Filed electronically with the Securities and Exchange Commission on
January 25, 2000
File No. 33-12938
File No. 811-5076
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_/
Pre-Effective Amendment No. /_/
Post-Effective Amendment No. 14 /X/
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and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /_/
Amendment No. 15 /X/
--
TAX-EXEMPT CALIFORNIA MONEY MARKET FUND
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(Exact Name of Registrant as Specified in Charter)
222 South Riverside Plaza, Chicago, Illinois
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (312) 537-7000
Philip J. Collora, Vice President and Secretary
Scudder Kemper Investments, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
/_/ Immediately upon filing pursuant to paragraph (b)
/_/ 60 days after filing pursuant to paragraph (a) (1)
/_/ 75 days after filing pursuant to paragraph (a) (2)
/X/ On February 1, 2000 pursuant to paragraph (b)
/_/ On ______________ pursuant to paragraph (a) (1)
/_/ On __________________ pursuant to paragraph (a) (2) of Rule 485.
If appropriate, check the following box:
/_/ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
Tax-Exempt California
Money Market Fund
PROSPECTUS
February 1, 2000
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
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Table of Contents
TAX-EXEMPT CALIFORNIA MONEY MARKET FUND
The Fund And Its Portfolio
1 The Fund's Goal And Main Strategy
2 The Main Risks Of Investing In The Fund
3 Performance
4 How Much Investors Pay
5 Other Policies And Risks
6 Who Manages The Fund
7 Financial Highlights
Your Investment In The Fund
8 Policies You Should Know About
11 Understanding Distributions And Taxes
<PAGE>
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Tax-Exempt California TICKER SYMBOL TXCXX
Money Market Fund
The Fund's Goal And Main
Strategy
The fund seeks maximum current income that is exempt from federal and State of
California income taxes to the extent consistent with stability of capital.
To pursue its goal, the fund invests at least 65% of total assets in California
municipal securities. The fund normally invests at least 80% of net assets in
municipal securities and other securities whose income is free from regular
federal income tax and from alternative minimum tax (AMT). The fund seeks to
maintain a stable $1.00 share price to preserve the value of your investment.
The fund may buy many types of municipal securities including industrial
development bonds. However, everything the fund buys has to meet the standards
for money market fund investments (see sidebar). In addition, the fund currently
intends to only buy securities that are in the top credit grade for short-term
debt securities.
Working in conjunction with credit analysts, the portfolio managers screen
potential securities and develop a list of those that the fund may buy. The
managers then decide which securities on this list to buy, looking for
attractive yield and weighing considerations such as credit quality, economic
outlook and possible interest rate movements. The managers may adjust the fund's
exposure to interest rate risk, typically seeking to take advantage of possible
rises in interest rates and to preserve yield when interest rates appear likely
to fall.
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Money Fund Rules
To be called a money market fund, a mutual fund must operate within strict
federal rules. Designed to help maintain a stable $1.00 share price, these rules
limit money funds to particular types of securities. Some of the rules:
o individual securities must have remaining maturities of no more than 397 days
o the dollar-weighted average maturity of the fund's holdings cannot exceed 90
days
o all securities must be in the top two credit grades for short-term debt
securities and be denominated in U.S. dollars
1
<PAGE>
The Main Risks Of Investing
In The Fund
Money market funds are generally considered to have lower risks than other types
of mutual funds. Even so, there are several risk factors that could reduce the
yield you get from the fund or make it perform less well than other investments.
As with most money market funds, the most important factor is market interest
rates. The fund's yield tends to reflect current interest rates, which means
that when these rates fall, the fund's yield generally falls as well.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt fund performance. The fact that the
fund invests primarily in securities from a single state increases this risk,
because any factors affecting the state or region, such as economic or fiscal
problems, could affect portfolio securities. For example, California residents'
high sensitivity to taxes could make it hard to raise taxes in order to meet
obligations, or the state's economy could be hurt by natural disasters.
Additionally, industrial development bonds are typically backed by revenues from
a given facility and by the credit of a private company, but are not backed by
the taxing power of a municipality.
Other factors that could affect performance include:
o the managers could be incorrect in their analysis of interest rate trends,
credit quality or other matters
o securities that rely on third-party guarantors to raise their credit quality
could fall in price or go into default if the financial condition of the
guarantor deteriorates
o political or legal actions could change the way the fund's dividends are
taxed
Remember that mutual funds are investments, not bank deposits. They're not
insured or guaranteed by the FDIC or any other government agency. Although the
fund seeks to preserve the value of your investment at $1.00 per share, this
share price isn't guaranteed and you could lose money by investing in the fund.
o This fund may appeal to California taxpayers who are in a
moderate to high tax bracket and who are looking for the
income, liquidity and stability that a money fund is
designed to offer.
2
<PAGE>
Performance
The bar chart shows how the fund's total returns have varied from year to year,
which may give some idea of risk. The table shows how the fund's returns over
different periods average out. All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
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Annual Total Returns (%) as of 12/31 each year
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THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
5.03 3.71 2.20 1.84 2.24 3.31 2.82 2.93 2.52 2.26
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Best Quarter: 1.29%, Q2 1990
Worst Quarter: 0.42%, Q1 1994
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Average Annual Total Returns as of 12/31/1999
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1 Year 5 Years 10 Years
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2.26% 2.77% 2.89%
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7-day yield as of 12/31/1999: 3.23%
3
<PAGE>
How Much Investors Pay
The fee table describes the fees and expenses that you may pay if you buy and
hold shares of this fund. This information doesn't include any fees that may be
charged by your financial services firm.
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Fee Table
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The fund has no sales charges or other shareholder fees. The fund does have
annual operating expenses, and as a shareholder you pay them indirectly.
Shareholder Fees (%) None
(paid directly from your investment)
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Annual Operating Expenses (%)
(deducted from fund assets)
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Management Fee 0.22
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Distribution (12b-1) Fee 0.33
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Other Expenses* 0.20
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Total Annual Operating Expenses 0.75
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* Includes costs of shareholder servicing, custody, accounting services and
similar expenses, which may vary with fund size and other factors.
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Example
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Based on the figures above, this example helps you compare this fund's expenses
to those of other funds. The example assumes the expenses above remain the same,
that you invested $10,000, earned 5% annual returns and reinvested all dividends
and distributions. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
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$77 $240 $417 $930
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4
<PAGE>
Other Policies And Risks
While the previous pages describe the main points of the fund's strategy and
risks, there are a few other issues to know about:
o As a temporary defensive measure, the fund could shift up to 100% of assets
into investments such as taxable money market securities. This would mean
that the fund was not pursuing its goal.
o The investment advisor establishes a security's credit grade when it buys the
security, using independent ratings or, for unrated securities, its own
credit analysis. If a security's credit quality falls below the minimum
required for purchase by the fund, the security will be sold unless the
advisor or the Board believes this would not be in the shareholders' best
interests.
o This prospectus doesn't tell you about every policy or risk of investing in a
fund. For more information on these, you may want to request a copy of the
Statement of Additional Information (the last page tells you how to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
5
<PAGE>
Who Manages The Fund
The Investment Advisor
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY. Scudder Kemper has more than 80 years of experience
managing mutual funds and currently has more than $290 billion in assets under
management.
Scudder Kemper takes a team approach, bringing together professionals from many
investment disciplines. Supporting each team are Scudder Kemper's many
economists, research analysts, traders and other investment specialists, located
across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.22% of its average daily net assets.
The Portfolio Managers
The portfolio managers handle the day-to-day management of the fund. The lead
manager for this fund is Frank Rachwalski, Jr. Mr. Rachwalski, who began his
investment career when he joined the advisor in 1973, has managed the fund since
its inception.
o The fund is managed by a team of investment professionals
who work together to develop the fund's investment
strategies.
6
<PAGE>
Financial Highlights
This table is designed to help you understand the fund's financial performance
in recent years. The figures in the first part of the table are for a single
share. The total return figures represent the percentage that an investor in a
particular fund would have earned, assuming all dividends and distributions were
reinvested. This information has been audited by Ernst & Young LLP, whose
report, along with the fund's financial statements, is included in the annual
report (see "Shareholder reports" on the last page).
<TABLE>
<CAPTION>
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Tax-Exempt California Money Market Fund
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<S> <C> <C> <C> <C> <C>
Years ended September 30, 1999 1998 1997 1996 1995
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Per Share Operating Performance:
Net asset value, beginning of period $1.00 1.00 1.00 1.00 1.00
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Net investment income .02 .03 .03 .03 .03
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Less dividends declared .02 .03 .03 .03 .03
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Net asset value, end of period $1.00 1.00 1.00 1.00 1.00
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Total Return (not annualized) 2.15% 2.71 2.91 2.93 3.23
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Ratios to Average Net Assets (annualized)
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Expenses .75% .74 .78 .72 .75
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Net investment income 2.14% 2.66 2.78 2.88 3.16
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Supplemental Data
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Net assets at end of period (in thousands) $402,432 164,937 117,432 118,884 105,292
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</TABLE>
7
<PAGE>
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Your Investment In The Fund
The following pages describe the main policies associated with buying and
selling shares of the fund. There is also information on dividends and taxes and
other matters that may affect you as a fund shareholder.
Because this fund is available only through a financial services firm, such as a
broker, financial institution or workplace retirement plan, you should contact a
representative of your financial services firm for instructions on how to buy or
sell fund shares.
Policies You Should Know
About
The policies below may affect you as a shareholder. In any case where materials
provided by your financial services firm contradict the information given here,
you should follow the information in your firm's materials. Please note that a
financial services firm may charge its own fees.
Rule 12b-1 Plan
The fund has adopted a plan under Rule 12b-1 that provides for fees payable as
an expense of the fund that are used by Kemper Distributors, Inc., as principal
underwriter, to pay for distribution. Because 12b-1 fees are paid out of fund
assets on an ongoing basis, they will, over time, increase the cost of
investment and may cost more than other types of sales charges.
Policies about transactions
The fund is open for business each day the New York Stock Exchange is open.
Normally, the fund calculates its share price three times every business day: at
11 a.m. Central time; as of the close of regular trading on the Exchange
(typically 3 p.m. Central time, but sometimes earlier, as in the case of
scheduled half-day trading or unscheduled suspensions of trading); and at 8 p.m.
Central time.
8
<PAGE>
As noted earlier, the fund expects to maintain a stable $1.00 share price.
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through financial services firms must be forwarded to
Kemper Service Company before they can be processed, you'll need to allow extra
time. A representative of your financial services firm should be able to tell
you when your order will be processed.
Wire transactions that arrive by 11 a.m. Central time will receive that day's
dividend. Wire transactions received between 11 a.m. Central time and 3 p.m.
Central time will start to accrue dividends the next business day. Investments
by check will be effective at 3 p.m. Central time on the business day following
receipt and will earn dividends the following calendar day.
When selling shares, you'll generally receive the dividend for the day on which
your shares were sold. If we receive a sell request before 11 a.m. Central time
and the request calls for proceeds to be sent out by wire, we will normally wire
you the proceeds on the same day. However, you won't receive that day's
dividend.
When you want to sell more than $50,000 worth of shares or send the proceeds to
a third party or to a new address, you'll usually need to place your order in
writing and include a signature guarantee. The only exception is if you want
money wired to a bank account that is already on file with us; in that case, you
don't need a signature guarantee. Also, you don't need a signature guarantee for
an exchange, although we may require one in certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokerages,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
If you purchased your shares directly from the fund's transfer agent, you can
sell them by sending a written request (with a signature guarantee) to:
Kemper Service Corp.
Attention: Transaction Processing
P.O. Box 219557
Kansas City, MO 64121
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: ten days) or when unusual circumstances prompt the
SEC to allow further delays.
9
<PAGE>
Your financial services firm may set its own minimum investments, although those
set by the fund are as follows:
o Minimum initial investment: $1,000
o Minimum additional investment: $100
o Minimum investment with an automatic investment plan: $50
Share certificates are available on written request. However, we don't recommend
them unless you want them for a specific purpose, because they can only be sold
by mailing them in, and if they're ever lost they're difficult and expensive to
replace.
How the fund calculates share price
The fund's share price is its net asset value per share, or NAV. To calculate
NAV, the fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
In valuing securities, we typically use the amortized cost method (the method
used by most money market funds).
Other rights we reserve
You should be aware that we may do any of the following:
o withhold 31% of your distributions as federal income tax if you have been
notified by the IRS that you are subject to backup withholding, or if you
fail to provide us with a correct taxpayer ID number or certification that
you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been opened, we
may give you 30 days' notice to provide the correct number
o close your account and send you the proceeds if your balance falls below
$1,000; we will give you 60 days' notice so you can either increase your
balance or close your account (this policy doesn't apply to most retirement
accounts or if you have an automatic investment plan)
o pay you for shares you sell by "redeeming in kind," that is, by giving you
marketable securities (which typically will involve brokerage costs for you
to liquidate) rather than cash
o change, add or withdraw various services, fees and account policies
o reject or limit purchases of shares for any reason
o withdraw or suspend any part of the offering made by this prospectus
10
<PAGE>
Understanding Distributions And Taxes
Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences.
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
The fund intends to declare income dividends daily, and pay them monthly. The
fund may make short- or long-term capital gains distributions in November or
December, and may make additional distributions for tax purposes if necessary.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares (at NAV) or all sent to you by
check. Tell us your preference on your application. If you don't indicate a
preference, your dividends and distributions will all be reinvested. For
retirement plans, reinvestment is the only option.
Dividends from the fund are generally tax-free for most shareholders, meaning
that investors can receive them without incurring federal and California state
income tax liability. However, there are a few exceptions:
o a portion of the fund's dividends may be taxable as a ordinary income if it
came from investments in taxable securities
o because the fund can invest up to 20% of net assets in securities whose
income is subject to the federal alternative minimum tax (AMT), you may owe
taxes on a portion of your dividends if you are among those investors who
must pay AMT
The following tables show the usual tax status of transactions in fund shares as
well as that of any taxable distribution from the fund:
Generally taxed at ordinary income rates
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o short-term capital gains from selling fund shares
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o income dividends you receive from the fund
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o short-term capital gains distributions received from the fund
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Generally taxed at capital gains rates
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o long-term capital gains from selling fund shares
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o long-term capital gains distributions received from the fund
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You will be sent detailed tax information every January. These statements tell
you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
11
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from the fund's management team
about recent market conditions and the effects of the fund's strategies on its
performance. They also have detailed performance figures, a list of everything
the fund owns and the fund's financial statements. Shareholders get these
reports automatically. To reduce costs, we may mail one copy per household. For
more copies, contact your financial services firm.
Statement of Additional Information (SAI) -- This tells you more about the
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact your financial services firm or the SEC (see
below). Materials you get from your financial services firm are free; those from
the SEC involve a copying fee. If you like, you can look over these materials in
person at the SEC's Public Reference Room in Washington, DC. You can also obtain
these materials by calling the Shareholder Service Agent at (800) 231-8568,
during normal business hours only.
SEC
450 Fifth Street, N.W.
Washington, DC 20549-6009
www.sec.gov
Tel (800) SEC-0330
SEC File Number
Tax-Exempt California
Money Market Fund
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
February 1, 2000
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, 2000. The prospectus may be obtained without
charge from the Fund by calling or writing 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
INVESTMENT RESTRICTIONS.................................................3
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS.........................4
MUNICIPAL SECURITIES....................................................5
INVESTMENT ADVISORAND SHAREHOLDER SERVICES.............................16
PORTFOLIO TRANSACTIONS.................................................19
PURCHASE AND REDEMPTION OF SHARES......................................20
DIVIDENDS, NET ASSET VALUE AND TAXES...................................21
PERFORMANCE............................................................23
OFFICERS AND TRUSTEES..................................................26
SPECIAL FEATURES.......................................................27
SHAREHOLDER RIGHTS.....................................................29
APPENDIX -- RATINGS OF INVESTMENTS.....................................31
<PAGE>
The financial statements appearing in the Fund's Annual Report to Shareholders
dated September 30, 1999 are incorporated herein by reference. The Fund's Annual
Report to Shareholders accompanies this Statement of Additional Information.
<PAGE>
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, as amended (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.
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 advisor 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.
<PAGE>
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.
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which the Fund may engage or a financial
instrument which the Fund may purchase are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. (the "Advisor"), in its
discretion, might, but is not required to, use in managing the Fund's assets.
The Advisor may, in its discretion, at any time, employ such practice, technique
or instrument for one or more funds but not for all funds advised by it.
Furthermore, it is possible that certain types of financial instruments or
investment techniques described herein may not be available, permissible,
economically feasible or effective for their intended purposes in all markets.
Certain practices, techniques, or instruments may not be principal activities of
the Fund, but, to the extent employed, could, from time to time, have a material
impact on the Fund's performance.
The Fund seeks to maintain a net asset value of $1.00 per share.
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
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rated within the two highest rating categories by Moody's or S&P; or (f) are
judged by the investment advisor to be of comparable quality at the time of
purchase. 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"). The municipal securities market is narrower
and less liquid, with fewer investors than the taxable market.
The investment objective of the Fund and the investment policies set forth in
"Investment Restrictions" are fundamental and may not 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."
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 must meet the diversification requirements of Rule 2a-7 under the 1940
Act. Rule 2a-7 currently provides that a single state money fund shall not, as
to 75% of its total 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.
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.
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
<PAGE>
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
advisor 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 advisor 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 advisor 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 advisor 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.
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
<PAGE>
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 advisor. 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 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
<PAGE>
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.
1995-96 through 1997-98 Fiscal Years
With the end of the recession of the early 1990's and a growing economy
beginning in 1994, the State's financial condition improved markedly through a
combination of increasing revenues, slowdown in growth of social welfare
programs, and continued spending restraint. The last of the recession-induced
budget deficits was repaid, allowing the State's Special Fund for Economic
Uncertainties (the "SFEU") to post a positive cash balance for only the second
time in the 1990's, totaling $281 million as of June 30, 1997. The State's cash
position also improved and no deficit borrowing occurred over the last four
fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (approximately $2.2
billion in 1995-96, $1.6 billion in 1996-97, $2.4 billion in 1997-98 and $1.0
billion in 1998-99) than were initially planned when the budgets were enacted.
These additional funds were largely directed to school spending as mandated by
Proposition 98, and to make up shortfalls from reduced federal health and
welfare aid in 1995-96 and 1996-97. The accumulated budget deficit from the
recession years was eliminated.
1998-99 Fiscal Year Budget
The following were major features of the 1998 Budget Act and certain additional
fiscal bills enacted before the end of the legislative session:
The most significant feature of the 1998-99 budget was agreement on a total of
$1.4 billion of tax cuts. The central element was a bill which provided for a
phased-in reduction of the Vehicle License Fee ("VLF"). Since the VLF is
transferred to cities and counties under existing law, the bill provided for the
General Fund to replace the lost revenues. Starting on January 1, 1999, the VLF
was reduced by 25 percent, at a cost to the General Fund of approximately $500
million in the 1998-99 Fiscal Year and about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget included both temporary and
permanent increases in the personal income tax dependent credit ($612 million
General Fund cost in 1998-99, and less in future years), a nonrefundable
renter's tax credit ($133 million), and various targeted business tax credits
($106 million).
Proposition 98 funding for K-14 schools was increased by $1.7 billion in General
Fund moneys over revised 1997-98 levels, approximately $300 million higher than
the minimum Proposition 98 guarantee. Of the 1998-99 funds, major new programs
included money for instructional and library materials, previously deferred
maintenance, support for increasing the school year to 180 days and reduction of
class sizes in Grade 9.
Funding for higher education increased substantially above the actual 1997-98
level. General Fund support was increased by $340 million (15.6 percent) for the
University of California and $267 million (14.1 percent) for the California
State University system. In addition, Community Colleges funding increased by
$300 million (6.6 percent).
The budget included increased funding for health, welfare and social services
programs. A 4.9 percent grant increase was included in the basic welfare grants,
the first increase in those grants in nine years.
<PAGE>
Funding for the judiciary and criminal justice programs increased approximately
11 percent over 1997-98, primarily to reflect increased State support for local
trial courts and rising prison population.
Major legislation enacted after the 1998 Budget Act included new funding for
resources projects, a share of the purchase of the Headwaters Forest, funding
for the Infrastructure and Economic Development Bank ($50 million) and funding
for the construction of local jails. The State realized savings of $433 million
from a reduction in the State's contribution to the State Teacher's Retirement
System in 1998-99.
1999-2000 Fiscal Year Budget
On January 8, 1999, Governor Davis released his proposed budget for Fiscal Year
1999-2000 (the "January Governor's Budget"). The January Governor's Budget
generally reported that general fund revenues for FY 1998-99 and FY 1999-2000
would be lower than earlier projections (primarily due to weaker overseas
economic conditions perceived in late 1998), while some caseloads would be
higher than earlier projections. The January Governor's Budget proposed $60.5
billion of general fund expenditures in FY 1999-2000, with a $415 million SFEU
reserve at June 30, 2000.
The 1999 May Revision showed an additional $4.3 billion of revenues for combined
fiscal years 1998-99 and 1999-2000. The final Budget Bill was adopted by the
Legislature on June 16, 1999, and was signed by the Governor on June 29, 1999
(the "1999 Budget Act"), meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.
The final 1999 Budget Act estimated General Fund revenues and transfers of $63.0
billion, and contained expenditures totaling $63.7 billion after the Governor
used his line-item veto to reduce the legislative Budget Bill expenditures by
$581 million (both General Fund and Special Fund). The 1999 Budget Act also
contained expenditures of $16.1 billion from special funds and $1.5 billion from
bond funds. The Administration estimated that the SFEU would have a balance at
June 30, 2000, of about $880 million. Not included in this amount was an
additional $300 million which (after the Governor's vetoes) was "set aside" to
provide funds for employee salary increases (to be negotiated in bargaining with
employee unions), and for litigation reserves. The 1999 Budget Act anticipates
normal cash flow borrowing during the fiscal year.
The principal features of the 1999 Budget Act include the following:
Proposition 98 funding for K-12 schools was increased by $1.6 billion in General
Fund moneys over revised 1998-99 levels, $108.6 million higher than the minimum
Proposition 98 guarantee. Of the 1999-2000 funds, major new programs included
money for reading improvement, new textbooks, school safety, improving teacher
quality, funding teacher bonuses, providing greater accountability for school
performance, increasing preschool and after school care programs and funding
deferred maintenance of school facilities.
Funding for higher education increased substantially above the actual 1998-99
level. General Fund support was increased by $184 million (7.3 percent) for the
University of California and $126 million (5.9 percent) for the California State
University system. In addition, Community Colleges funding increased by $324.3
million (6.6 percent). As a result, undergraduate fees at the University of
California and the California State University System will be reduced for the
second consecutive year, and the per-unit charge at Community Colleges will be
reduced by $1.
The Budget included increased funding of nearly $600 million for health and
human services.
About $800 million from the General Fund will be directed toward infrastructure
costs, including $425 million in additional funding for the Infrastructure Bank,
initial planning costs for a new prison in the Central Valley, additional
equipment for train and ferry service, and payment of deferred maintenance for
state parks.
The Legislature enacted a one-year additional reduction of 10 percent of the VLF
for calendar year 2000, at a General Fund cost of about $250 million in each of
FY 1999-2000 and 2000-01 to make up lost funding to local governments.
Conversion of this one-time reduction to a permanent cut will remain subject to
the revenue tests in the legislation adopted last year.
A one-time appropriation of $150 million, to be split between cities and
counties, was made to offset property tax shifts during the early 1990's.
Additionally, an ongoing $50 million was appropriated as a subvention to cities
for jail booking or processing fees charged by counties when an individual
arrested by city personnel is taken to a county detention facility.
Constitutional, Legislative and Other Factors
Certain California constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could produce the
adverse effects described below, among others.
Revenue Distribution. Certain Debt Obligations in the Portfolio may be
obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's General Fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
<PAGE>
theretofore paid out of local funds. Whether and to what extent a portion of the
State's General Fund will be distributed in the future to counties, cities and
their various entities is unclear.
Health Care Legislation. Certain Debt Obligations in the Portfolio may be
obligations which are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect these
revenues and, consequently, payment on those Debt Obligations.
The Federally sponsored Medicaid program for health care services to eligible
welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such hospital
met applicable requirements for participation. California law now provides that
the State of California shall selectively contract with hospitals to provide
acute inpatient services to Medi-Cal patients. Medi-Cal contracts currently
apply only to acute inpatient services. Generally, such selective contracting is
made on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in relation to
inflation, costs or other factors. Other reductions or limitations may be
imposed on payment for services rendered to Medi-Cal beneficiaries in the
future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California will
be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice under
certain circumstances and is obligated to make contractual payments only to the
extent the California legislature appropriates adequate funding therefor.
California enacted legislation in 1982 that authorizes private health plans and
insurers to contract directly with hospitals for services to beneficiaries on
negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a stated term,
regardless of provider losses or of bankruptcy of the respective HMO or PPO. It
is expected that failure to execute and maintain such PPO and HMO contracts
would reduce a hospital's patient base or gross revenues. Conversely,
participation may maintain or increase the patient base, but may result in
reduced payment and lower net income to the contracting hospitals.
These Debt Obligations may also be insured by the State of California pursuant
to an insurance program implemented by the Office of Statewide Health Planning
and Development for health facility construction loans. If a default occurs on
insured Debt Obligations, the State Treasurer will issue debentures payable out
of a reserve fund established under the insurance program or will pay principal
and interest on an unaccelerated basis from unappropriated State funds. At the
request of the Office of Statewide Health Planning and Development, Arthur D.
Little, Inc. prepared a study in December 1983, to evaluate the adequacy of the
reserve fund established under the insurance program and based on certain
formulations and assumptions found the reserve fund substantially underfunded.
In September of 1986, Arthur D. Little, Inc. prepared an update of the study and
concluded that an additional 10% reserve be established for "multi-level"
facilities. For the balance of the reserve fund, the update recommended
maintaining the current reserve calculation method. In March of 1990, Arthur D.
Little, Inc. prepared a further review of the study and recommended that
separate reserves continue to be established for "multi-level" facilities at a
reserve level consistent with those that would be required by an insurance
company.
Mortgages and Deeds. Certain Debt Obligations in the Portfolio may be
obligations which are secured in whole or in part by a mortgage or deed of trust
on real property. California has five principal statutory provisions which limit
the remedies of a creditor secured by a mortgage or deed of trust. Two statutes
limit the creditor's right to obtain a deficiency judgment, one limitation being
based on the method of foreclosure and the other on the type of debt secured.
Under the former, a deficiency judgment is barred when the foreclosure is
accomplished by means of a nonjudicial trustee's sale. Under the latter, a
deficiency judgment is barred when the foreclosed mortgage or deed of trust
secures certain purchase money obligations. Another California statute, commonly
known as the "one form of action" rule, requires creditors secured by real
property to exhaust their real property security by foreclosure before bringing
a personal action against the debtor. The fourth statutory provision limits any
deficiency judgment obtained by a creditor secured by real property following a
judicial sale of such property to the excess of the outstanding debt over the
fair value of the property at the time of the sale, thus preventing the creditor
from obtaining a large deficiency judgment against the debtor as the result of
low bids at a judicial sale. The fifth statutory provision gives the debtor the
right to redeem the real property from any judicial foreclosure sale as to which
a deficiency judgment may be ordered against the debtor.
<PAGE>
Upon the default of a mortgage or deed of trust with respect to California real
property, the creditor's nonjudicial foreclosure rights under the power of sale
contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days after
expiration of the three-month reinstatement period. The debtor may reinstate the
mortgage, in the manner described above, up to five business days prior to the
scheduled sale date. Therefore, the effective minimum period for foreclosing on
a mortgage could be in excess of seven months after the initial default. Such
time delays in collections could disrupt the flow of revenues available to an
issuer for the payment of debt service on the outstanding obligations if such
defaults occur with respect to a substantial number of mortgages or deeds of
trust securing an issuer's obligations.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the private-right-of-sale
proceedings violate the due process requirements of the Federal or State
Constitutions, consequently preventing an issuer from using the nonjudicial
foreclosure remedy described above.
Certain Debt Obligations in the Portfolio may be obligations which finance the
acquisition of single family home mortgages for low and moderate income
mortgagors. These obligations may be payable solely from revenues derived from
the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California antideficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.
Under California law, mortgage loans secured by single-family owner-occupied
dwellings may be prepaid at any time. Prepayment charges on such mortgage loans
may be imposed only with respect to voluntary prepayments made during the first
five years during the term of the mortgage loan, and then only if the borrower
prepays an amount in excess of 20% of the original principal amount of the
mortgage loan in a 12-month period; a prepayment charge cannot in any event
exceed six months' advance interest on the amount prepaid during the 12-month
period in excess of 20% of the original principal amount of the loan. This
limitation could affect the flow of revenues available to an issuer for debt
service on the outstanding debt obligations which financed such home mortgages.
Proposition 13. Certain of the Debt Obligations may be obligations of issuers
who rely in whole or in part on ad valorem real property taxes as a source of
revenue. On June 6, 1978, California voters approved an amendment to the
California Constitution known as Proposition 13, which added Article XIIIA to
the California Constitution. The effect of Article XIIIA was to limit ad valorem
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Section 1 of Article XIIIA, as amended, limits the maximum ad valorem tax on
real property to 1% of full cash value to be collected by the counties and
apportioned according to law. The 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption charges on any
bonded indebtedness for the acquisition or improvement of real property approved
by two-thirds of the votes cast by the voters voting on the proposition. Section
2 of Article XIIIA defines "full cash value" to mean "the County Assessor's
valuation of real property as shown on the 1975/76 tax bill under `full cash
value' or, thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after the 1975
assessment." The full cash value may be adjusted annually to reflect inflation
at a rate not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by damage, destruction or other factors.
Legislation enacted by the California Legislature to implement Article XIIIA
provides that notwithstanding any other law, local agencies may not levy any ad
valorem property tax except to pay debt service on indebtedness approved by the
voters prior to July 1, 1978, and that each county will levy the maximum tax
permitted by Article XIIIA.
Proposition 9. On November 6, 1979, an initiative known as "Proposition 9" or
the "Gann Initiative" was approved by the California voters, which added Article
XIIIB to the California Constitution. Under Article XIIIB, State and local
governmental entities have an annual "appropriations limit" and are not allowed
to spend certain moneys called "appropriations subject to limitation" in an
amount higher than the "appropriations limit." Article XIIIB does not affect the
appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population, and certain
services provided by these entities. Article
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XIIIB also provides that if these entities' revenues in any year exceed the
amounts permitted to be spent, the excess is to be returned by revising tax
rates or fee schedules over the subsequent two years.
Proposition 98. On November 8, 1988, voters of the State approved Proposition
98, a combined initiative constitutional amendment and statute called the
"Classroom Instructional Improvement and Accountability Act." Proposition 98
changed State funding of public education below the university level and the
operation of the State Appropriations Limit, primarily by guaranteeing K-14
schools a minimum share of General Fund revenues. Under Proposition 98 (modified
by Proposition 111 as discussed below), K-14 schools are guaranteed the greater
of (a) in general, a fixed percent of General Fund revenues ("Test 1"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted for changes in
the cost of living (measured as in Article XIII B by reference to State per
capita personal income) and enrollment ("Test 2"), or (c) a third test, which
would replace Test 2 in any year when the percentage growth in per capita
General Fund revenues from the prior year plus one half of one percent is less
than the percentage growth in State per capita personal income ("Test 3"). Under
Test 3, schools would receive the amount appropriated in the prior year adjusted
for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If Test 3 is used in any year, the
difference between Test 3 and Test 2 would become a "credit" to schools which
would be the basis of payments in future years when per capita General Fund
revenue growth exceeds per capita personal income growth.
Proposition 98 permits the Legislature -- by two-thirds vote of both houses,
with the Governor's concurrence -- to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
During the recession years of the early 1990s, General Fund revenues for several
years were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. In 1992, a lawsuit was filed, California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. During the
course of this litigation, a trial court determined that almost $2 billion in
"loans" which had been provided to school districts during the recession
violated the constitutional protection of support for public education. A
settlement was reached on April 12, 1996 which ensures that future school
funding will not be in jeopardy over repayment of these so-called loans.
Proposition 111. On June 30, 1989, the California Legislature enacted Senate
Constitutional Amendment 1, a proposed modification of the California
Constitution to alter the spending limit and the education funding provisions of
Proposition 98. Senate Constitutional Amendment 1 -- on the June 5, 1990 ballot
as Proposition 111 -- was approved by the voters and took effect on July 1,
1990. Among a number of important provisions, Proposition 111 recalculated
spending limits for the State and for local governments, allowed greater annual
increases in the limits, allowed the averaging of two years' tax revenues before
requiring action regarding excess tax revenues, reduced the amount of the
funding guarantee in recession years for school districts and community college
districts (but with a floor of 40.9 percent of State general fund tax revenues),
removed the provision of Proposition 98 which included excess moneys transferred
to school districts and community college districts in the base calculation for
the next year, limited the amount of State tax revenue over the limit which
would be transferred to school districts and community college districts, and
exempted increased gasoline taxes and truck weight fees from the State
appropriations limit. Additionally, Proposition 111 exempted from the State
appropriations limit funding for capital outlays.
Proposition 62. On November 4, 1986, California voters approved an initiative
statute known as Proposition 62. This initiative provided the following:
Requires that any tax for general governmental purposes imposed by local
governments be approved by resolution or ordinance adopted by a two-thirds vote
of the governmental entity's legislative body and by a majority vote of the
electorate of the governmental entity;
Requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction;
Restricts the use of revenues from a special tax to the purposes or for the
service for which the special tax was imposed;
Prohibits the imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIIA;
Prohibits the imposition of transaction taxes and sales taxes on the sale of
real property by local governments;
Requires that any tax imposed by a local government on or after August 1, 1985
be ratified by a majority vote of the electorate within two years of the
adoption of the initiative;
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Requires that, in the event a local government fails to comply with the
provisions of this measure, a reduction in the amount of property tax revenue
allocated to such local government occurs in an amount equal to the revenues
received by such entity attributable to the tax levied in violation of the
initiative; and
Permits these provisions to be amended exclusively by the voters of the State of
California.
In September 1988, the California Court of Appeal in City of Westminster v.
County of Orange, 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal. Ct. App. 1988),
held that Proposition 62 is unconstitutional to the extent that it requires a
general tax by a general law city, enacted on or after August 1, 1985 and prior
to the effective date of Proposition 62, to be subject to approval by a majority
of voters. The Court held that the California Constitution prohibits the
imposition of a requirement that local tax measures be submitted to the
electorate by either referendum or initiative. It is impossible to predict the
impact of this decision on charter cities, on special taxes or on new taxes
imposed after the effective date of Proposition 62. The California Court of
Appeal in City of Woodlake v. Logan, (1991) 230 Cal. App. 3d 1058, subsequently
held that Proposition 62's popular vote requirements for future local taxes also
provided for an unconstitutional referenda. The California Supreme Court
declined to review both the City of Westminster and the City of Woodlake
decisions.
In Santa Clara Local Transportation Authority v. Guardino, (Sept. 28, 1995) 11
Cal. 4th 220, reh'g denied, modified (Dec. 14, 1995) 12 Cal. 4th 344e, the
California Supreme Court upheld the constitutionality of Proposition 62's
popular vote requirements for future taxes, and specifically disapproved of the
City of Woodlake decision as erroneous. The Court did not determine the
correctness of the City of Westminster decision, because that case appeared
distinguishable, was not relied on by the parties in Guardino, and involved
taxes not likely to still be at issue. It is impossible to predict the impact of
the Supreme Court's decision on charter cities or on taxes imposed in reliance
on the City of Woodlake case.
In McBrearty v. City of Brawley, 59 Cal. App. 4th 1441, 69 Cal. Rptr. 2d 862
(Cal. Ct. App. 1997), the Court of Appeal held that the city of Brawley must
either hold an election or cease collection of utility taxes that were not
submitted to a vote. In 1991, the city of Brawley adopted an ordinance imposing
a utility tax on its residents and began collecting the tax without first
seeking voter approval. In 1996, the taxpayer petitioned for writ of mandate
contending that Proposition 62 required the city to submit its utility tax on
residents to vote of local electorate. The trial court issued a writ of mandamus
and the city appealed.
First, the Court of Appeal held that the taxpayer's cause of action accrued for
statute of limitation purposes at the time of the Guardino decision rather than
at the time when the city adopted the tax ordinance which was July 1991. Second,
the Court held that the voter approval requirement in Proposition 62 was not an
invalid mechanism under the state constitution for the involvement of the
electorate in the legislative process. Third, the Court rejected the city's
argument that Guardino should only be applied on a prospective basis. Finally,
the Court held Proposition 218 (see discussion below) did not impliedly protect
any local general taxes imposed prior January 1, 1995 against challenge.
Assembly Bill 1362 (Mazzoni), introduced February 28, 1997, which would have
made the Guardino decision inapplicable to any tax first imposed or increased by
an ordinance or resolution adopted before December 14, 1995, was vetoed by the
Governor on October 11, 1997. The California State Senate had passed the Bill on
May 16, 1996 and the California State Assembly had passed the bill on September
11, 1997. It is not clear whether the Bill, if enacted, would have been
constitutional as a non-voted amendment to Proposition 62 or as a non-voted
change to Proposition 62's operative date.
Proposition 218. On November 5, 1996, the voters of the State approved
Proposition 218, a constitutional initiative, entitled the "Right to Vote on
Taxes Act" ("Proposition 218"). Proposition 218 adds Articles XIII C and XIII D
to the California Constitution and contains a number of interrelated provisions
affecting the ability of local governments to levy and collect both existing and
future taxes, assessments, fees and charges. Proposition 218 became effective on
November 6, 1996. The Sponsors are unable to predict whether and to what extent
Proposition 218 may be held to be constitutional or how its terms will be
interpreted and applied by the courts. However, if upheld, Proposition 218 could
substantially restrict certain local governments' ability to raise future
revenues and could subject certain existing sources of revenue to reduction or
repeal, and increase local government costs to hold elections, calculate fees
and assessments, notify the public and defend local government fees and
assessments in court.
Article XIII C of Proposition 218 requires majority voter approval for the
imposition, extension or increase of general taxes and two-thirds voter approval
for the imposition, extension or increase of special taxes, including special
taxes deposited into a local government's general fund. Proposition 218 also
provides that any general tax imposed, extended or increased without voter
approval by any local government on or after January 1, 1995 and prior to
November 6, 1996 shall continue to be imposed only if approved by a majority
vote in an election held within two years of November 6, 1996.
Article XIII C of Proposition 218 also expressly extends the initiative power to
give voters the power to reduce or repeal local taxes, assessments, fees and
charges, regardless of the date such taxes, assessments, fees or charges were
imposed. This
<PAGE>
extension of the initiative power to some extent constitutionalizes the March 6,
1995 State Supreme Court decision in Rossi v. Brown, which upheld an initiative
that repealed a local tax and held that the State constitution does not preclude
the repeal, including the prospective repeal, of a tax ordinance by an
initiative, as contrasted with the State constitutional prohibition on
referendum powers regarding statutes and ordinances which impose a tax.
Generally, the initiative process enables California voters to enact legislation
upon obtaining requisite voter approval at a general election. Proposition 218
extends the authority stated in Rossi v. Brown by expanding the initiative power
to include reducing or repealing assessments, fees and charges, which had
previously been considered administrative rather than legislative matters and
therefore beyond the initiative power.
The initiative power granted under Article XIII C of Proposition 218, by its
terms, applies to all local taxes, assessments, fees and charges and is not
limited to local taxes, assessments, fees and charges that are property related.
Article XIII D of Proposition 218 adds several new requirements making it
generally more difficult for local agencies to levy and maintain "assessments"
for municipal services and programs. "Assessment" is defined to mean any levy or
charge upon real property for a special benefit conferred upon the real
property.
Article XIII D of Proposition 218 also adds several provisions affecting "fees"
and "charges" which are defined as "any levy other than an ad valorem tax, a
special tax, or an assessment, imposed by a local government upon a parcel or
upon a person as an incident of property ownership, including a user fee or
charge for a property related service." All new and, after June 30, 1997,
existing property related fees and charges must conform to requirements
prohibiting, among other things, fees and charges which (i) generate revenues
exceeding the funds required to provide the property related service, (ii) are
used for any purpose other than those for which the fees and charges are
imposed, (iii) are for a service not actually used by, or immediately available
to, the owner of the property in question, or (iv) are used for general
governmental services, including police, fire or library services, where the
service is available to the public at large in substantially the same manner as
it is to property owners. Further, before any property related fee or charge may
be imposed or increased, written notice must be given to the record owner of
each parcel of land affected by such fee or charges. The local government must
then hold a hearing upon the proposed imposition or increase of such property
based fee, and if written protests against the proposal are presented by a
majority of the owners of the identified parcels, the local government may not
impose or increase the fee or charge. Moreover, except for fees or charges for
sewer, water and refuse collection services, no property related fee or charge
may be imposed or increased without majority approval by the property owners
subject to the fee or charge or, at the option of the local agency, two-thirds
voter approval by the electorate residing in the affected area.
Proposition 87. On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California Constitution
by authorizing the California Legislature to prohibit redevelopment agencies
from receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments approved by
voters on or after January 1, 1989.
<PAGE>
<PAGE>
INVESTMENT ADVISOR AND SHAREHOLDER SERVICES
Investment advisor.
Scudder Kemper Investments, Inc. (the "Advisor"), an investment counsel
firm, acts as investment advisor to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Advisor introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On December 31, 1997, Zurich
Insurance Company ("Zurich") acquired a majority interest in the Advisor, and
Zurich Kemper Investments, Inc., a Zurich subsidiary, became part of the
Advisor. The Advisor's name changed to Scudder Kemper Investments, Inc. 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 Group. By way of a dual holding
company structure, former Zurich shareholders initially owned approximately 57%
of Zurich Financial Services Group, with the balance initially owned by former
B.A.T shareholders.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Advisor's income is professional fees
received from providing continuous investment advice. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations as well as providing investment advice to over 280 open and
closed-end mutual funds.
The Advisor maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Advisor receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor's international
investment management team travels the world, researching hundreds of companies.
In selecting the securities in which the Fund may invest, the conclusions and
investment decisions of the Advisor with respect to the Funds are based
primarily on the analyses of its own research department.
Certain investments may be appropriate for a fund and also for other clients
advised by the Advisor. Investment decisions for a fund and other clients are
made with a view to achieving their respective investment objectives and after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Advisor to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a fund. Purchase and sale orders for a fund may be combined with
those of other clients of the Advisor in the interest of achieving the most
favorable net results to that fund.
In certain cases the investments for the Fund are managed by the same
individuals who manage one or more other mutual funds advised by the Advisor
that have similar names, objectives and investment styles as the Fund. You
should be aware that the Fund is likely to differ from these other mutual funds
in size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of the Fund can be expected to vary from those of the other mutual
funds.
Pursuant to an investment management agreement, Scudder Kemper acts as the
Fund's investment advisor, manages its investments, administers its business
affairs, furnishes office facilities and equipment, provides clerical, and
administrative
<PAGE>
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 Advisor 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 Advisor in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
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.
The present investment management agreement the "Agreement" approved by the
Trustees on July 21, 1998, became effective September 7, 1998, and was approved
at a shareholder meeting held on December 17, 1998. The Agreement will continue
in effect until September 30, 1999 and from year to year thereafter only if its
continuance is approved annually by the vote of a majority of those Trustees who
are not parties to such Agreement or interested persons of the Advisor or the
Trust, cast in person at a meeting called for the purpose of voting on such
approval, and either by a vote of the Trust's Trustees or of a majority of the
outstanding voting securities of the Fund. The Agreement may be terminated at
any time without payment of penalty by either party on sixty days' written
notice and automatically terminate in the event of its assignment.
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 Advisor, including the former investment
advisor, fees of $625,000, $306,000 and $127,000 for the fiscal years ended
September 30, 1999, 1998 and 1997, respectively.
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts 02110, a subsidiary of Scudder
Kemper, is responsible for determining the daily net asset value per share of
the 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 Advisor,
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 0.33%
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. 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
<PAGE>
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, 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. In addition, KDI may, from time to time, from its own
resources, pay certain firms additional amounts for such services including,
without limitation fixed dollar amounts and amounts based upon a percentage of
net assets or increased net assets in those Fund accounts that said firms
maintain and service. KDI may also reimburse firms for costs associated with the
transfer of client balances to the Fund. 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, 1999, the Fund incurred distribution
fees of $322,121. Of such amount, KDI remitted $0.00 to various firms pursuant
to the related services agreements. For the fiscal year ended September 30,
1999, KDI incurred underwriting, distribution and administrative expenses in the
approximate amounts noted: service fees to firms $367,560; advertising and
literature $44,233; and marketing and sales expenses $110,658; for a total of
$522,451. 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.
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.
For the fiscal year ended September 30, 1997, the Fund incurred distribution
fees of $190,000. Of such amount, KDI remitted $182,000 to various firms
pursuant to the related services agreements. For the fiscal year ended September
30, 1997, KDI incurred underwriting, distribution and administrative expenses in
the approximate amounts noted: service fees to firms $182,000; advertising and
literature $0; and marketing and sales expenses $30,000; for a total of
$212,000. 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
Advisor 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 Advisor, serves as "Shareholder Service Agent" of
the Fund and, as such, performs all of IFTC's duties as transfer agent and
dividend paying agent. IFTC receives, as transfer agent, and pays to KSvC as
follows: annual account fees of a maximum of $13 per account
<PAGE>
plus out-of-pocket expense reimbursement. For the fiscal years ended September
30, 1999, 1998 and 1997, IFTC remitted fees in the amount of $309,000, $125,000
and $21,000, respectively, 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
Allocation of brokerage is supervised by the Advisor.
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 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 Advisor 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
Advisor 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 Advisor 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 Advisor'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 Advisor 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 Advisor may give consideration to those firms that have sold or
are selling shares of a fund managed by the Advisor.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions through Scudder Investor Services, Inc.
("SIS"), a corporation registered as a broker-dealer and a subsidiary of the
Advisor. 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 Advisor, it is the opinion
of the Advisor that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Advisor's staff. Such information may be useful to the Advisor in providing
services to clients other than the Fund and not all such information is used by
the Advisor in connection with the Fund. Conversely, such information provided
to the Advisor by broker/dealers through whom other clients of the Advisor
effect securities transactions may be useful to the Advisor in providing
services to the Fund.
<PAGE>
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
Purchase 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. The Fund may waive the minimum for purchases by trustees, directors,
officers or employees of the Fund or the Advisor 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.
Redemption of Shares. Upon receipt by the Fund's Shareholder Service Agent 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.
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.
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 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
<PAGE>
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. Central 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 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 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.
<PAGE>
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. Central time.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 asset 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 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 advisors 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 advisors with respect to the
consequences of the Superfund Act.
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
<PAGE>
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 1999 calendar year, 5% 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
advisors 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 advisors 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 advisors 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 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
From time to time, the Fund may advertise several types of performance
information for the Portfolio, including "yield" and "effective yield." Each of
these figures is based upon historical earnings and is not representative of the
future performance of the Fund. The yield of the Fund refers to the net
investment income generated by a hypothetical investment in the Fund over a
specific seven-day period. This net investment income is then annualized, which
means that the net investment income generated during the seven-day period is
assumed to be generated each week over an annual period and is shown as a
percentage of the investment. The effective yield is calculated similarly, but
the net investment income earned by the investment is assumed to be compounded
when annualized. The effective yield will be slightly higher than the yield due
to this compounding effect. The tax equivalent yield is similar to the effective
yield calculated on an after-tax basis.
The Fund's seven-day 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 for
the Fund as follows. The first calculation is net investment income per share,
which is accrued interest on Fund securities, plus or minus amortized 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 calculations. For the
seven-day period ended September 30, 1999, the Fund's yield was 2.62%.
The Fund's effective seven-day yield is determined by taking the base period
return (computed as described above) and calculating the effect of assumed
compounding. The formula for the seven-day effective yield is: (seven-day base
period return +1)365/7 - 1. The Fund may also advertise a thirty-day effective
yield in which case the formula is (thirty-day base
<PAGE>
period return +1)365/30 - 1. For the seven-day period ended September 30, 1999,
the Fund's effective yield was 2.66%.
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, 1999, the Fund's tax-equivalent yield was
4.66%. 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,
1999, the Fund's tax-equivalent yield was 4.23%. 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 cannot be a guarantee of future results.
The Fund may depict the historical performance of the securities in which the
Fund may invest over periods reflecting a variety of market or economic
conditions either alone or in comparison with alternative investments
performance indexes of those investments or economic indicators. The Fund may
also describe the Fund's holdings and depict its size or relative size compared
to other mutual funds, the number and make-up of its shareholder base and other
descriptive factors concerning the Fund.
Investors also may want to compare the Fund's performance 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 values 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. In addition,
investors may want to compare the Fund's performance to the Consumer Price Index
either directly or by calculating its "real rate of return," which is adjusted
for the effects of inflation.
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 1999 Federal and
State tax rate schedules.
Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Under
$126,600
<TABLE>
<CAPTION>
Your
Marginal A Tax-Exempt Yield of:
Taxable Income Federal Tax 2% 3% 4% 5% 6% 7%
Single Joint Rate 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% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72%
- ---------------------------------------------------------------------------------------------------------------
Over $61,400 Over $102,300 31.0 2.90% 4.35% 5.80% 7.25% 8.70% 10.14%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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:
------ ----- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$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
</TABLE>
Taxable Equivalent Yield Table for Persons Whose Adjusted Gross Income is Over
$126,600*
<TABLE>
<CAPTION>
Your
Marginal A Tax-Exempt Yield of:
Taxable Income Federal Tax 2% 3% 4% 5% 6% 7%
Single Joint Rate Is Equivalent to a Taxable Yield of:
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$61,400-$128,100 $102,300-$155,950 31.9% 2.94% 4.41% 5.87% 7.34% 8.81% 10.28%
- ---------------------------------------------------------------------------------------------------------------
$128,100-$278,450 $155,950-$278,450 37.1 3.18% 4.77% 6.36% 7.95% 9.54% 11.13%
- ---------------------------------------------------------------------------------------------------------------
Over $278,450 Over $278,450 40.8 3.38% 5.07% 6.67% 8.45% 10.14% 11.82%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
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:
------ ----- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 61,400-$128,100 $102,300-$155,950
38.2% 6.74 8.09 9.71 11.33 12.94 14.56
$155,950-$278,450 42.9 7.01 8.76 10.51 12.26 14.01 15.76
$128,100-$278,450
Over $278,450 Over $278,450 46.3 7.59 9.49 11.39 13.28 15.18 17.08
</TABLE>
o This table assumes a decrease of $3.00 of itemized deductions for each $100
of adjusted gross income over $126,600. For a married couple with adjusted
gross income between $186,800 and $309,300 (single between $126,600 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. For 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%)).
<PAGE>
OFFICERS AND TRUSTEES
The officers and trustees of the Fund, their birthdates, their principal
occupations and their affiliations, if any, with the Advisor and KDI are listed
below. All persons named as trustees also serve in similar capacities for other
funds advised by the Advisor.
JOHN W. BALLANTINE (2/16/46), Trustee, 1500 North Lake Shore Drive, Chicago,
Illinois; First Chicago NBD Corporation/The First National Bank of Chicago:
1996-1998 Executive Vice President and Chief Risk Management Officer; 1995-1996
Executive Vice President and Head of International Banking; 1992-1995 Executive
Vice President, Chief Credit and Market Risk Officer.
LEWIS A. BURNHAM (1/8/33), Trustee, 16410 Avila Boulevard, Tampa, Florida;
Retired; formerly, Partner, Business Resources Group; formerly, Executive Vice
President, Anchor Glass Container Corporation.
LINDA C. COUGHLIN (1/1/52), Trustee, Two International Place, Boston,
Massachusetts; Managing Director, Advisor.
DONALD L. DUNAWAY (3/8/37), Trustee, 7011 Green Tree Drive, Naples, Florida;
Retired; formerly, Executive Vice President, A.O. Smith Corporation (diversified
manufacturer).
ROBERT B. HOFFMAN (12/11/36), Trustee, 1530 North State Parkway, Chicago,
Illinois; Chairman, Harnischfeger Industries, Inc. (machinery for the mining and
paper industries); formerly, Vice Chairman and Chief Financial Officer, Monsanto
Company (agricultural, pharmaceutical and nutritional/food products); formerly,
Vice President, Head of International Operations, FMC Corporation (manufacturer
of machinery and chemicals).
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, Advisor; 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; formerly, Partner, Steptoe & Johnson (attorneys); prior
thereto, Commissioner, Internal Revenue Service; prior thereto, Assistant
Attorney General (Tax), U.S. Department of Justice; Director, Bethlehem Steel
Corp.
WILLIAM P. SOMMERS (7/22/33), Trustee, 24717 Harbour View Drive, Ponte Vedra
Beach, Florida; Consultant and Director, SRI Consulting; prior thereto,
President and Chief Executive Officer, SRI International (research and
development); prior thereto, Executive Vice President, Iameter (medical
information and educational service provider); prior thereto, Senior Vice
President and Director, Booz, Allen & Hamilton Inc. (management consulting
firm); Director, PSI Inc., Evergreen Solar, Inc. and Litton Industries.
MARK S. CASADY (9/21/60), President*, 345 Park Avenue, New York, New York;
Managing Director, Advisor.
ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Senior Vice President, Advisor.
KATHRYN L. QUIRK (12/3/52), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Advisor
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Advisor.
PHILIP J. COLLORA (11/15/45), Vice President, Treasurer and Secretary*, 222
South Riverside Plaza, Chicago, Illinois; Senior Vice President, Advisor.
JOHN R. HEBBLE (6/27/58), Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Advisor.
BRENDA LYONS (2/21/63), Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Advisor
<PAGE>
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Advisor.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Advisor.
FRANK J. RACHWALSKI, JR. (3/26/45), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Advisor.
ROBERT C. PECK, JR. (10/1/46), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Advisor; formerly, Executive Vice
President and Chief Investment Officer with an unaffiliated investment
management firm from 1988 to June 1997.
* 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 fiscal year ended September 30, 1999 and the total compensation that
Kemper funds paid to each trustee during calendar year 1998.
<TABLE>
<CAPTION>
Aggregate Compensation Total Compensation Kemper
Name of Trustee From Fund Funds Paid to Trustees***
- --------------- --------- -------------------------
<S> <C> <C>
John W. Ballantine* $0
Lewis A. Burnham................................... $126,100
Donald L. Dunaway**................................ $135,000
Robert B. Hoffman.................................. $116,100
Donald R. Jones.................................... $129,600
Shirley D. Peterson................................ $108,800
William P. Sommers................................. $108,800
</TABLE>
* Mr. Ballantine was elected to the Board on May 18, 1999.
** Includes deferred fees. Pursuant to deferred compensation agreements with
the Fund, deferred amounts accrue interest monthly at a rate equal to the
yield of Zurich Money Funds -- Zurich Money Market Fund. Total deferred
fees (including interest thereon) payable from the Fund to Mr. Dunaway are
$____________.
*** Includes compensation during 1999 for service on 25 funds managed by
Scudder Kemper with 43 fund portfolios. Each trustee currently serves as a
trustee of 26 funds managed by Scudder Kemper with 48 fund portfolios.
As of December 31, 1999, 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 Mutual Funds may be exchanged for
each other at their relative net asset values: Kemper Technology Fund, Kemper
Total Return Fund, Kemper Growth Fund, Kemper Small Capitalization Equity Fund,
Kemper Income and Capital Preservation Fund, Kemper Municipal Bond Fund, Kemper
Strategic Income Fund, Kemper High Yield Series, Kemper U.S. Government
Securities Fund, Kemper International Fund, Kemper State Tax-Free Income Series,
Kemper Short-Term U.S. Government Fund, Kemper Blue Chip Fund, Kemper Global
Income Fund, Kemper Target Equity Fund (series are subject to a limited offering
period), Kemper Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund,
Kemper U.S. Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper
Value Series, Inc., Kemper Value Plus Growth Fund, Kemper Quantitative Equity
Fund, Kemper Horizon Fund, Kemper New Europe Fund, Kemper Asian Growth Fund,
Kemper Aggressive Growth Fund, Kemper Global/International Series, Inc., Kemper
Securities Trust and Kemper Equity Trust ("Kemper Mutual Funds") and certain
"Money Market Funds" (Zurich Money Funds, Zurich Yieldwise Funds, Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash Fund and Investors Cash Trust). 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 Mutual Fund
in excess of $1,000,000 (except Money Market Funds 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"). In addition
shares of a Kemper Mutual Fund with a value of $1,000,000 or less (except Kemper
Cash Reserves Fund) acquired by exchange from another Kemper Mutual Fund, or
from a Money Market Fund, may not be exchanged thereafter until they have been
owned for 15 days, if, in the investment advisor's judgment, the exchange
activity
<PAGE>
may have an adverse effect on the fund. In particular, a pattern of exchanges
that coincides with a "market timing" strategy may be disruptive to the Kemper
fund and therefore may be subject to the 15-day hold policy. For purposes of
determining whether the 15-Day Hold Policy applies to a particular exchange, the
value of the shares to be exchanged shall be computed by aggregating the value
of shares being exchanged for all accounts under common control, 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 will be 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 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.
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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 advisor
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.
<PAGE>
TAX-EXEMPT CALIFORNIA MONEY MARKET FUND
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits.
- -------- ---------
<S> <C>
(a) Agreement and Declaration of Trust incorporated herein by reference to
Post-Effective Amendment No. 9 to Registrant's Registration Statement on
Form N-1A filed on January 22, 1996.
(b) By-laws incorporated herein by reference to Post-Effective Amendment No. 9
to Registrant's Registration Statement on Form N-1A filed on January 2, 1996.
(c) Text of Share Certificate incorporated herein by reference to Post-Effective
Amendment No. 9 to Registrant's Registration Statement on Form N-1A filed on
January 2, 1996.
(d)(1) Revised Investment Management Agreement dated September 7, 1998 incorporated
herein by reference to Post-Effective Amendment No. 13 to Registrant's
Registration Statement on Form N-1A filed on November 19, 1999.
(e)(1) Administration, Shareholder Services and Distribution Agreement dated
September 7, 1998 incorporated herein by reference to Post-Effective
Amendment No. 12 to Registrant's Registration Statement on Form N-1A filed
on December 3, 1998.
(e)(2) Administration, Shareholder Services and Distribution Agreement dated
October 1, 1999 is filed herein.
(f) Inapplicable
(g)(1) Custodian Contract between Registrant and State Street Bank and Trust
Company dated May 3, 1999 incorporated herein by reference to Post-Effective
Amendment No. 13 to Registrant's Registration Statement on Form N-1A filed
on November 19, 1999.
(h)(1)(a) Agency Agreement incorporated herein by reference to Post-Effective
Amendment No. 9 to Registrant's Registration Statement on Form N-1A filed on
January 2, 1996.
(h)(1)(b) Supplement to Agency Agreement incorporated herein by reference to
Post-Effective Amendment No. 10 to Registrant's Registration Statement on
Form N-1A filed on January 2, 1997.
(h)(2) Fund Accounting Services Agreement dated December 31, 1997 incorporated
herein by reference to Post-Effective Amendment No. 12 to Registrant's
Registration Statement on Form N-1A filed on December 3, 1998.
(h)(3) Supplement to Services Agreement is filed herein.
(i) Legal Opinion and Consent of Counsel is filed herein.
<PAGE>
(j) Report and Consent of Auditors is filed herein.
(k) Inapplicable
(l) Inapplicable
(m) Amended and Restated Rule 12b-1 Plan dated August 1, 1998 incorporated
herein by reference to Post-Effective Amendment No. 12 to Registrant's
Registration Statement on Form N-1A filed on December 3, 1998.
(n) Inapplicable
(o) Inapplicable
</TABLE>
Item 24. Persons Controlled by or under Common Control with Fund.
- -------- --------------------------------------------------------
None
Item 25. Indemnification.
- -------- ----------------
Article VIII of the Registrant's Agreement and Declaration of Trust
(Exhibit 1 hereto, which is incorporated herein by reference) provides in effect
that the Registrant will indemnify its officers and trustees under certain
circumstances. However, in accordance with Section 17(h) and 17(i) of the
Investment Company Act of 1940 and its own terms, said Article of the Agreement
and Declaration of Trust does not protect any person against any liability to
the Registrant or its shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question as to whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
On June 26, 1997, Zurich Insurance Company ("Zurich"), ZKI Holding
Corp. ("ZKIH"), Zurich Kemper Investments, Inc. ("ZKI"), Scudder, Stevens &
Clark, Inc. ("Scudder") and the representatives of the beneficial owners of the
capital stock of Scudder ("Scudder Representatives") entered into a transaction
agreement ("Transaction Agreement") pursuant to which Zurich became the majority
stockholder in Scudder with an approximately 70% interest, and ZKI was combined
with Scudder ("Transaction"). In connection with the trustees' evaluation of the
Transaction, Zurich agreed to indemnify the Registrant and the trustees who were
not interested persons of ZKI or Scudder (the "Independent Trustees") for and
against any liability and expenses based upon any action or omission by the
Independent Trustees in connection with their consideration of and action with
respect to the Transaction. In addition, Scudder has agreed to indemnify the
Registrant and the Independent Trustees for and against any liability and
expenses based upon any misstatements or omissions by Scudder to the Independent
Trustees in connection with their consideration of the Transaction.
Item 26. Business and Other Connections of Investment Adviser
- -------- ----------------------------------------------------
<PAGE>
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, ZKI Holding Corporation xx
Steven Gluckstern Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Zurich Holding Company of America o
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Director, Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
<PAGE>
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
</TABLE>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Item 27. Principal Underwriters.
- -------- -----------------------
(a)
Kemper Distributors, Inc. acts as principal underwriter of the
Registrant's shares and acts as principal underwriter of the Kemper
Funds.
(b)
Information on the officers and directors of Kemper Distributors, Inc.,
principal underwriter for the Registrant is set forth below. The
principal business address is 222 South Riverside Plaza, Chicago,
Illinois 60606.
<TABLE>
<CAPTION>
(1) (2) (3)
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
<S> <C> <C>
James L. Greenawalt President None
Thomas W. Littauer Director, Chief Executive Officer Trustee, Vice President, Chairman of
the Board of Trustees
Kathryn L. Quirk Director, Secretary, Chief Legal Vice President
Officer and Vice President
<PAGE>
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
James J. McGovern Chief Financial Officer and Vice None
President
Linda J. Wondrack Vice President and Chief Compliance Vice President
Officer
Paula Gaccione Vice President None
Michael E. Harrington Vice President None
Robert A. Rudell Vice President None
William M. Thomas Vice President None
Elizabeth C. Werth Vice President None
Todd N. Gierke Assistant Treasurer None
Philip J. Collora Assistant Secretary Vice President and Secretary
Paul J. Elmlinger Assistant Secretary None
Diane E. Ratekin Assistant Secretary None
Mark S. Casady Director, Vice Chairman President
Stephen R. Beckwith Director None
</TABLE>
(c) Not applicable
Item 28. Location of Accounts and Records
- -------- --------------------------------
Accounts, books and other documents are maintained at the offices of
the Registrant, the offices of Registrant's investment adviser, Scudder Kemper
Investments, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, at the
offices of the Registrant's principal underwriter, Kemper Distributors, Inc.,
222 South Riverside Plaza, Chicago, Illinois 60606 or, in the case of records
concerning custodial functions, at the offices of the custodian, State Street
Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110 or, in
the case of records concerning transfer agency functions, at the offices of IFTC
and of the shareholder service agent, Kemper Service Company, 811 Main Street,
Kansas City, Missouri 64105.
Item 29. Management Services.
- -------- --------------------
Inapplicable.
Item 30. Undertakings.
- -------- -------------
Inapplicable.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement, pursuant to
Rule 485(b) under the Securities Act of 1933, and has duly caused this amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago and State of Illinois, on the
25th day of January, 2000.
TAX-EXEMPT CALIFORNIA MONEY
MARKET FUND
By /s/ Mark S. Casady
Mark S. Casady, President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below on January 25,
2000, on behalf of the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Thomas W. Littauer January 25, 2000
- --------------------------------------
Thomas W. Littauer* Chairman and Trustee
/s/ John W. Ballantine
- --------------------------------------
John W. Ballantine* Trustee January 25, 2000
/s/ Lewis A. Burnham January 25, 2000
- --------------------------------------
Lewis A. Burnham* Trustee
- --------------------------------------
Linda C. Coughlin Trustee January 25, 2000
/s/ Donald L. Dunaway January 25, 2000
- --------------------------------------
Donald L. Dunaway* Trustee
/s/ Robert B. Hoffman January 25, 2000
- --------------------------------------
Robert B. Hoffman* Trustee
/s/ Donald R. Jones January 25, 2000
- --------------------------------------
Donald R. Jones* Trustee
/s/ Shirley D. Peterson January 25, 2000
- --------------------------------------
Shirley D. Peterson* Trustee
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ William P. Sommers January 25, 2000
- --------------------------------------
William P. Sommers* Trustee
/s/ John R. Hebble January 25, 2000
- --------------------------------------
John R. Hebble Treasurer (Principal Financial and
Accounting Officer)
</TABLE>
*By: /s/ Philip J. Collora
Philip J. Collora**
** Philip J. Collora signs this document pursuant to powers
of attorney contained in Post-Effective Amendment No. 11
to the Registration Statement, filed January 27, 1998, in
Post-Effective Amendment No. 13 to the Registration
Statement, filed November 19, 1999 and filed herein.
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Caroline Pearson, Maureen E. Kane, and Philip J. Collora and any of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement of Tax-Exempt
California Money Market Fund, a Massachusetts business trust, on Form N-1A under
the Securities Act of 1933, as amended, and the Investment Company Act of 1940,
as amended, and any or all amendments thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
DATED: June 30, 1999
-------
/s/ Thomas W. Littauer
----------------------
Thomas W. Littauer
Trustee
<PAGE>
File No. 33-12938
File No. 811-5076
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 14
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 15
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
TAX-EXEMPT CALIFORNIA MONEY MARKET FUND
<PAGE>
TAX-EXEMPT CALIFORNIA MONEY MARKET FUND
EXHIBIT INDEX
Exhibit (e)(2)
Exhibit (h)(3)
Exhibit (i)
Exhibit (j)
Exhibit (e)(2)
ADMINISTRATION, SHAREHOLDER SERVICES AND
DISTRIBUTION AGREEMENT
AGREEMENT made this 1st day of October, 1999, by and between TAX-EXEMPT
CALIFORNIA MONEY MARKET FUND, a Massachusetts business trust (the "Fund"), and
KEMPER DISTRIBUTORS, INC., a Delaware corporation ("KDI").
In consideration of the mutual covenants hereinafter contained, it is hereby
agreed by and between the parties hereto as follows:
1. The Fund hereby appoints KDI to act as administrator, distributor and
principal underwriter for the distribution of shares of beneficial interest
(hereinafter called "shares") of the Fund in jurisdictions wherein shares of the
Fund may legally be offered for sale; provided, however, that the Fund in its
absolute discretion may (a) issue or sell shares directly to holders of shares
of the Fund upon such terms and conditions and for such consideration, if any,
as it may determine, whether in connection with the distribution of subscription
or purchase rights, the payment or reinvestment of dividends or distributions,
or otherwise; (b) issue or sell shares at net asset value to the shareholders of
any other investment company, for which KDI shall act as exclusive distributor,
who wish to exchange all or a portion of their investment in shares of such
other investment company for shares of the Fund; or (c) issue shares in
connection with the merger or consolidation of any other investment company with
the Fund or the Fund's acquisition, by purchase or otherwise, of all or
substantially all of the assets of any other investment company or all or
substantially all of the outstanding shares of any such company.
KDI shall appoint various broker-dealers and other financial services firms
("Firms") to provide a cash management service for their clients through the
Fund. The Firms shall provide such office space and equipment, telephone
facilities, personnel, literature distribution, advertising and promotion as is
necessary or beneficial for providing information and services to potential and
existing shareholders of the Fund and to assist the Fund's shareholder service
agent in servicing accounts of the Firm's clients who own Fund shares
("clients"). Such services and assistance may include, but are not limited to,
establishment and maintenance of shareholder accounts and records, processing
purchase and redemption transactions, automatic investment in Fund shares of
client account cash balances, answering routine client inquiries regarding the
Fund, assistance to clients in changing dividend options, account designations
and addresses, and such other services as the Fund or KDI may reasonably
request. KDI may also provide some of the above services for the Fund directly.
KDI accepts such appointment and agrees during the term hereof to render such
services and to assume the obligations herein set forth for the compensation
herein provided. KDI shall for all purposes herein provided be deemed to be an
independent contractor and, unless otherwise expressly provided or authorized,
shall have no authority to act for or represent the Fund in any way or otherwise
be deemed an agent of the Fund. It is understood and agreed that KDI, by
separate agreement with the Fund, may also serve the Fund in other capacities.
The services of KDI to the Fund under this Agreement are not to be deemed
exclusive, and KDI shall be free to
<PAGE>
render similar services or other services to others so long as its services
hereunder are not impaired thereby.
In carrying out its duties and responsibilities hereunder, KDI will, pursuant to
separate administration services and selling group agreements ("services
agreements"), appoint various Firms to provide administrative, distribution and
other services contemplated hereunder directly to or for the benefit of existing
and potential shareholders who may be clients of such Firms Such Firms shall at
all times be deemed to be independent contractors retained by KDI and not the
Fund. KDI and not the Fund will be responsible for the payment of compensation
to such Firms for such services.
KDI will use its best efforts with reasonable promptness to sell such part of
the authorized shares of the Fund remaining unissued as from time to time shall
be effectively registered under the Securities Act of 1933 ("Securities Act"),
at prices determined as hereinafter provided and on terms hereinafter set forth,
all subject to applicable federal and state laws and regulations and to the
Fund's organizational documents, provided, however, that KDI may in its
discretion refuse to accept orders for shares from any particular applicant. The
price the Fund shall receive for all shares purchased from the Fund shall be the
net asset value used in determining the public offering price applicable to the
sale of such shares.
2. KDI shall sell shares of the Fund to or through qualified Firms in such
manner, not inconsistent with the provisions hereof and the Fund's currently
effective registration statement, including the prospectus and statement of
additional information and any supplements or amendments thereto ("Registration
Statement"), as KDI may determine from time to time, provided that no Firm or
other person shall be appointed and authorized to act as agent of the Fund
without the prior consent of the Fund. In addition to sales made by it as agent
of the Fund, KDI may, in its discretion, also sell shares of the Fund as
principal to persons with whom it does not have services agreements.
Shares of any series of the Fund offered for sale or sold by KDI shall be so
offered or sold at a price per share determined in accordance with the
Registration Statement except as departure from such prices shall be permitted
by the rules and regulations of the Securities and Exchange Commission;
provided, however, that any public offering price for shares of the Fund shall
be the net asset value per share. The net asset value per share of the Fund
shall be determined in the manner and at the times set forth in the Registration
Statement.
KDI will require each Firm to conform to the provisions hereof and the
Registration Statement with respect to the public offering price of the Fund's
shares, and neither KDI nor any such Firms shall withhold the placing of
purchase orders so as to make a profit thereby.
3. The Fund will use its best efforts to keep effectively registered under the
Securities Act for sale as herein contemplated such shares as KDI shall
reasonably request and as the Securities and Exchange Commission shall permit to
be so registered. Notwithstanding any other provision hereof, the Fund may
terminate, suspend or withdraw the offering of shares whenever, in its sole
discretion, it deems such action to be desirable.
2
<PAGE>
4. The Fund will execute any and all documents and furnish any and all
information that may be reasonably necessary in connection with the
qualification of its shares for sale (including the qualification of the Fund as
a dealer where necessary or advisable) in such states as KDI may reasonably
request (it being understood that the Fund shall not be required without its
consent to comply with any requirement which in its opinion is unduly
burdensome). The Fund will furnish to KDI from time to time such information
with respect to the Fund and its shares as KDI may reasonably request for use in
connection with the sale of shares of the Fund.
5. KDI shall issue and deliver or shall arrange for various Firms to issue and
deliver on behalf of the Fund such confirmations of sales made by it pursuant to
this Agreement as may be required. At or prior to the time of issuance of
shares, KDI will pay or cause to be paid to the Fund the amount due the Fund for
the sale of such shares. Certificates shall be issued or shares registered on
the transfer books of the Fund in such names and denominations as KDI may
specify.
6. KDI shall order shares of the Fund from the Fund only to the extent that it
shall have received purchase orders therefor. KDI will not make, or authorize
Firms or others to make, any short sales of shares of the Fund. KDI, as agent of
and for the account of the Fund, may repurchase the shares of the Fund at such
prices and upon such terms and conditions as shall be specified in the
Registration Statement. In selling or reacquiring shares of the Fund for the
account of the Fund, KDI will in all respects conform to the requirements of all
state and federal laws and the Conduct Rules of the National Association of
Securities Dealers, Inc., relating to such sale or reacquisition, as the case
may be. KDI will observe and be bound by all the provisions of the Fund's
organizational documents (and of any fundamental policies adopted by the Fund
pursuant to the Investment Company Act of 1940 (the "Investment Company Act"),
notice of which shall have been given to KDI) which at the time in any way
require, limit, restrict, prohibit or otherwise regulate any action on the part
of KDI hereunder.
KDI agrees to indemnify and hold harmless the Fund and each of its Board members
and officers and each person, if any, who controls the Fund within the meaning
of Section 15 of the Securities Act, against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
the Fund or such Board members, officers, or controlling persons may become
subject under such Act, under any other statute, at common law or otherwise,
arising out of the acquisition of any shares by any person which (i) may be
based upon any wrongful act by KDI or any of KDI's employees or representatives,
or (ii) may be based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein not misleading if such statement or
omission was made in reliance upon information furnished to the Fund by KDI, or
(iii) may be incurred or arise by reason of KDI's acting as the Fund's agent
instead of purchasing and reselling shares as principal in distributing the
shares to the public, provided, however, that in no case (i) is KDI's indemnity
in favor of a Board member or officer or any other person deemed to protect such
Board member or officer or other person against any liability to which any such
person would otherwise be subject by reason of willful misfeasance, bad faith,
or gross negligence in the performance of his duties or by reason of his
reckless disregard of obligations and duties under this Agreement or (ii) is KDI
to be liable under the indemnity agreement
3
<PAGE>
contained in this paragraph with respect to any claim made against the Fund or
any person indemnified unless the Fund or such person, as the case may be, shall
have notified KDI in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claims shall have
been served upon the Fund or upon such person (or after the Fund or such person
shall have received notice of such service on any designated agent), but failure
to notify KDI of any such claim shall not relieve KDI from any liability which
KDI may have to the Fund or any person against whom such action is brought
otherwise than on account of KDI's indemnity agreement contained in this
paragraph. KDI shall be entitled to participate, at KDI's own expense, in the
defense, or, if KDI so elects, to assume the defense of any suit brought to
enforce any such liability, but if KDI elects to assume the defense, such
defense shall be conducted by counsel chosen by KDI and satisfactory to the
Fund, to its officers and Board members, or to any controlling person or
persons, defendant or defendants in the suit. In the event that KDI elects to
assume the defense of any such suit and retain such counsel, the Fund, such
officers and Board members or controlling person or persons, defendant or
defendants in the suit shall bear the fees and expenses of any additional
counsel retained by them, but, in case KDI does not elect to assume the defense
of any such suit, KDI will reimburse the Fund, such officers and Board members
or controlling person or persons, defendant or defendants in such suit for the
reasonable fees and expenses of any counsel retained by them. KDI agrees to
notify the Fund promptly of the commencement of any litigation or proceedings
against it in connection with the issue and sale of any shares. The Fund shall
not, without the prior written consent of KDI, effect any settlement of any
pending or threatened action, suit or proceeding in respect of which the Fund is
or could have been a party and indemnity has or could have been sought hereunder
by the Fund, unless such settlement includes an unconditional release of KDI
from all liability on claims that are the subject matter of such action, suit or
proceeding.
The Fund agrees to indemnify and hold harmless KDI and each of KDI's directors
and officers and each person, if any, who controls KDI within the meaning of
Section 15 of the Securities Act, against any and all losses, claims, damages,
liabilities or litigation (including legal and other expenses) to which KDI or
such directors, officers or controlling persons may become subject under such
Act, under any other statute, at common law or otherwise, arising out of the
acquisition of any shares by any person which (i) may be based upon any wrongful
act by the Fund or any of its employees or representatives, or (ii) may be based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading if such statement or omission was not made
in reliance upon information furnished to KDI by the Fund; provided, however,
that in no case (i) is the Fund's indemnity in favor of a director or officer or
any other person deemed to protect such director or officer or other person
against any liability to which any such person would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of his duties or by reason of his reckless disregard of obligations and duties
under this Agreement or (ii) is the Fund to be liable under its indemnity
agreement contained in this paragraph with respect to any claims made against
KDI or any such director, officer or controlling person unless KDI or such
director, officer or controlling person, as the case may be, shall have notified
the Fund in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon KDI or
4
<PAGE>
upon such director, officer or controlling person (or after KDI or such
director, officer or controlling person shall have received notice of such
service on any designated agent), but failure to notify the Fund of any such
claim shall not relieve it from any liability which it may have to the person
against whom such action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Fund will be entitled to participate
at its own expense in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Fund elects to assume
the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to KDI, its directors, officers, or controlling person or persons,
defendant or defendants in the suit. In the event that the Fund elects to assume
the defense of any such suit and retain such counsel, KDI, its directors,
officers or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them,
but, in case the Fund does not elect to assume the defense of any such suit, it
will reimburse KDI or such directors, officers or controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify KDI promptly of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of any shares. KDI shall
not, without the prior written consent of the Fund, effect any settlement of any
pending or threatened action, suit or proceeding in respect of which either KDI
is or could have been a party and indemnity has or could have been sought
hereunder by KDI, unless such settlement includes an unconditional release of
the Fund from all liability on claims that are the subject matter of such
action, suit or proceeding.
7. The Fund shall assume and pay all charges and expenses of its operations not
specifically assumed or otherwise to be provided by KDI under this Agreement or
the Fund's Amended and Restated 12b-1 Plan (the "Plan"). The Fund will pay or
cause to be paid expenses (including the fees and disbursements of its own
counsel) and all taxes and fees payable to the federal, state or other
governmental agencies on account of the registration or qualification of
securities issued by the Fund or otherwise. The Fund will also pay or cause to
be paid expenses incident to the issuance of shares of beneficial interest, such
as the cost of share certificates, issue taxes, and fees of the transfer agent.
KDI will pay all expenses (other than expenses which one or more Firms may bear
pursuant to any agreement with KDI) incident to the sale and distribution of the
shares issued or sold hereunder including, without limiting the generality of
the foregoing, all expenses of printing and distributing any prospectus and of
preparing, printing and distributing or disseminating any other literature,
advertising and selling aids in connection with the offering of the shares for
sale (except that such expenses need not include expenses incurred by the Fund
in connection with the preparation, typesetting, printing and distribution of
any registration statement, prospectus or report or other communication to
shareholders in their capacity as such) and expenses of advertising in
connection with such offering.
8. This Agreement shall become effective on the date hereof and shall continue
until September 30, 2000 and shall continue from year to year thereafter only so
long as such continuance is approved in the manner required by the Investment
Company Act.
This Agreement shall automatically terminate in the event of its assignment and
may be terminated at any time without the payment of any penalty by the Fund or
by KDI on (60) days' written notice to the other party. The Fund may effect
termination by a vote of (i) a majority of
5
<PAGE>
the trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plan, this Agreement or
in any other agreement related to the Plan, or (ii) a majority of the
outstanding voting securities of the Fund.
All material amendments to this Agreement must be approved by a vote of a
majority of the Board of Trustees of the Fund, including the trustees who are
not interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan, this Agreement or in any other agreement
related to the Plan, cast in person at a meeting called for such purpose.
The terms "assignment," "interested person" and "vote of a majority of the
outstanding voting securities" shall have the meanings set forth in the
Investment Company Act and the rules and regulations thereunder.
KDI shall receive such compensation for its distribution services as set forth
in the Plan. Termination of this Agreement shall not affect the right of KDI to
receive payments on any unpaid balance of the compensation earned prior to such
termination, as set forth in the Plan.
Notwithstanding anything in this Agreement to the contrary, KDI shall be
contractually bound hereunder by the terms of any publicly announced waiver of
or cap on the compensation received for its distribution services under the Plan
or by the terms of any written document provided to the Board of the Fund
announcing a waiver or cap, as if such waiver or cap were fully set forth
herein.
9. KDI will not use or distribute or authorize the use, distribution or
dissemination by Firms or others in connection with the sale of Fund shares any
statements, other than those contained in the Registration Statement, except
such supplemental literature or advertising as shall be lawful under federal and
state securities laws and regulations. KDI will furnish the Fund with copies of
all such material.
10. If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder shall not be thereby
affected.
11. Any notice under this Agreement shall be in writing, addressed and delivered
or mailed, postage prepaid, to the other party at such address as such other
party may designate for the receipt of such notice.
12. All parties hereto are expressly put on notice of the Fund's Agreement and
Declaration of Trust and all amendments thereto, all of which are on file with
the Secretary of The Commonwealth of Massachusetts, and the limitation of
shareholder and trustee liability contained therein. This Agreement has been
executed by and on behalf of the Fund by its representatives as such
representatives and not individually, and the obligations of the Fund hereunder
are not binding upon any of the trustees, officers or shareholders of the Fund
individually but are binding upon only the assets and property of the Fund. With
respect to any claim by KDI for recovery of any liability of the Fund arising
hereunder allocated to a particular series, whether in accordance with the
express terms hereof or otherwise, KDI shall have no recourse against the assets
of any other series for such purpose.
6
<PAGE>
13. This Agreement shall be construed in accordance with applicable federal law
and with the laws of The Commonwealth of Massachusetts.
14. This Agreement is the entire contract between the parties relating to the
subject matter hereof and supersedes all prior agreements between the parties
relating to the subject matter hereof.
IN WITNESS WHEREOF, the Fund and KDI have caused this Agreement to be executed
as of the day and year first above written.
TAX-EXEMPT CALIFORNIA MONEY ATTEST:
MARKET FUND
By:
/s/Mark S. Casady /s/Maureen E. Kane
----------------------- ------------------------
Mark S. Casady Maureen E. Kane
President Assistant Secretary
KEMPER DISTRIBUTORS, INC. ATTEST:
By: /s/James L. Greenawalt /s/Philip J. Collora
----------------------- ------------------------
Title: Title: Ass't. Sec.
7
Exhibit (h)(3)
SUPPLEMENT TO SERVICES AGREEMENT
Supplement to the Services Agreements between INVESTORS FIDUCIARY TRUST
COMPANY ("IFTC") and KEMPER SERVICE COMPANY ("KSvC").
WHEREAS, IFTC and each Fund listed on the Attachment hereto (each a
"Fund") and IFTC are parties to an Agency Agreement, as supplemented from time
to time (each an "Agency Agreement");
WHEREAS, IFTC and KSvC are parties to certain Services Agreements, as
supplemented from time to time, pursuant to which KSvC has agreed to assume and
perform the duties and responsibilities of IFTC under each Agency Agreement;
WHEREAS, Section 7 of each Services Agreement provides that the fees
payable by IFTC to KSvC thereunder shall be as set forth in a separate schedule
to be agreed upon by IFTC and KSvC; and
WHEREAS, the parties desire to reflect in this Supplement the revised
fee schedule for each Services Agreement as in effect as of January 1, 1999;
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein provided, the parties agree as follows:
1. The revised fee schedule for services provided by KSvC for each Fund
under each respective Services Agreement as in effect on January 1, 1999, is set
forth in Exhibit A hereto;
2. This Supplement shall become a part of each respective Services
Agreement and subject to its terms and shall supersede all previous fee
schedules under such Agreement as of the date hereof.
INVESTORS FIDUCIARY TRUST COMPANY
By: /s/Stephen R. Hilliard
-----------------------------------
Name: STEPHEN R. HILLIARD
Title: EXECUTIVE VICE PRESIDENT
KEMPER SERVICE COMPANY
By: /s/Michael J. Curran
-----------------------------------
Name: Michael J. Curran
Title: President
<PAGE>
ATTACHMENT
----------
Investors Fund Series
Kemper Blue Chip Portfolio
Kemper Contrarian Value Portfolio
Kemper Global Blue Chip Portfolio
Kemper Global Income Portfolio
Kemper Government Securities Portfolio
Kemper Growth Portfolio
Kemper High Yield Portfolio
Kemper Horizon 5 Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 20+ Portfolio
Kemper International Growth And Income Portfolio
Kemper International Portfolio
Kemper Investment Grade Bond Portfolio
Kemper Money Market Portfolio
Kemper Small Cap Growth Portfolio
Kemper Small Cap Value Portfolio
Kemper Total Return Portfolio
Kemper Value+Growth Portfolio
Kemper-Dreman Financial Services Portfolio
Kemper-Dreman High Return Equity Portfolio
Kemper Adjustable Rate U. S. Government Fund
Kemper Aggressive Growth Fund
Kemper Asian Growth Fund
Kemper Blue Chip Fund
Kemper Diversified Income Fund
Kemper Europe Fund
Kemper Global Income Fund
Kemper Growth Fund
Kemper High Income Trust
Kemper High Yield Series
Kemper High Yield Fund
Kemper High Yield Opportunity Fund
<PAGE>
Kemper Horizon Fund
Kemper Horizon 20+ Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 5 Portfolio
Kemper Income and Capital Preservation Fund
Kemper Intermediate Government Trust
Kemper International Fund
Kemper Multi-Market Income Trust
Kemper Municipal Income Trust
Kemper National Tax-Free Income Series
Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper Portfolios
Kemper Cash Reserves Fund
Kemper U.S. Mortgage Fund
Kemper Short-Intermediate Government Fund
Kemper Quantitative Equity Fund
Kemper Small Capitalization Equity Fund
Kemper State Tax-Free Income Series
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund
Kemper Strategic Income Fund
Kemper Strategic Municipal Income Trust
Kemper Target Equity Fund
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 Worldwide 2004 Fund
2
<PAGE>
Kemper Technology Fund
Kemper Total Return Fund
Kemper U.S. Government Securities Fund
Kemper Value Plus Growth Fund
Kemper Value Series, Inc.
Kemper Contrarian Fund
Kemper-Dreman High Return Equity Fund
Kemper Small Cap Value Fund
Zurich Money Funds
Zurich Money Market Fund
Zurich Government Money Fund
Zurich Tax-Free Money Fund
Zurich YieldWise Funds
Zurich YieldWise Money Fund
Zurich YieldWise Government Money Fund
Zurich YieldWise Municipal Money Fund
As of: January 1, 1999
3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
FEE SCHEDULE EFFECTIVE AS OF JANUARY 1, 1999
--------------------------------------------
For all accounts except Scudder Kemper Retirement Services: Kemper KemFlex
A Shares B Shares C Shares I Shares ZMF, ZYF
-------- -------- -------- -------- --------
Per Account Fee (in $)
Annual Open Account Fee
<S> <C> <C> <C> <C> <C>
Equity 10.00 10.00 10.00 10.00
Taxable Bond 14.00 14.00 14.00 14.00
Tax-Free Bond 14.00 14.00 14.00 14.00
Zurich Money Funds and 10.00
Zurich YieldWise Funds
CDSC Fee N/A 2.00 N/A N/A N/A
New Accounts Fee*
Equity 5.00 5.00 5.00 5.00
Taxable Bond 5.00 5.00 5.00 5.00
Tax-Free Bond 5.00 5.00 5.00 5.00
Zurich Money Funds and 5.00
Zurich YieldWise Funds
Asset Based Fee (in bps)
Equity 8 bp 8 bp 8 bp 8 bp
Taxable Bond 5 bp 5 bp 5 bp 5 bp
Tax-Free Bond 2 bp 2 bp 2 bp 2 bp
Zurich Money Funds and 5 bp
Zurich YieldWise Funds
FEE SCHEDULE EFFECTIVE AS OF JANUARY 1, 1999
--------------------------------------------
Scudder Kemper Retirement Services: Kemper KemFlex
A Shares B Shares C Shares I Shares ZMF, ZYF
-------- -------- -------- -------- --------
Per Account Fee (in $)
Annual Open Account Fee
Equity 18.00 18.00 18.00 18.00
Taxable Bond 23.00 23.00 23.00 23.00
Tax-Free Bond 23.00 23.00 23.00 23.00
Zurich Money Funds and 10.00
Zurich YieldWise Funds
CDSC Fee N/A 2.00 N/A N/A N/A
New Accounts Fee*
Equity 5.00 5.00 5.00 5.00
Taxable Bond 5.00 5.00 5.00 5.00
Tax-Free Bond 5.00 5.00 5.00 5.00
Zurich Money Funds and 5.00
Zurich YieldWise Funds
Asset Based Fee (in bps)
Equity 8 bp 8 bp 8 bp 8 bp
Taxable Bond 5 bp 5 bp 5 bp 5 bp
Tax-Free Bond 2 bp 2 bp 2 bp 2 bp
Zurich Money Funds and 5 bp
Zurich YieldWise Funds
</TABLE>
- -----------------------------------
* The new shareholder account fee is not applicable to Class A Share accounts
established in connection with a conversion from Class B Shares.
<PAGE>
The out-of-pocket expenses of Agent will be reimbursed by Fund in accordance
with the provisions of Section 5 of the Agency Agreement. Fees and out-of-pocket
expenses shall be paid or reimbursed on a monthly basis upon receipt of an
invoice therefor.
The asset based fee for each month shall be equal to 1/12 of the applicable
annual fee rate, as set forth in this schedule, of the average daily net assets
of the Fund for each month. The asset based fee in the schedule is expressed in
basis points ("bps") as an annual rate. 100 basis points is equivalent to one
percentage point (1.00%). For certain Funds listed in Exhibit B, total transfer
agency fees and related out-of-pocket expenses payable by the Fund shall be
limited for any fiscal year of the Fund to the levels set forth in Exhibit B,
which levels are expressed as a percentage of average daily net assets for the
applicable fiscal year.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT B
TRANSFER AGENT EXPENSE CAPS
A Shares B Shares C Shares
-------- -------- --------
<S> <C> <C> <C>
Kemper Adjustable Rate U.S. Government Fund 0.22% 0.14%
Kemper Blue Chip Fund 0.38% 0.30%
Kemper Cash Reserves Fund 0.14%
Kemper Diversified Income Fund 0.14%
Kemper Global Income Fund 0.22% 0.14%
Kemper Growth Fund 0.30%
Kemper High Yield Opportunity Fund 0.10%
Kemper Income and Capital Preservation Fund 0.22% 0.14%
Kemper International Fund 0.38% 0.30%
Kemper Small Capitalization Equity Fund 0.30%
Kemper Technology Fund 0.38% 0.30%
Kemper Total Return Fund 0.30%
Kemper U.S. Government Securities Fund 0.22% 0.14%
Kemper U.S. Mortgage Fund 0.14%
</TABLE>
