 million. A portion of
tax-exempt interest, including exempt-interest dividends from the Fund, may be
includible in modified alternative minimum taxable income. Corporate
shareholders are advised to consult with their tax advisers with respect to the
consequences of the Superfund Act.
To the extent that dividends are derived from earnings on California state and
local government issues, such dividends will be exempt from California income
taxes provided the Fund has complied with the requirement that at least 50% of
its assets at the close of each quarter in the taxable year be invested in
Municipal Securities of California state and local issuers.
Net interest on certain "private activity bonds" issued on or after August 8,
1986 is treated as an item of tax preference and may, therefore, be subject to
both the individual and corporate alternative minimum tax. To the extent
provided by regulations to be issued by the Secretary of the Treasury,
exempt-interest dividends from the Fund are to be treated as interest on private
activity bonds in proportion to the interest the Fund receives from private
activity bonds, reduced by allowable deductions. For the 1997 calendar year, 3%
of the net interest income of the Fund was derived from "private activity
bonds."
Exempt-interest dividends, except to the extent of interest from "private
activity bonds," are not treated as a tax preference item. For a corporate
shareholder, however, such dividends will be included in determining such
corporate shareholder's "adjusted current earnings." Seventy-five percent of the
excess, if any, of "adjusted current earnings" over the corporate shareholder's
other alternative minimum taxable income with certain adjustments will be a tax
preference item. Corporate shareholders are advised to consult their tax
advisers with respect to alternative minimum tax consequences.
Shareholders will be required to disclose on their federal income tax returns
the amount of tax-exempt interest earned during the year, including
exempt-interest dividends received from the Fund.
Individuals whose modified income exceeds a base amount will be subject to
federal income tax on up to 85% of their Social Security benefits. Modified
income includes adjusted gross income, tax-exempt interest, including
exempt-interest dividends from the Fund, and 50% of Social Security benefits.
Individuals are advised to consult their tax advisers with respect to the
taxation of Social Security benefits.
Dividends to the extent of interest income received on California state and
local government issues, will be exempt from State of California income taxes
provided at least 50% of the Fund's total assets are invested in such issues at
the close of each quarter in the taxable year. The tax exemption for federal and
California income tax purposes of dividends from the Fund does not necessarily
result in exemptions under the income or other tax laws of any state or local
taxing authority. The laws of the several states and local taxing authorities
vary with respect to the taxation of such income, and shareholders of the Fund
are advised to consult their own tax advisers in that regard and as to the
status of their accounts under state and local tax laws.
The Fund is required by law to withhold 31% of taxable dividends paid to certain
shareholders who do not furnish a correct taxpayer identification number (in the
case of individuals, a social security number) and in certain other
circumstances.
Shareholders normally will receive monthly confirmations of dividends and of
purchase and redemption transactions. Tax information will be provided annually.
Shareholders are encouraged to retain copies of their account confirmation
statements
14
<PAGE>
or year-end statements for tax reporting purposes. However, those who have
incomplete records may obtain historical account transaction information at a
reasonable fee.
PERFORMANCE
As reflected in the prospectus, the historical performance calculation for the
Fund may be shown in the form of "yield," "effective yield," and "tax-equivalent
yield." These various measures of performance are described below.
The Fund's yield is computed in accordance with a standardized method prescribed
by rules of the Securities and Exchange Commission. Under that method, the yield
quotation is based on a seven-day period and is computed as follows. The first
calculation is net investment income per share, which is accrued interest on
portfolio securities, plus or minus amortized original issue discount or
premium, less accrued expenses. This number is then divided by the price per
share (expected to remain constant at $1.00) at the beginning of the period
("base period return"). The result is then divided by 7 and multiplied by 365
and the resulting yield figure is carried to the nearest one-hundredth of one
percent. Realized capital gains or losses and unrealized appreciation or
depreciation of investments are not included in the calculation. For the
seven-day period ended September 30, 1998, the Fund's yield was 2.97%.
The Fund's effective yield is determined by taking the base period return
(computed as described above) and calculating the effect of assumed compounding.
The formula for the effective yield is: (base period return +1) 365/7 - 1. For
the seven-day period ended September 30, 1998, the Fund's effective yield was
3.01%.
The tax-equivalent yield of the Fund is computed by dividing that portion of the
Fund's yield (computed as described above) which is tax-exempt by (one minus the
stated combined State of California and federal income tax rate) and adding the
result to that portion, if any, of the yield of the Fund that is not tax-
exempt. Based upon an assumed combined State of California and federal income
tax rate of 42.9% and the Fund's yield as computed as described above for the
seven day period ended September 30, 1998, the Fund's tax-equivalent yield was
5.20%. Based upon an assumed federal income tax rate of 37.1% and the Fund's
yield computed as described above for the seven-day period ended September 30,
1998, the Fund's tax-equivalent yield was 5.27%. For additional information
concerning tax-exempt yields, see "Tax-Exempt versus Taxable Yield" below.
The Fund's yield fluctuates, and the publication of an annualized yield
quotation is not a representation as to what an investment in the Fund will
actually yield for any given future period. Actual yields will depend not only
on changes in interest rates on money market instruments during the period in
which the investment in the Fund is held, but also on such matters as Fund
expenses.
Investors have an extensive choice of money market funds and money market
deposit accounts and the information below may be useful to investors who wish
to compare the past performance of the Fund with that of its competitors. Past
performance is not a guarantee of future results.
As indicated in the prospectus (see "Performance"), the Fund's performance may
be compared to that of other mutual funds tracked by Lipper Analytical Services,
Inc. ("Lipper"). Lipper performance calculations include the reinvestment of all
capital gain and income dividends for the periods covered by the calculations.
The Fund's performance also may be compared to other money market funds as
reported by IBC Financial Data, Inc.'s ("IBC") or Money Market Insight(R)
reporting services on money market funds. As reported by IBC, all investment
results represent yield (annualized results for the period net of management
fees and other expenses) and one-year investment results are effective annual
yields assuming reinvestment of dividends.
The Fund's performance also may be compared on an after-tax basis to various
bank products, including the average rate of bank and thrift institution money
market deposit accounts or interest bearing checking accounts as reported in the
BANK RATE MONITOR National Index(TM) of 100 leading bank and thrift institutions
as published by the BANK RATE MONITOR(TM), N. Palm Beach, Florida 33408. The
rates published by the BANK RATE MONITOR National Index(TM) are averages of the
personal account rates offered on the Wednesday prior to the date of publication
by 100 large banks and thrifts in the top ten Consolidated Standard Metropolitan
Statistical Areas. Account minimums range upward from $2,500 in each institution
and compounding methods vary. Interest bearing checking accounts generally offer
unlimited check writing while money market deposit accounts generally restrict
the number of checks that may be written. If more than one rate is offered, the
lowest rate is used. Rates are determined by the financial institution and are
subject to change at any time specified by the institution. Bank products
represent a taxable alternative income producing product. Bank and thrift
institution deposit accounts may be insured. Shareholder accounts in the Fund
are not insured. Bank passbook savings accounts share some liquidity features
with money market mutual fund accounts but they may not offer all the features
available from a money market mutual fund, such as check writing. Bank passbook
savings accounts normally offer a fixed
15
<PAGE>
rate of interest while the yield of the Fund fluctuates. Bank checking accounts
normally do not pay interest but share some liquidity features with money market
mutual fund accounts (e.g., the ability to write checks against the account).
Bank certificates of deposit may offer fixed or variable rates for a set term.
(Normally, a variety of terms are available.) Withdrawal of these deposits prior
to maturity normally will be subject to a penalty. In contrast, shares of the
Fund are redeemable at the net asset value (normally $1.00 per share) next
determined after a request is received, without charge.
Investors also may want to compare the Fund's performance on an after-tax basis
to that of U.S. Treasury bills or notes because such instruments represent
alternative income producing products. Treasury obligations are issued in
selected denominations. Rates of U.S. Treasury obligations are fixed at the time
of issuance and payment of principal and interest is backed by the full faith
and credit of the U.S. Treasury. The market value of such instruments generally
will fluctuate inversely with interest rates prior to maturity and will equal
par value at maturity. Generally, the value of obligations with shorter
maturities will fluctuate less than those with longer maturities. The Fund's
yield will fluctuate. Also, while the Fund seeks to maintain a net asset value
per share of $1.00, there is no assurance that it will be able to do so.
Any such comparisons may be useful to investors who wish to compare the Fund's
past performance with that of its competitors. Of course, past performance
cannot be a guarantee of future results.
The Fund's performance also may be compared to the Consumer Price Index, as
published by the U.S. Bureau of Labor Statistics, which is an established
measure of change over time in the prices of goods and services in major
expenditure groups.
Tax-Exempt versus Taxable Yield. You may want to determine which investment --
tax-exempt or taxable -- will provide you with a higher after-tax return. To
determine the taxable equivalent yield, simply divide the yield from the
tax-exempt investment by [1 minus your marginal tax rate]. The tables below are
provided for your convenience in making this calculation for selected tax-exempt
yields and taxable income levels. These yields are presented for purposes of
illustration only and are not representative of any yield that the Fund may
generate. Both tables are based upon current law as to the 1998 Federal and
State tax rate schedules.
<TABLE>
<CAPTION>
Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Under $124,500
Taxable Income Your Marginal A Tax-Exempt Yield of:
Federal Tax Rate
----------------
4% 5% 6% 7% 8% 9%
Single Joint Is Equivalent to a Taxable Yield of:
------ ----- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$25,350-$61,400 $42,350-$102,300 28.0% 5.56 6.94 8.33 9.72 11.11 12.50
Over $61,400 Over $102,300 31.0 5.80 7.25 8.70 10.14 11.59 13.04
Combined
Marginal
Taxable Income California and A Tax-Exempt Yield of:
Federal Tax Rate
----------------
4% 5% 6% 7% 8% 9%
Single Joint Is Equivalent to a Taxable Yield of:
------ ----- ------------------------------------
$25,350-$26,644 $42,350-$53,288 32.3% 5.91 7.39 8.86 10.34 11.82 13.29
$26,644-33,673 $53,288-$67,346 33.8 6.04 7.55 9.06 10.57 12.08 13.60
$33,673-$61,400 $67,346-$102,300 34.7 6.13 7.66 9.19 10.72 12.25 13.78
Over $61,400 Over $102,300 37.4 6.39 7.99 9.58 11.18 12.78 14.38
Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Over $124,500
Taxable Income Your Marginal A Tax-Exempt Yield of:
Federal Tax Rate
----------------
4% 5% 6% 7% 8% 9%
Single Joint Is Equivalent to a Taxable Yield of:
------ ----- ------------------------------------
$ 61,400-$128,100 $102,300-$155,950 31.9% 5.87 7.34 8.81 10.28 11.75 13.22
$128,100-$278,450 $155,950-$278,450 37.1 6.36 7.95 9.54 11.13 12.72 14.31
Over $278,450 Over $278,450 40.8 6.76 8.45 10.14 11.82 13.51 15.20
16
<PAGE>
Combined
Marginal
Taxable Income California and A Tax-Exempt Yield of:
Federal Tax Rate
----------------
4% 5% 6% 7% 8% 9%
Single Joint Is Equivalent to a Taxable Yield of:
------ ----- ------------------------------------
$ 61,400-$128,100 $102,300-$155,950 38.2% 6.47 8.09 9.71 11.33 12.94 14.56
$128,100-$278,450 $155,950-$278,450 42.9 7.01 8.76 10.51 12.26 14.01 15.76
Over $278,450 Over $278,450 46.3 7.45 9.31 11.17 13.04 14.90 16.76
</TABLE>
o This table assumes a decrease of $3.00 of itemized deductions for each $100
of adjusted gross income over $124,500. For a married couple with adjusted
gross income between $186,800 and $309,300 (single between $124,500 and
$247,000), add 0.7% to the above Marginal Federal Tax Rate for each
personal and dependency exemption. The taxable equivalent yield is the
tax-exempt yield divided by: 100% minus the adjusted tax rate.
o or example, if the table tax rate is 37.1% and you are married with no
dependents, the adjusted tax rate is 38.5% (37.1% + 0.7% + 0.7%). For a
tax-exempt yield of 6%, the taxable equivalent yield is about 9.8% (6% /
(100%-38.5%)).
OFFICERS AND TRUSTEES
The officers and trustees of the Fund, their birthdates, their principal
occupations and their affiliations, if any, with the Adviser and KDI are listed
below. All persons named as trustees also serve in similar capacities for other
funds advised by the Adviser.
LEWIS A. BURNHAM (1/8/33), Trustee, 16410 Avila Boulevard, Tampa, Florida;
Partner, Business Resources Group; formerly, Executive Vice President, Anchor
Glass Container Corporation.
DONALD L. DUNAWAY (3/8/37), Trustee, 7515 Pelican Bay Boulevard, Naples,
Florida; Retired; formerly, Executive Vice President, A. O. Smith Corporation
(diversified manufacturer).
ROBERT B. HOFFMAN (12/11/36), Trustee, 800 North Lindbergh Boulevard, St. Louis,
Missouri; Vice Chairman and Chief Financial Officer, Monsanto Company
(agricultural, pharmaceutical and nutritional/food products); prior thereto,
Vice President and Head of International Operations, FMC Corporation
(manufacturer of machinery and chemicals).
DONALD R. JONES (1/17/30), Trustee, 182 Old Wick Lane, Inverness, Illinois;
Retired; Director, Motorola, Inc. (manufacturer of electronic equipment and
components); formerly, Executive Vice President and Chief Financial Officer,
Motorola, Inc.
THOMAS W. LITTAUER (4/26/55), Trustee and Vice President*, Two International
Place, Boston, Massachusetts; Managing Director, Adviser; formerly, Head of
Broker Dealer Division of an unaffiliated investment management firm during
1997; prior thereto, President of Client Management Services for an unaffiliated
investment management firm from 1991 to 1996.
SHIRLEY D. PETERSON (9/3/41), Trustee, 401 Rosemont Avenue, Frederick, Maryland;
President, Hood College, Maryland; prior thereto, Partner, Steptoe & Johnson
(attorneys); prior thereto, Commissioner of Internal Revenue Service; prior
thereto, Assistant Attorney General, U.S. Department of Justice; Director,
Bethlehem Steel Corp.
DANIEL PIERCE (3/18/34), Trustee, 345 Park Avenue, New York, New York; Chairman
of the Board and Managing Director, Adviser; Director, Fiduciary Trust Company
and Fiduciary Company Incorporated.
WILLIAM P. SOMMERS (7/22/33), Trustee, 24717 Harbour View Drive, Ponte Vedra
Beach, Florida; Consultant and Director, SRI International (research and
development); prior thereto, President and Chief Executive Officer, SRI
International; prior thereto, Executive Vice President, Iameter (medical
information and educational service provider); prior thereto, Senior Vice
President and Director, Booz, Allen & Hamilton, Inc. (management consulting
firm); Director, PSI, Inc., Evergreen Solar, Inc. and Litton Industries.
MARK S. CASADY (9/21/60), President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser.
ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Senior Vice President, Adviser.
KATHRYN L. QUIRK (12/3/52), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Adviser
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
17
<PAGE>
PHILIP J. COLLORA (11/15/45), Vice President, Treasurer and Secretary*, 222
South Riverside Plaza, Chicago, Illinois; Senior Vice President, Adviser.
JOHN R. HEBBLE (6/27/58), Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
BRENDA LYONS (2/21/63), Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Adviser.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Adviser.
FRANK J. RACHWALSKI, JR. (3/26/45), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser.
ROBERT C. PECK, JR. (10/1/46), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser; formerly, Executive Vice
President and Chief Investment Officer with an unaffiliated investment
management firm from 1988 to June 1997.
ELIZABETH C. WERTH (10/1/47), Assistant Secretary*, (30), 222 South Riverside
Plaza, Chicago, Illinois; Scudder Kemper; and Vice President and Director of
State Registrations, KDI.
* Interested persons as defined in the Investment Company Act of 1940.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Fund. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during the
Fund's 1998 fiscal year except that the information in the last column is for
calendar year 1997.
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation Kemper
Name of Trustee From Fund Funds Paid to Trustees**
- --------------- --------- ------------------------
<S> <C> <C>
Lewis A. Burnham................................... $1,900 $126,100
Donald L. Dunaway*................................. $2,100 $135,000
Robert B. Hoffman.................................. $1,900 $116,000
Donald R. Jones.................................... $2,000 $129,600
Shirley D. Peterson................................ $1,700 $108,800
William P. Sommers................................. $1,700 $108,800
</TABLE>
* Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with the Kemper Funds. Deferred amounts accrue
interest monthly at a rate equal to the yield of Zurich Money Funds --
Zurich Money Market Fund. Total deferred fees and interest accrued for
latest and prior fiscal years for this Fund are $22,000 for Mr. Dunaway.
** Includes compensation for services as trustee on 25 fund boards with 41
portfolios. Each trustee currently serves as a trustee of 27 Kemper Funds
and 47 fund portfolios.
As of December 31, 1998, the trustees and officers as a group owned less than 1%
of the then outstanding shares of the Fund, and no person owned of record 5% or
more of the outstanding shares of the Fund.
SPECIAL FEATURES
Exchange Privilege. Subject to the limitations described below, Class A shares
(or the equivalent) of the following Kemper Funds may be exchanged for each
other at their relative net asset values: : Kemper Adjustable Rate U.S.
Government Fund, Kemper Aggressive Growth Fund, Kemper Asian Growth Fund, Kemper
Blue Chip Fund, Kemper California Tax-Free Income Fund, Kemper Cash Reserves
Fund, Kemper Contrarian Fund, Kemper Diversified Income Fund, Kemper Emerging
Markets Growth Fund, Kemper Emerging Markets Income Fund, Kemper Europe Fund,
Kemper Florida Tax-Free Income Fund, Kemper Global Blue Chip Fund, Kemper Global
Income Fund, Kemper Growth Fund, Kemper High Yield Fund, Kemper High Yield
Opportunity, Kemper Horizon 10+ Portfolio, Kemper Horizon 20+ Portfolio, Kemper
Horizon 5 Portfolio, Kemper Income And Capital Preservation Fund, Kemper
Intermediate Municipal Bond, Kemper International Fund, Kemper International
Growth and Income Fund, Kemper Large Company Growth Fund (currently available
only to employees of Scudder Kemper Investments, Inc.; not available in all
states), Kemper Latin America Fund, Kemper Municipal Bond Fund, Kemper New York
Tax-Free Income Fund, Kemper Ohio Tax-Free Income Fund, Kemper Quantitative
Equity Fund, Kemper Research Fund (currently available only to employees of
Scudder Kemper Investments, Inc.; not available in
18
<PAGE>
all states), Kemper Retirement Fund -- Series I, Kemper Retirement Fund --
Series II, Kemper Retirement Fund -- Series III, Kemper Retirement Fund --
Series IV, Kemper Retirement Fund -- Series V, Kemper Retirement Fund -- Series
VI, Kemper Retirement Fund -- Series VII, Kemper Short-Intermediate Government
Fund, Kemper Small Cap Value Fund, Kemper Small Cap Value+Growth Fund (currently
available only to employees of Scudder Kemper Investments, Inc.; not available
in all states), Kemper Small Capitalization Equity Fund, Kemper Small Cap
Relative Value Fund, Kemper Technology Fund, Kemper Total Return Fund, Kemper
U.S. Government Securities Fund, Kemper U.S. Growth and Income Fund, Kemper U.S.
Mortgage Fund, Kemper Value+Growth Fund, Kemper Worldwide 2004 Fund,
Kemper-Dreman High Return Equity Fund, Kemper-Dreman Financial Services Fund
("Kemper Funds").). Shares of Money Market Funds and Kemper Cash Reserves Fund
that were acquired by purchase (not including shares acquired by dividend
reinvestment) are subject to the applicable sales charge on exchange. In
addition, shares of a Kemper Fund in excess of $1,000,000 (except Zurich
Yieldwise Money Fund and Kemper Cash Reserves Fund), acquired by exchange from
another Fund, may not be exchanged thereafter until they have been owned for 15
days (the "15-Day Hold Policy"). For purposes of determining whether the 15-Day
Hold Policy applies to a particular exchange, the value of the shares to be
exchanged shall be computed by aggregating the value of shares being exchanged
for all accounts under common control, discretion or advice, including without
limitation accounts administered by a financial services firm offering market
timing, asset allocation or similar services. Series of Kemper Target Equity
Fund are available on exchange only during the Offering Period for such series
as described in the prospectus for such series. Cash Equivalent Fund, Tax-Exempt
California Money Market Fund, Cash Account Trust, Investors Municipal Cash Fund
and Investors Cash Trust are available on exchange but only through a financial
services firm having a services agreement with KDI with respect to such funds.
Exchanges may only be made for funds that are available for sale in the
shareholder's state of residence. Currently, Tax-Exempt California Money Market
Fund is available for sale only in California and the portfolios of Investors
Municipal Cash Fund are available for sale only in certain states.
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Kemper fund into which they are being exchanged.
Exchanges are made based on relative dollar values of the shares involved in the
exchange. There is no service fee for an exchange; however, financial services
firms may charge for their services in expediting exchange transactions.
Exchanges will be effected by redemption of shares of the fund held and purchase
of shares of the other fund. For federal income tax purposes, any such exchange
constitutes a sale upon which a gain or loss may be realized, depending upon
whether the value of the shares being exchanged is more or less than the
shareholder's adjusted cost basis. Shareholders interested in exercising the
exchange privilege may obtain an exchange form and prospectuses of the other
funds from firms or KDI. Exchanges also may be authorized by telephone if the
account holder has given authorization. Once the authorization is on file, the
Shareholder Service Agent will honor requests by telephone at 1-800-231-8568,
subject to the limitations on liability described under "Redemption of Shares"
in the prospectus. Any share certificates must be deposited prior to any
exchange of such shares. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to implement the
telephone exchange privilege. The exchange privilege is not a right and may be
suspended, terminated or modified at any time. Except as otherwise permitted by
applicable regulation, 60 days' prior written notice of any termination or
material change will be provided.
Systematic Exchange Privilege. The owner of $1,000 or more of the shares of a
Kemper Fund or Money Market Fund may authorize the automatic exchange of a
specified amount ($100 minimum) of such shares for shares of another such Kemper
Fund. Shareholders interested in the systematic exchange privilege may obtain
the appropriate forms and prospectuses of the other funds from firms or the
Shareholder Service Agent. If selected, exchanges will be made automatically
until the privilege is terminated by the shareholder or the other Kemper Fund.
Exchanges are subject to the terms and conditions described above under
"Exchange Privilege", except that the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange is not applicable. This privilege may not
be used for the exchange of shares held in certificated form.
Systematic Withdrawal Program. The owner of $5,000 or more of the Fund's shares
may provide for the payment from the owner's account of any requested dollar
amount up to $50,000 to be paid to the owner or a designated payee monthly,
quarterly, semi-annually or annually. The minimum periodic payment is $100.
Shares are redeemed so that the payee will receive payment approximately the
first of the month. Dividend distributions will be automatically reinvested at
net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested, redemptions for the purpose of making such payments may reduce or
even exhaust the account. The right is reserved to amend the systematic
withdrawal program on thirty days notice. The program may be terminated at any
time by the shareholder or the Fund. Firms provide varying arrangements for
their clients to redeem Fund shares on a periodic basis. Such firms may
independently establish minimums for such services.
Electronic Funds Transfer Programs. For your convenience, the Fund has
established several investment and redemption programs using electronic funds
transfer via the Automated Clearing House (ACH). There is currently no charge by
the Fund for these ACH transactions. To use these features, your financial
institution (your employer's financial institution in the case
19
<PAGE>
of payroll deposit) must be affiliated with an Automated Clearing House (ACH).
This ACH affiliation permits the Shareholder Service Agent to rely upon
telephone instructions from any person to electronically transfer money between
your bank account, or employer's payroll bank in the case of Direct Deposit, and
your Fund account, subject to the limitations on liability under "Redemption of
Shares" in the prospectus. Your bank's crediting policies of these transferred
funds may vary. These features may be amended or terminated at any time by the
Fund. Shareholders should contact the Kemper Service Company at 1-800-621-1048
or the firm through which their account was established for more information.
These programs may not be available through some firms that distribute shares of
the Fund.
SHAREHOLDER RIGHTS
The Fund is an open-end diversified management investment company, organized as
a business trust under the laws of Massachusetts on February 25, 1987. The Fund
may issue an unlimited number of shares of beneficial interest in one or more
series or "Portfolios," all having no par value. While only shares of a single
Portfolio are presently being offered, the Board of Trustees may authorize the
issuance of additional Portfolios if deemed desirable, each with its own
investment objective, policies and restrictions. Since the Fund may offer
multiple Portfolios, it is known as a "series company." Shares of a Portfolio
have equal noncumulative voting rights and equal rights with respect to
dividends, assets and liquidation of such Portfolio. Shares are fully paid and
nonassessable when issued, are transferable without restriction and have no
preemptive or conversion rights. The Fund is not required to hold annual
shareholders' meetings and does not intend to do so. However, it will hold
special meetings as required or deemed desirable for such purposes as electing
trustees, changing fundamental policies or approving an investment management
agreement. Subject to the Agreement and Declaration of Trust of the Fund,
shareholders may remove trustees. If shares of more than one Portfolio are
outstanding, shareholders will vote by Portfolio and not in the aggregate except
when voting in the aggregate is required under the 1940 Act, such as for the
election of trustees.
The Fund generally is not required to hold meetings of its shareholders. Under
the Agreement and Declaration of Trust of the Fund ("Declaration of Trust"),
however, shareholder meetings will be held in connection with the following
matters: (a) the election or removal of trustees if a meeting is called for such
purpose; (b) the adoption of any contract for which shareholder approval is
required by the Investment Company Act of 1940 ("1940 Act"); (c) any termination
of the Fund to the extent and as provided in the Declaration of Trust; (d) any
amendment of the Declaration of Trust (other than amendments changing the name
of the Fund or any Portfolio, establishing a Portfolio, supplying any omission,
curing any ambiguity or curing, correcting or supplementing any defective or
inconsistent provision thereof); (e) as to whether a court action, proceeding or
claim should or should not be brought or maintained derivatively or as a class
action on behalf of the Fund or the shareholders, to the same extent as the
stockholders of a Massachusetts business corporation; and (f) such additional
matters as may be required by law, the Declaration of Trust, the By-laws of the
Fund, or any registration of the Fund with the Securities and Exchange
Commission or any state, or as the trustees may consider necessary or desirable.
The shareholders also would vote upon changes in fundamental investment
objectives, policies or restrictions.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) the Fund will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy on the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of the Fund stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, the
Fund has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
The Declaration of Trust provides that the presence at a shareholder meeting in
person or by proxy of at least 30% of the shares entitled to vote on a matter
shall constitute a quorum. Thus, a meeting of shareholders of the Fund could
take place even if less than a majority of the shareholders were represented on
its scheduled date. Shareholders would in such a case be permitted to take
action which does not require a larger vote than a majority of a quorum, such as
the election of trustees and ratification of the selection of auditors. Some
matters requiring a larger vote under the Declaration of Trust, such as
termination or reorganization of the Fund and certain amendments of the
Declaration of Trust, would not be affected by this
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provision; nor would matters which under the 1940 Act require the vote of a
"majority of the outstanding voting securities" as defined in the 1940 Act.
The Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Fund (or any Portfolio) by notice to the shareholders without
shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of the
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund and the Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by Scudder Kemper remote
and not material, since it is limited to circumstances in which a disclaimer is
inoperative and the Fund itself is unable to meet its obligations.
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APPENDIX -- RATINGS OF INVESTMENTS
The two highest ratings of Moody's Investors Service, Inc. ("Moody's") for
Municipal Securities are Aaa and Aa. Municipal Securities rated Aaa are judged
to be of the "best quality." The rating of Aa is assigned to Municipal
Securities which are of "high quality by all standards," but as to which margins
of protection or other elements make long-term risks appear somewhat larger than
Aaa rated Municipal Securities. The Aaa and Aa rated Municipal Securities
comprise what are generally known as "high grade."
The two highest ratings of Standard & Poor's Corporation ("S&P") for Municipal
Securities are AAA (Prime) and AA (High Grade). Municipal Securities rated AAA
are "obligations of the highest quality." The rating of AA is accorded issues
with investment characteristics "only slightly less marked than those of the
prime quality issues."
Moody's ratings for state and municipal notes and other short-term loans will be
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Loans designated MIG-1 are of the
best quality, enjoying strong protection from established cash flows of funds
for their servicing or from established and broad-based access to the market for
refinancing, or both. Loans designated MIG-2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
An S&P municipal and corporate commercial paper rating is a current assessment
of the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into four categories, ranging from "A"
for the highest quality obligations to "D" for the lowest. Issues assigned this
highest rating are regarded as having the greatest capacity for timely payment.
The designation A-1 indicates that the degree of safety regarding timely payment
is very strong. The designation A-2 indicates the capacity for timely payment is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated "A-1."
The "other debt securities" included in the definition of temporary investments
are corporate (as opposed to municipal) debt obligations rated AAA or AA by S&P
or Aaa or Aa by Moody's. Corporate debt obligations rated AAA by S&P are
"highest grade obligations." Obligations bearing the rating of AA also qualify
as "high grade obligations" and "in the majority of instances differ from AAA
issues only in small degree." The Moody's corporate debt ratings of Aaa and Aa
do not differ materially from those set forth above for Municipal Securities.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's. Among the factors considered by them in assigning ratings
are the following: (a) evaluation of the management of the issuer; (b) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (c) evaluation of
the issuer's products in relation to competition and customer acceptance; (d)
liquidity; (e) amount and quality of long-term debt; (f) trend of earnings over
a period of ten years; (g) financial strength of a parent company and the
relationships which exist with the issuer; and (h) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Relative strength or
weakness of the above factors determines whether the issuer's commercial paper
is rated Prime-1, 2 or 3.
After its purchase by the Fund, an issue of Municipal Securities or a temporary
investment may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event requires the elimination of
such obligation from the Fund's portfolio, but the Fund's investment adviser
will consider such an event in its determination of whether the Fund should
continue to hold such obligation in its portfolio. To the extent that the
ratings accorded by S&P or Moody's for Municipal Securities or temporary
investments may change as a result of changes in such organizations, or changes
in their rating systems, the Fund will attempt to use comparable ratings as
standards for its investments in Municipal Securities or temporary investments
in accordance with the investment policies contained herein.
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