<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1996
1933 ACT REGISTRATION NO. 33-14832
1940 ACT REGISTRATION NO. 811-5195
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM N-1A
<TABLE>
<CAPTION>
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 [ ]
<S> <C>
Pre-Effective Amendment No. _ [ ]
Post-Effective Amendment No. 14 [X]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 15 [X]
</TABLE>
(Check appropriate box or boxes)
------------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND
(Exact name of Registrant as Specified in Charter)
<TABLE>
<CAPTION>
222 South Riverside Plaza, Chicago, Illinois 60606
<S> <C>
(Address of Principal Executive Office) (Zip Code)
</TABLE>
Registrant's Telephone Number, including Area Code: (312) 537-7000
<TABLE>
<S> <C>
Philip J. Collora, Vice President and Secretary With a copy to:
Kemper Adjustable Rate U.S. Government Fund Cathy G. O'Kelly
222 South Riverside Plaza David A. Sturms
Chicago, Illinois 60606 Vedder, Price, Kaufman & Kammholz
(Name and Address of Agent for Service) 222 North LaSalle Street
Chicago, Illinois 60601
</TABLE>
Registrant has registered an indefinite number of its shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940. The Rule 24f-2 Notice for Registrant's fiscal year ended August 31,
1996 was filed on or about October 17, 1996.
It is proposed that this filing will become effective (check appropriate
box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on December 20, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE* FEE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of beneficial interest, without par
value:................................... 4,178,750 $8.59 $330,000 $100.00
===========================================================================================================
</TABLE>
* The fee is calculated in accordance with Rule 24e-2.
(b)(2) 8,347,526; (b)(3) 4,207,193; (b)(4) 4,140,333.
================================================================================
<PAGE> 2
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
CROSS-REFERENCE SHEET
BETWEEN ITEMS ENUMERATED IN PART A
OF FORM N-1A AND PROSPECTUS
<TABLE>
<CAPTION>
ITEM NUMBER
OF FORM N-1A LOCATION IN PROSPECTUS
- ----------------------------------------------- -----------------------------------------------
<S> <C> <C>
1. Cover Page............................... Cover Page
2. Synopsis................................. Summary; Summary of Expenses; Supplement to
Prospectus
3. Condensed Financial Information.......... Financial Highlights; Performance
4. General Description of Registrant........ Summary; Investment Objectives, Policies and
Risk Factors; Capital Structure
5. Management of the Fund................... Summary; Investment Manager and
Underwriter
5A. Management's Discussion of Fund
Performance.............................. Performance
6. Capital Stock and Other Securities....... Summary; Dividends and Taxes; Net Asset
Value; Purchase of Shares; Capital Structure
7. Purchase of Securities Being Offered..... Summary; Purchase of Shares; Investment
Manager and Underwriter; Special Features;
Supplement to Prospectus
8. Redemption or Repurchase................. Summary; Redemption or Repurchase of Shares
9. Pending Legal Proceedings................ Inapplicable
</TABLE>
<PAGE> 3
KEMPER FIXED INCOME FUNDS
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 20, 1996
CLASS I SHARES
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
KEMPER CASH RESERVES FUND
KEMPER DIVERSIFIED INCOME FUND
KEMPER U.S. GOVERNMENT SECURITIES FUND
KEMPER HIGH YIELD FUND
KEMPER INCOME AND CAPITAL PRESERVATION FUND
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
Kemper Adjustable Rate U.S. Government Fund (the "Adjustable Rate Fund"), Kemper
Cash Reserves Fund (the "Cash Reserves Fund"), Kemper Diversified Income Fund
(the "Diversified Fund"), Kemper U.S. Government Securities Fund (the
"Government Fund"), Kemper High Yield Fund (the "High Yield Fund"), Kemper
Income and Capital Preservation Fund (the "Income and Capital Fund"), Kemper
U.S. Mortgage Fund (the "Mortgage Fund") and Kemper Short-Intermediate
Government Fund (the "Short-Intermediate Government Fund") (collectively, the
"Funds") currently offer four classes of shares to provide investors with
different purchasing options. These are Class A, Class B and Class C shares,
which are described in the prospectus, and Class I shares, which are described
in the prospectus as supplemented hereby.
Class I shares are available for purchase exclusively by the following
investors: (a) tax-exempt retirement plans of Zurich Kemper Investments, Inc.
("ZKI") and its affiliates; and (b) the following investment advisory clients of
ZKI and its investment advisory affiliates (including Zurich Investment
Management, Inc.) that invest at least $1 million in a Fund: (1) unaffiliated
benefit plans, such as qualified retirement plans (other than individual
retirement accounts and self-directed retirement plans); (2) unaffiliated banks
and insurance companies purchasing for their own accounts; and (3) endowment
funds of unaffiliated non-profit organizations. Class I shares currently are
available for purchase only from Kemper Distributors, Inc., principal
underwriter for the Funds. Share certificates are not available for Class I
shares.
The primary distinctions among the classes of each Fund's shares lie in their
initial and contingent deferred sales charge schedules and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. Class I shares are offered at net asset value without an
initial sales charge and are not subject to a contingent deferred sales charge
or a Rule 12b-1 distribution fee. Also, there is no administrative services fee
charged to Class I shares. As a result of the relatively lower expenses for
Class I shares, the level of income dividends per share (as a percentage of net
asset value) and, therefore, the overall investment return, will be higher for
Class I shares than for Class A, Class B and Class C shares.
<PAGE> 4
The following information supplements the indicated sections of the prospectus.
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
(APPLICABLE TO ALL FUNDS) CLASS I
<S> <C>
Maximum Sales Charge on Purchases
(as a percentage of offering price)...................................................... None
Maximum Sales Charge on Reinvested Dividends............................................... None
Redemption Fees............................................................................ None
Exchange Fee............................................................................... None
Deferred Sales Charge (as a percentage of redemption proceeds)............................. None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND INCOME SHORT-
OPERATING EXPENSES ADJUSTABLE CASH HIGH AND INTERMEDIATE
(as a percentage of average RATE RESERVES DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE GOVERNMENT
net assets) FUND FUND FUND FUND FUND FUND FUND FUND
---------- -------- ----------- ---------- ----- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............. .55% .40% .56% .41% .53% .53% .50% .55%
12b-1 Fees.................. None None None None None None None None
Other Expenses
(estimated)............... .15% .15% .71% .18% .08% .19% .15% .15%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses.... .70% .55% 1.27% .59% .61% .72% .65% .70%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE FUND YEAR YEARS YEARS YEARS
- ---------------------------------------- ------------------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
You would pay the following expenses on Adjustable Rate................ $ 7 $22 $39 $ 87
a $1,000 investment, assuming (1) 5% Cash Reserves.................. $ 6 $18 $31 $ 69
annual return and (2) redemption at the Diversified.................... $13 $40 $70 $ 153
end of each time period: Government..................... $ 6 $19 $33 $ 74
High Yield..................... $ 6 $20 $34 $ 76
Income and Capital............. $ 7 $23 $40 $ 89
Mortgage....................... $ 7 $21 $36 $ 81
Short-Intermediate
Government..................... $ 7 $22 $39 $ 87
</TABLE>
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in Class I shares of a Fund will
bear directly or indirectly.
"Other Expenses" for Class I shares have been estimated for the current fiscal
year for the following funds: Adjustable Rate, Cash Reserves, Mortgage and
Short-Intermediate.
The Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of any Fund. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
2
<PAGE> 5
FINANCIAL HIGHLIGHTS
No financial information is presented for Class I shares of the Adjustable Rate
Fund, Cash Reserves Fund, Mortgage Fund and the Short-Intermediate Government
Fund since no Class I shares had been issued as of such Funds' fiscal year end.
DIVERSIFIED FUND
<TABLE>
<CAPTION>
NOVEMBER 22,
1995 TO
OCTOBER 31,
1996
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 5.98
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on
investments and foreign currency .12
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .57
- ------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .55
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.00
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 10.01%
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.27%
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 7.48
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
GOVERNMENT FUND
<TABLE>
<CAPTION>
YEAR ENDED JULY 3 TO
OCTOBER 31, OCTOBER 31,
1996 1995
----------- -----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.92 8.88
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .22
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (.17) .04
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .47 .26
- ------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .65 .22
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.74 8.92
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.56% 3.02
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses .59% .53
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 7.35 7.07
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 6
HIGH YIELD FUND
<TABLE>
<CAPTION>
DECEMBER 29,
YEAR ENDED 1994 TO
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.01 7.55
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .78 .66
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain .23 .39
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.01 1.05
- ------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .79 .59
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.23 8.01
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 13.32% 14.37
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses .61% .61
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 9.72 10.70
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
INCOME AND CAPITAL FUND
<TABLE>
<CAPTION>
YEAR ENDED JULY 3 TO
OCTOBER 31, OCTOBER 31,
1996 1995
----------- -----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.61 8.52
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .60 .19
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (.15) .12
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .45 .31
- ------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .61 .22
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.45 8.61
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.45% 3.65
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses .72% .62
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 7.14 6.87
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SPECIAL FEATURES
Shareholders of a Fund's Class I shares may exchange their shares for (i) shares
of Kemper Money Funds--Kemper Money Market Fund if the shareholders of Class I
shares have purchased shares because they are participants in tax-exempt
retirement plans of ZKI and its affiliates and (ii) Class I shares of any other
"Kemper Mutual Fund" listed under "Special Features--Class A Shares--Combined
Purchases" in the prospectus. Conversely, shareholders of Kemper Money
Funds--Kemper Money Market Fund who have purchased shares because they are
participants in tax-exempt retirement plans of ZKI and its affiliates may
exchange their shares for Class I shares of "Kemper Mutual Funds" to the extent
that they are available through their plan. Exchanges will be made at the
relative net asset values of the shares. Exchanges are subject to the
limitations set forth in the prospectus under "Special Features--Exchange
Privilege--General."
December 20, 1996
KFIF-1I (12/96)
4
<PAGE> 7
<TABLE>
<S> <C>
TABLE OF CONTENTS
- -----------------------------------------------
Summary 1
- -----------------------------------------------
Summary of Expenses 3
- -----------------------------------------------
Financial Highlights 5
- -----------------------------------------------
Investment Objectives, Policies and Risk
Factors 15
- -----------------------------------------------
Investment Manager and Underwriter 34
- -----------------------------------------------
Dividends and Taxes 38
- -----------------------------------------------
Net Asset Value 39
- -----------------------------------------------
Purchase of Shares 40
- -----------------------------------------------
Redemption or Repurchase of Shares 46
- -----------------------------------------------
Special Features 51
- -----------------------------------------------
Performance 54
- -----------------------------------------------
Capital Structure 56
- -----------------------------------------------
Appendix--Portfolio Composition 58
- -----------------------------------------------
</TABLE>
This combined prospectus of the Kemper Fixed Income Funds contains information
about each of the Funds that you should know before investing and should be
retained for future reference. A Statement of Additional Information dated
December 20, 1996, has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. It is available upon request without
charge from the Funds at the address or telephone number on this cover or the
firm from which this prospectus was obtained.
THE FUNDS' SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT IN A
FUND'S SHARES INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[KEMPER LOGO]
KEMPER
FIXED
INCOME
FUNDS
PROSPECTUS December 20, 1996
KEMPER FIXED INCOME FUNDS
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This prospectus describes a choice of eight fixed income investment portfolios
managed by Zurich Kemper Investments, Inc.
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
KEMPER CASH RESERVES FUND
KEMPER DIVERSIFIED INCOME FUND
KEMPER U.S. GOVERNMENT SECURITIES FUND
KEMPER HIGH YIELD FUND
KEMPER INCOME AND CAPITAL PRESERVATION FUND
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
Kemper Cash Reserves Fund, Kemper U.S. Mortgage Fund and Kemper
Short-Intermediate Government Fund are each a series of Kemper Portfolios.
AN INVESTMENT IN KEMPER CASH RESERVES FUND IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
<PAGE> 8
KEMPER FIXED INCOME FUNDS
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606, TELEPHONE 1-800-621-1048
SUMMARY
INVESTMENT OBJECTIVES. The eight open-end, diversified, management investment
companies or portfolios thereof (the "Funds") covered in this combined
prospectus are as follows:
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND (the "Adjustable Rate Fund") seeks
high current income consistent with low volatility of principal.
KEMPER CASH RESERVES FUND (the "Cash Reserves Fund") seeks maximum current
income to the extent consistent with stability of principal from a portfolio of
high quality money market instruments.
KEMPER DIVERSIFIED INCOME FUND (the "Diversified Fund") seeks a high current
return.
KEMPER U.S. GOVERNMENT SECURITIES FUND (the "Government Fund") seeks high
current income, liquidity and security of principal.
KEMPER HIGH YIELD FUND (the "High Yield Fund") seeks the highest level of
current income obtainable from a professionally managed, diversified portfolio
of fixed income securities which the Fund's investment manager considers
consistent with reasonable risk.
KEMPER INCOME AND CAPITAL PRESERVATION FUND (the "Income and Capital Fund")
seeks as high a level of current income as is consistent with prudent investment
management, preservation of capital and ready marketability of its portfolio.
KEMPER U.S. MORTGAGE FUND (the "Mortgage Fund") seeks maximum current return
from U.S. Government securities.
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND (the "Short-Intermediate Government
Fund") seeks, with equal emphasis, high current income and preservation of
capital from a portfolio composed primarily of short and intermediate-term U.S.
Government securities.
Each Fund (other than the Cash Reserves Fund) may engage in options and
financial futures transactions. The Diversified, High Yield and Income and
Capital Funds each may invest a portion of its assets in foreign securities and
engage in related foreign currency transactions. See "Investment Objectives,
Policies and Risk Factors."
RISK FACTORS. There is no assurance that the investment objective of any Fund
will be achieved and investment in each Fund includes risks that vary in kind
and degree depending upon the investment policies of that Fund. The returns and
net asset value of each Fund will fluctuate (except that the Cash Reserves Fund
seeks to maintain a net asset value of $1.00 per share). Investors should note
that investments in high yield securities by certain Funds (principally the
Diversified and High Yield Funds) entail relatively greater risk of loss of
income and principal than investments in higher rated securities and market
prices of high yield securities may fluctuate more than market prices of higher
rated securities. Foreign investments by certain Funds involve risk and
opportunity considerations not typically associated with investing in U.S.
companies. The U.S. Dollar value of a foreign security tends to decrease when
the value of the U.S. Dollar rises against the foreign currency in which the
security is denominated and tends to increase when the value of the U.S. Dollar
falls against such currency. Thus, the U.S. Dollar value of foreign securities
in a Fund's portfolio, and the Fund's net asset value, may change in response to
changes in currency exchange rates even though the value of the foreign
securities in local currency terms may not have changed. While a Fund's
investments in foreign securities will principally be in developed countries,
the Fund may invest a portion of its assets in countries considered by the
Fund's investment manager to be developing or "emerging" markets, which involve
exposure to economic structures that are generally less diverse and mature than
in the United States, and to political systems that may be less stable. There
are special risks associated with options, financial futures, foreign currency
and other derivative transactions and there is no assurance that use of those
investment techniques will be successful. The government guarantee of the U.S.
Government securities in which certain Funds invest (principally the Adjustable
Rate, Government, Mortgage and Short-Intermediate
1
<PAGE> 9
Government Funds) does not guarantee the market value of the shares of such
Funds. Normally, the value of investments in U.S. Government securities, as with
most debt securities, varies inversely with changes in interest rates. See
"Investment Objectives, Policies and Risk Factors."
PURCHASES AND REDEMPTIONS. Each Fund provides investors with the option of
purchasing shares in the following ways:
<TABLE>
<S> <C>
Class A Shares..................... Offered at net asset value plus a maximum sales charge of 4.5%
(3.5% for the Adjustable Rate and Short-Intermediate
Government Funds) of the offering price. No initial sales
charge applies to purchases of Class A shares of the Cash
Reserves Fund, but the applicable sales charge applies for
exchanges of such shares into Class A shares of other Kemper
Mutual Funds. Reduced sales charges apply to purchases of
$100,000 or more. Class A shares purchased at net asset value
under the Large Order NAV Purchase Privilege may be subject to
a 1% contingent deferred sales charge if redeemed within one
year of purchase and a .50% contingent deferred sales charge
if redeemed during the second year of purchase.
Class B Shares..................... Offered at net asset value, subject to a Rule 12b-1
distribution fee and a contingent deferred sales charge that
declines from 4% to zero on certain redemptions made within
six years of purchase. Class B shares automatically convert
into Class A shares (which have lower ongoing expenses) six
years after purchase.
Class C Shares..................... Offered at net asset value without an initial sales charge,
but subject to a Rule 12b-1 distribution fee and a 1%
contingent deferred sales charge on redemptions made within
one year of purchase. Class C shares do not convert into
another class.
</TABLE>
Each class of shares represents interests in the same portfolio of investments
of a Fund. The minimum initial investment is $1,000 and each investment
thereafter must be at least $100. Shares are redeemable at net asset value,
which may be more or less than original cost, subject to any applicable
contingent deferred sales charge. See "Purchase of Shares" and "Redemption or
Repurchase of Shares."
INVESTMENT MANAGER AND UNDERWRITER. Zurich Kemper Investments, Inc. ("ZKI")
serves as investment manager for each Fund. ZKI is paid an investment management
fee by each Fund based upon the average daily net assets of that Fund at an
effective annual rate that differs for each Fund. Zurich Investment Management
Limited ("ZIML"), an affiliate of ZKI, is the sub-adviser for each of the
Diversified Fund, the High Yield Fund, and the Income and Capital Fund and is
paid by ZKI a fee of .30% of the portion of the average daily net assets of that
Fund allocated by ZKI to ZIML for management. Kemper Distributors, Inc. ("KDI"),
a wholly owned subsidiary of ZKI, is principal underwriter and administrator for
each Fund. For Class B shares and Class C shares, KDI receives a Rule 12b-1
distribution fee of .75 of 1% of average daily net assets. KDI also receives the
amount of any contingent deferred sales charges paid on the redemption of
shares. Administrative services are provided to shareholders under
administrative services agreements with KDI. Each Fund pays an administrative
services fee at the annual rate of up to .25 of 1% of average daily net assets
of each class of the Fund, which KDI pays to financial services firms. See
"Investment Manager and Underwriter."
DIVIDENDS. The Cash Reserves Fund's net investment income is declared as a
dividend daily, and dividends are reinvested or paid in cash monthly. Each of
the other Funds normally distributes monthly dividends of net investment income
and distributes any net realized short-term and long-term capital gains at least
annually. Income and capital gain dividends of a Fund are automatically
reinvested in additional shares of that Fund, without a sales charge, unless the
shareholder makes a different election. See "Dividends and Taxes."
GENERAL. In the opinion of the staff of the Securities and Exchange Commission,
the use of this combined prospectus may make each Fund liable for any
misstatement or omission in this prospectus regardless of the particular Fund to
which it pertains.
2
<PAGE> 10
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO ALL
FUNDS)(1) CLASS A CLASS B CLASS C
-------- -------------------- ---------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases
(as a percentage of offering price).................. 3.5*/4.5%(2) None None
Maximum Sales Charge on Reinvested Dividends........... None None None
Redemption Fees........................................ None None None
Exchange Fee........................................... None None None
Deferred Sales Charge (as a percentage of redemption None(3) 4% during the first 1% during
proceeds)............................................ year, 3% during the the first
second and third year
years, 2% during the
fourth and fifth
years and 1% in the
sixth year
</TABLE>
* 3.5% APPLIES TO THE ADJUSTABLE RATE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS
ONLY.
- ---------------
(1) Investment dealers and other firms may independently charge additional fees
for shareholder transactions or for advisory services; please see their
materials for details.
(2) Reduced sales charges apply to purchases of $100,000 or more. See "Purchase
of Shares -- Initial Sales Charge Alternative -- Class A Shares." No initial
sales charge applies to purchases of Class A shares of the Cash Reserves
Fund but the applicable sales charge applies for exchanges into Class A
shares of other Kemper Mutual Funds.
(3) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% the first year and .50% the second year. See "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares."
CLASS A SHARES
<TABLE>
<CAPTION>
ANNUAL FUND INCOME SHORT-
OPERATING EXPENSES ADJUSTABLE CASH HIGH AND INTERMEDIATE
(as a percentage of average net RATE RESERVES DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE GOVERNMENT
assets) FUND FUND FUND FUND FUND FUND FUND FUND
---------- -------- ----------- ---------- ----- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees.................. .55% .40% .56% .41% .53% .53% .50% .55%
12b-1 Fees....................... None None None None None None None None
Other Expenses................... .60% .68% .47% .36% .35% .43% .47% .60%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses......... 1.15% 1.08% 1.03% .77% .88% .96% .97% 1.15%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
ANNUAL FUND INCOME SHORT-
OPERATING EXPENSES ADJUSTABLE CASH HIGH AND INTERMEDIATE
(as a percentage of average net RATE RESERVES DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE GOVERNMENT
assets) FUND FUND FUND FUND FUND FUND FUND FUND
---------- -------- ----------- ---------- ----- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees.................. .55% .40% .56% .41% .53% .53% .50% .55%
12b-1 Fees(4).................... .75% .75% .75% .75% .75% .75% .75% .75%
Other Expenses................... .59% .84% .65% .57% .49% .65% .55% .67%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses......... 1.89% 1.99% 1.96% 1.73% 1.77% 1.93% 1.80% 1.97%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(4) Long-term shareholders may pay more than the economic equivalent of the
maximum initial sales charges permitted by the National Association of
Securities Dealers, although KDI believes that it is unlikely because of the
automatic conversion feature described under "Purchase of Shares--Deferred
Sales Charge Alternative--Class B Shares."
3
<PAGE> 11
CLASS C SHARES
<TABLE>
<CAPTION>
ANNUAL FUND INCOME SHORT-
OPERATING EXPENSES ADJUSTABLE CASH HIGH AND INTERMEDIATE
(as a percentage of average net RATE RESERVES DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE GOVERNMENT
assets) FUND FUND FUND FUND FUND FUND FUND FUND
---------- -------- ----------- ---------- ----- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees................ .55% .40% .56% .41% .53 % .53% .50% .55%
12b-1 Fees(5).................. .75% .75% .75% .75% .75 % .75% .75% .75%
Other Expenses................. .59% .64% .55% .54% .43 % .62% .47% .55%
----- -------- ----- ----- ----- ------ -------- -----
Total Operating Expenses....... 1.89% 1.79% 1.86% 1.70% 1.71 % 1.90% 1.72% 1.85%
======== ====== ======== ========= ==== ===== ======= =========
</TABLE>
- ---------------
(5) As a result of the accrual of 12b-1 fees, long-term shareholders may pay
more than the economic equivalent of the maximum initial sales charges
permitted by the National Association of Securities Dealers.
CLASS A SHARES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
EXAMPLE
You would pay the following Adjustable Rate $ 46 $70 $96 $170
expenses on a $1,000 Cash Reserves $56 $78 $102 $171
investment, assuming (1) 5% Diversified $55 $76 $99 $165
annual return and (2) Government $53 $68 $86 $136
redemption at the end of each High Yield $54 $72 $92 $149
time period: Income and Capital $54 $74 $96 $158
Mortgage $54 $75 $96 $159
Short-Intermediate Government $46 $70 $96 $170
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
EXAMPLE(6)
You would pay the following Adjustable Rate $ 49 $79 $ 112 $184
expenses on a $1,000 Cash Reserves $50 $82 $117 $186
investment, assuming (1) 5% Diversified $50 $82 $116 $182
annual return and (2) Government $48 $74 $104 $155
redemption at the end of each High Yield $48 $76 $106 $163
time period: Income and Capital $50 $81 $114 $177
Mortgage $48 $77 $107 $170
Short-Intermediate Government $50 $82 $116 $189
You would pay the following Adjustable Rate $ 19 $59 $ 102 $184
expenses on the same Cash Reserves $20 $62 $107 $186
investment, assuming no Diversified $20 $62 $106 $182
redemption: Government $18 $54 $94 $155
High Yield $18 $56 $96 $163
Income and Capital $20 $61 $104 $177
Mortgage $18 $57 $97 $170
Short-Intermediate Government $20 $62 $106 $189
</TABLE>
- ---------------
(6) Assumes conversion to Class A shares six years after purchase and was
calculated based upon the assumption that the shareholder was an owner of
the shares on the first day of the first year and the contingent deferred
sales charge was applied as follows: 1 year (3%), 3 years (2%), 5 years (1%)
and 10 years (0%). See "Redemption or Repurchase of Shares -- Contingent
Deferred Sales Charge -- Class B Shares" for more information regarding the
calculation of the contingent deferred sales charge.
4
<PAGE> 12
CLASS C SHARES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
EXAMPLE(7)
You would pay the following Adjustable Rate $ 19 $59 $ 102 $221
expenses on a $1,000 Cash Reserves $ 18 $56 $ 97 $211
investment,
assuming (1) 5% annual return Diversified $ 19 $58 $ 101 $218
and (2) redemption at the end Government $ 17 $54 $ 92 $201
of each time period: High Yield $ 17 $54 $ 93 $202
Income and Capital $ 19 $60 $ 103 $222
Mortgage $ 17 $54 $ 93 $203
Short-Intermediate Government $ 19 $58 $ 100 $217
</TABLE>
- ---------------
(7) Assumes that the shareholder was the owner on the first day of the first
year and the contingent deferred sales charge was not applicable for any of
the periods shown. See "Redemption or Repurchase of Shares--Contingent
Deferred Sales Charge--Class C Shares."
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in a Fund will bear directly or
indirectly. See "Investment Manager and Underwriter" for more information. The
Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of any Fund. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The tables below show financial information for each Fund expressed in terms of
one share outstanding throughout the period. The information in the table for
each Fund is covered by the report of the Fund's independent auditors. The
report for each Fund is contained in its Registration Statement and is available
from that Fund. The financial statements contained in each Fund's 1996 Annual
Report to Shareholders are incorporated herein by reference and may be obtained
by writing or calling that Fund.
5
<PAGE> 13
ADJUSTABLE RATE FUND
<TABLE>
<CAPTION>
SEPTEMBER 1,
JULY 1 TO 1987 TO
YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED JUNE 30, JUNE 30,
CLASS A SHARES 1996 1995 1994 1993 1992 1991 1991 1990 1989 1988
------------------------------ --------- ------------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $8.30 8.33 8.68 8.63 8.37 8.21 8.21 8.66 8.79 9.00
- -----------------------------------------
Income from investment operations:
Net investment income .46 .48 .34 .47 .63 .13 .79 .81 .87 .52
- -----------------------------------------
Net realized and unrealized gain
(loss) (.09) (.04) (.29) .02 .22 .17 .02 (.41) (.08) (.14)
- -----------------------------------------
Total from investment operations .37 .44 .05 .49 .85 .30 .81 .40 .79 .38
- -----------------------------------------
Less dividends:
Distribution from net investment
income .45 .47 .40 .44 .59 .14 .81 .78 .85 .49
- -----------------------------------------
Distribution from net realized
gain -- -- -- -- -- -- -- .07 .07 .10
- -----------------------------------------
Total dividends .45 .47 .40 .44 .59 .14 .81 .85 .92 .59
- -----------------------------------------
Net asset value, end of period $8.22 8.30 8.33 8.68 8.63 8.37 8.21 8.21 8.66 8.79
- -----------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 4.55% 5.52 .59 5.87 10.56 3.62 10.33 4.85 9.64 4.29
- -----------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)(A):
Expenses 1.15% 1.10 .93 .21 .28 1.09 1.07 1.37 1.41 1.51
- -----------------------------------------
Net investment income 5.49 5.76 3.96 5.44 7.02 9.45 9.62 9.60 10.10 8.63
- -----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED CLASS B YEAR ENDED CLASS C
AUGUST 31, MAY 31 TO AUGUST 31, MAY 31 TO
CLASS B & C SHARES 1996 1995 AUGUST 31, 1994 1996 1995 AUGUST 31, 1994
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.31 8.32 8.37 8.32 8.33 8.37
- ------------------------------------------------------------------------------ -----------------------------------
Income from investment operations:
Net investment income .40 .43 .07 .40 .43 .08
- ------------------------------------------------------------------------------ -----------------------------------
Net realized and unrealized gain
(loss) (.09) (.04) (.04) (.09) (.04) (.04)
- ------------------------------------------------------------------------------ -----------------------------------
Total from investment operations .31 .39 .03 .31 .39 .04
- ------------------------------------------------------------------------------ -----------------------------------
Less distribution from net investment
income .39 .40 .08 .39 .40 .08
- ------------------------------------------------------------------------------ -----------------------------------
Net asset value, end of period $8.23 8.31 8.32 8.24 8.32 8.33
- ------------------------------------------------------------------------------ -----------------------------------
TOTAL RETURN (NOT ANNUALIZED): 3.79% 4.84 .34 3.82 4.89 .47
- ------------------------------------------------------------------------------ -----------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.89% 1.85 1.96 1.89 1.79 1.88
- ------------------------------------------------------------------------------ -----------------------------------
Net investment income 4.75 5.01 3.36 4.75 5.07 3.52
- ------------------------------------------------------------------------------ -----------------------------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 1,
JULY 1 TO 1987 TO
YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED JUNE 30, JUNE 30,
ALL CLASSES 1996 1995 1994 1993 1992 1991 1991 1990 1989 1988
------------------------------------------- --------- --------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL
DATA:
Net assets at
end of period
(in thousands) $ 94,477 129,757 202,815 212,694 174,967 76,749 75,012 75,913 75,704 59,054
- --------------------------
Portfolio
turnover rate
(%) annualized 272% 308 533 138 309 228 259 278 265 201
- --------------------------
</TABLE>
(a) ZKI agreed to waive its management fee and to absorb certain other operating
expenses of the Adjustable Rate Fund through December 31, 1992. Thereafter,
these expenses were gradually reinstated through January 31, 1994. Without this
agreement, the ratio of expenses to average net assets and the ratio of net
investment income to average net assets for Class A Shares would have been .99%
and 3.90%, respectively, for fiscal 1994, .95% and 4.70%, respectively, for
fiscal 1993, and .90% and 6.40%, respectively, for fiscal 1992.
6
<PAGE> 14
CASH RESERVES FUND
<TABLE>
<CAPTION>
JANUARY 10,
YEAR ENDED AUGUST 1, 1992 TO
SEPTEMBER 30, TO SEPTEMBER 30, YEAR ENDED JULY 31, JULY 31,
1996 1995 1995 1994 1993 1992
------------- ---------------- -------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 1.00 1.00 1.00 1.00 1.00 1.00
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income and dividends declared .05 .01 .05 .03 .02 .01
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 1.00 1.00 1.00 1.00 1.00
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)(C): 4.67% .85 4.99 2.78 2.42 1.57
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)(B):
Expenses 1.08% .92 .89 .92 .93 1.39
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 4.53 5.11 4.75 2.86 2.42 2.75
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1,
SEPTEMBER 30, TO SEPTEMBER 30, YEAR ENDED JULY 31,
1996 1995 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------- ---------------- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment
income and
dividends
declared .04 .01 .04 .02 .02 .03 .05 .07 .07 .05 .04
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT
ANNUALIZED)(C): 3.73% .71 4.08 1.78 1.56 2.65 5.35 6.72 7.36 5.42 4.20
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE
NET ASSETS
(ANNUALIZED)(B):
Expenses 1.99% 1.79 1.78 1.89 1.82 2.22 2.18 2.12 2.08 2.08 2.28
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment
income 3.62 4.24 3.86 1.89 1.53 2.69 5.32 6.52 7.17 5.31 4.19
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1, YEAR ENDED MAY 31,
SEPTEMBER 30, TO SEPTEMBER 30, JULY 31, TO JULY 31,
1996 1995 1995 1994
------------- ---------------- ---------- ----------
<S> <C> <C> <C> <C>
CLASS C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 1.00 1.00 1.00 1.00
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income and dividends
declared .04 .01 .04 --
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 1.00 1.00 1.00
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED(C): 3.93% .71 4.08 .42
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.79% 1.78 1.76 1.80
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income 3.82 4.25 3.88 2.64
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1,
SEPTEMBER 30, TO SEPTEMBER 30, YEAR ENDED JULY 31,
1996 1995 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------- ---------------- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALL CLASSES
SUPPLEMENTAL
DATA:
Net asset at end
of period (in
thousand) $ 207,616 176,557 213,031 424,317 166,808 156,219 240,994 284,977 285,194 245,604 150,683
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) ZKI agreed to absorb temporarily, certain operating expenses of the Cash
Reserves Fund during a portion of fiscal 1994 and 1993. Without this agreement,
ratios of expenses and net investment income to average net assets for the Class
A shares would have been 1.15% and 2.63%, respectively, for fiscal 1994 and
1.18% and 2.17%, respectively, for fiscal 1993. Ratios of expenses and net
investment income to average net assets for the Class B shares would have been
2.12% and 1.66%, respectively, for fiscal 1994 and 2.07% and 1.28%,
respectively, for fiscal 1993.
(c) The total returns for the year ended July 31, 1995 include the effect of a
capital contribution from the investment manager. Without the capital
contribution, the total returns would have been 4.07% in Class A, 3.16% in Class
B and 3.16% in Class C.
7
<PAGE> 15
DIVERSIFIED FUND
<TABLE>
<CAPTION>
DEC. 1, THIRTEEN
1990 YEAR MONTHS
TO ENDED ENDED
YEAR ENDED OCT. 31, OCT. 31, NOV. 30, NOV. 30, YEAR ENDED OCT. 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------ ------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $5.98 5.77 6.23 5.65 5.47 4.14 5.48 6.06 6.10 7.55
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .46 .55 .52 .59 .63 .60 .71 .39 .13 .14
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments
and foreign currency .12 .16 (.45) .58 .14 1.36 (1.34) .10 .72 (.55)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .58 .71 (.07) 1.17 .77 1.96 (.63) .49 .85 (.41)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment
income .57 .50 .53 .59 .59 .63 .71 .40 .13 .16
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net
realized gain -- -- -- -- -- -- -- -- .02 .75
- ---------------------------------------------------------------------------------------------------------------------------------
Paid in surplus -- -- -- -- -- -- -- .67 .74 .13
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .57 .50 .53 .59 .59 .63 .71 1.07 .89 1.04
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.99 5.98 5.77 6.23 5.65 5.47 4.14 5.48 6.06 6.10
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 10.27% 12.90 1.02 21.60 14.59 50.58 (12.79) 8.59 15.30 (7.64)
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.03% 1.09 1.12 1.10 1.19 1.21 1.15 .96 .97 .92
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 7.72 9.43 8.81 9.74 11.02 13.41 14.32 6.76 3.08 2.01
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED OCT. 31, MAY 31 TO YEAR ENDED OCT. 31, MAY 31 TO
1996 1995 OCTOBER 31, 1994 1996 1995 OCTOBER 31, 1994
-------------------- ---------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS B & C SHARES
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $5.98 5.77 5.94 6.00 5.79 5.95
- ----------------------------------------------------------------------------------- ------------------------------------------
Income from investment operations:
Net investment income .41 .49 .19 .41 .50 .20
- ----------------------------------------------------------------------------------- ------------------------------------------
Net realized and unrealized gain
(loss) on investments and foreign
currency .12 .16 (.17) .12 .16 (.17)
- ----------------------------------------------------------------------------------- ------------------------------------------
Total from investment operations .53 .65 .02 .53 .66 .03
- ----------------------------------------------------------------------------------- ------------------------------------------
Less dividends from net investment
income .52 .44 .19 .52 .45 .19
- ----------------------------------------------------------------------------------- ------------------------------------------
Net asset value, end of period $5.99 5.98 5.77 6.01 6.00 5.79
- ----------------------------------------------------------------------------------- ------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 9.23% 11.87 .35 9.33 11.95 .55
- ----------------------------------------------------------------------------------- ------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.96% 2.04 1.97 1.86 1.84 1.96
- ----------------------------------------------------------------------------------- ------------------------------------------
Net investment income 6.79 8.48 8.01 6.89 8.68 8.02
- ----------------------------------------------------------------------------------- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DEC. 1, THIRTEEN
1990 YEAR MONTHS
TO ENDED ENDED
YEAR ENDED OCT. 31, OCT. 31, NOV. 30, NOV. 30, YEAR ENDED OCT. 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------ -------- -------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALL CLASSES
SUPPLEMENTAL DATA:
Net assets at end of period
(in thousands) $778,752 754,222 738,014 328,512 244,620 227,625 179,154 284,497 371,758 431,404
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 310% 286 179 80 57 20 45 102 16 150
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 16
GOVERNMENT FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning
of year $ 8.92 8.35 9.29 9.30 9.32 8.71 9.09 9.02 9.13 9.89
- ---------------------------------------------------------------------------------------------------------------------------------
Income from
investment
operations:
Net investment
income .63 .66 .67 .69 .78 .84 .85 .88 .93 .88
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and
unrealized gain
(loss) (.17) .56 (.97) (.01) (.02) .61 (.38) .09 (.08) (.65)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment
operations .46 1.22 (.30) .68 .76 1.45 .47 .97 .85 .23
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from
net investment
income .64 .65 .64 .69 .78 .84 .85 .90 .96 .91
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from
net realized gain -- -- -- -- -- -- -- -- -- .08
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .64 .65 .64 .69 .78 .84 .85 .90 .96 .99
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end
of year $ 8.74 8.92 8.35 9.29 9.30 9.32 8.71 9.09 9.02 9.13
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: 5.36% 15.24 (3.37) 7.60 8.44 17.41 5.53 11.51 9.73 2.35
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE
NET ASSETS:
Expenses .77% .72 .75 .65 .64 .63 .53 .49 .50 .51
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment
income 7.17 7.68 7.58 7.36 8.31 9.24 9.62 9.93 10.20 9.26
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED OCT. 31, MAY 31 TO YEAR ENDED OCT. 31, MAY 31 TO
1996 1995 OCTOBER 31, 1994 1996 1995 OCTOBER 31, 1994
<S> <C> <C> <C> <C> <C> <C>
CLASS B & C SHARES ---------------------- ---------------- ---------------------- ----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.91 8.34 8.67 8.93 8.35 8.67
- ----------------------------------------------------------------------------------- ------------------------------------------
Income from investment operations:
Net investment income .54 .58 .28 .55 .60 .29
- ----------------------------------------------------------------------------------- ------------------------------------------
Net realized and unrealized gain
(loss) (.17) .56 (.38) (.17) .56 (.38)
- ----------------------------------------------------------------------------------- ------------------------------------------
Total from investment operations .37 1.14 (.10) .38 1.16 (.09)
- ----------------------------------------------------------------------------------- ------------------------------------------
Less dividends from net investment
income .55 .57 .23 .56 .58 .23
- ----------------------------------------------------------------------------------- ------------------------------------------
Net asset value, end of period $ 8.73 8.91 8.34 8.75 8.93 8.35
- ----------------------------------------------------------------------------------- ------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 4.36% 14.18 (1.15) 4.40 14.33 (1.01)
- ----------------------------------------------------------------------------------- ------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.73% 1.69 1.71 1.70 1.64 1.68
- ----------------------------------------------------------------------------------- ------------------------------------------
Net investment income (loss) 6.21 6.71 7.09 6.24 6.76 7.12
- ----------------------------------------------------------------------------------- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALL CLASSES
--------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets at end
of year
(in thousands) $4,163,157 4,738,415 4,941,451 6,686,735 6,683,092 5,544,095 4,565,689 4,540,382 4,403,110 4,157,927
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover
rate 391% 362 1,000 550 569 695 497 289 203 278
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 17
HIGH YIELD FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 8.01 7.74 8.12 7.86 7.30 6.22 8.34 8.95 9.23 9.19
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .76 .83 .73 .81 .85 .92 1.07 1.09 1.10 1.07
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .23 .20 ( .35) .23 .54 1.15 (2.13) (.58) .09 .01
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .99 1.03 .38 1.04 1.39 2.07 (1.06) .51 1.19 1.08
- ------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .77 .76 .76 .78 .83 .99 1.06 1.12 1.11 1.04
- ------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- -- -- -- -- .36 --
- ------------------------------------------------------------------------------------------------------------------------
Total dividends .77 .76 .76 .78 .83 .99 1.06 1.12 1.47 1.04
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 8.23 8.01 7.74 8.12 7.86 7.30 6.22 8.34 8.95 9.23
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: 13.00% 14.10 4.64 13.92 19.96 36.82 (13.83) 5.91 14.22 12.03
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .88% .90 .86 .80 .82 .85 .73 .67 .72 .72
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 9.45 10.74 9.22 10.22 11.00 14.02 14.46 12.40 12.59 11.42
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED CLASS B YEAR ENDED CLASS C
SEPTEMBER 30, MAY 31 TO SEPTEMBER 30, MAY 31 TO
CLASS B & C SHARES 1996 1995 SEPTEMBER 30, 1994 1996 1995 SEPTEMBER 30, 1994
<S> <C> <C> <C> <C> <C> <C>
---------------
---------------
----
----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.00 7.73 7.96 8.02 7.75 7.96
- --------------------------------------------------------------------------------- -----------------------------------
Income from investment operations:
Net investment income .69 .76 .23 .69 .77 .25
- --------------------------------------------------------------------------------- -----------------------------------
Net realized and unrealized gain (loss) .23 .20 (.23) .23 .20 (.23)
- --------------------------------------------------------------------------------- -----------------------------------
Total from investment operations .92 .96 -- .92 .97 .02
- --------------------------------------------------------------------------------- -----------------------------------
Less dividends from net investment income .70 .69 .23 .70 .70 .23
- --------------------------------------------------------------------------------- -----------------------------------
Net asset value, end of period $8.22 8.00 7.73 8.24 8.02 7.75
- --------------------------------------------------------------------------------- -----------------------------------
TOTAL RETURN (NOT ANNUALIZED): 12.02% 13.09 -- 12.06 13.13 .27
- --------------------------------------------------------------------------------- -----------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.77% 1.77 1.80 1.71 1.71 1.74
- --------------------------------------------------------------------------------- -----------------------------------
Net investment income 8.56 9.87 8.70 8.62 9.93 8.75
- --------------------------------------------------------------------------------- -----------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALL CLASSES
------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets at end of
year
(in thousands) $4,096,939 3,527,954 3,152,029 1,957,524 1,953,509 1,673,161 1,183,943 1,552,762 978,310 452,771
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 102% 99 93 101 69 31 37 45 76 118
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 18
INCOME AND CAPITAL FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
-----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 8.62 7.91 8.97 8.34 8.22 7.70 8.22 8.53 8.44 9.12
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .58 .61 .61 .63 .67 .74 .80 .84 .89 .95
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.15) .72 (1.03) .62 .11 .53 (.52) (.26) .12 (.71)
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .43 1.33 (.42) 1.25 .78 1.27 .28 .58 1.01 .24
- ------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .59 .62 .59 .62 .66 .75 .80 .89 .92 .92
- ------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- .05 -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total dividends .59 .62 .64 .62 .66 .75 .80 .89 .92 .92
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 8.46 8.62 7.91 8.97 8.34 8.22 7.70 8.22 8.53 8.44
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: 5.17% 17.47 (4.86) 15.48 9.83 17.26 3.60 7.13 12.67 2.63
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .96% .90 .94 .82 .82 .82 .73 .67 .69 .69
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 6.90 7.31 7.34 7.26 8.01 9.21 10.05 10.02 10.53 10.70
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED CLASS B YEAR ENDED CLASS C
OCTOBER 31, MAY 31 TO OCTOBER 31, MAY 31 TO
CLASS B & C SHARES 1996 1995 OCTOBER 31, 1994 1996 1995 OCTOBER 31, 1994
<S> <C> <C> <C> <C> <C> <C>
------------- --------------- ------------- ---------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.59 7.90 8.16 8.61 7.90 8.16
- ------------------------------------------------------------------------------------- -------------------------------
Income from investment operations:
Net investment income .50 .51 .23 .50 .53 .23
- ------------------------------------------------------------------------------------- -------------------------------
Net realized and unrealized gain (loss) (.15) .72 (.26) (.15) .72 (.26)
- ------------------------------------------------------------------------------------- -------------------------------
Total from investment operations .35 1.23 (.03) .35 1.25 (.03)
- ------------------------------------------------------------------------------------- -------------------------------
Less dividends from net investment income .51 .54 .23 .51 .54 .23
- ------------------------------------------------------------------------------------- -------------------------------
Net asset value, end of period $ 8.43 8.59 7.90 8.45 8.61 7.90
- ------------------------------------------------------------------------------------- -------------------------------
TOTAL RETURN (NOT ANNUALIZED): 4.20% 16.12 (.45) 4.23 16.45 (.44)
- ------------------------------------------------------------------------------------- -------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.93% 1.81 1.92 1.90 1.78 1.89
- ------------------------------------------------------------------------------------- -------------------------------
Net investment income 5.93 6.40 6.72 5.96 6.43 6.75
- ------------------------------------------------------------------------------------- -------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALL CLASSES
-----------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets at end of year (in thousands) $572,998 649,427 510,432 569,145 482,009 432,490 394,131 404,995 322,229 255,779
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 74% 182 163 190 178 115 189 64 34 34
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 19
MORTGAGE FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31, JANUARY 10 TO
CLASS A SHARES 1996 1995 1995 1994 1993 JULY 31, 1992
<S> <C> <C> <C> <C> <C> <C>
------------ ------------ ---------------------- -----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.13 7.06 6.96 7.56 7.78 7.81
- ------------------------------------------
Income from investment operations:
Net investment income .49 .08 .53 .51 .62 .38
- ------------------------------------------
Net realized and unrealized gain (loss) (.19) .08 .09 (.59) (.21) (.03)
- ------------------------------------------
Total from investment operations .30 .16 .62 (.08) .41 .35
- ------------------------------------------
Less dividends from net investment income .52 .09 .52 .52 .63 .38
- ------------------------------------------
Net asset value, end of period $6.91 7.13 7.06 6.96 7.56 7.78
- ------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 4.28% 2.23 9.48 (1.21) 5.52 4.76
- ------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses .97% .94 .89 .99 .97 .94
- ------------------------------------------
Net investment income 6.98 6.87 7.77 7.00 8.22 8.73
- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31,
CLASS B SHARES 1996 1995 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------ ------------ ----------------------------------------------------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $7.12 7.05 6.96 7.56 7.77 7.25 7.25 7.61 7.58 8.01 8.52
- -------------------------------
Income from investment
operations:
Net investment income .44 .07 .47 .45 .57 .65 .64 .66 .72 .72 .73
- -------------------------------
Net realized and unrealized
gain (loss) (.19) .08 .09 (.59) (.21) .49 .01 (.36) .07 (.33) (.41)
- -------------------------------
Total from investment
operations .25 .15 .56 (.14) .36 1.14 .65 .30 .79 .39 .32
- -------------------------------
Less dividends:
Distribution from net
investment income .46 .08 .47 .46 .57 .62 .65 .66 .76 .74 .69
- -------------------------------
Distribution from net
realized
gain -- -- -- -- -- -- -- -- -- .08 .14
- -------------------------------
Total dividends .46 .08 .47 .46 .57 .62 .65 .66 .76 .82 .83
- -------------------------------
Net asset value, end of period $6.91 7.12 7.05 6.96 7.56 7.77 7.25 7.25 7.61 7.58 8.01
- -------------------------------
TOTAL RETURN (NOT ANNUALIZED): 3.54% 2.09 8.44 (2.00) 4.85 16.36 9.37 4.26 11.12 5.06 3.75
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.80% 1.79 1.75 1.79 1.75 1.86 2.03 1.99 1.98 1.98 2.02
- -------------------------------
Net investment income 6.15 6.02 6.91 6.27 7.44 8.70 8.86 9.00 9.62 9.28 8.70
- -------------------------------
</TABLE>
12
<PAGE> 20
MORTGAGE FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, JULY 31, MAY 31 TO
CLASS C SHARES 1996 1995 1995 JULY 31, 1994
------------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.12 7.05 6.95 6.99
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .43 .07 .48 .07
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.19) .08 .09 (.04)
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .24 .15 .57 .03
- ------------------------------------------------------------------------------------------------------------------------
Less dividend from net investment income .46 .08 .47 .07
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.90 7.12 7.05 6.95
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 3.47% 2.10 8.65 .47
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.72% 1.69 1.71 1.55
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 6.23 6.12 6.95 6.46
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUG. 1, 1995
SEPT. 30, TO SEPT. 30, YEAR ENDED JULY 31,
ALL CLASSES 1996 1995 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C>
--------- ----------- ----------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) $2,960,135 3,493,052 3,528,329 4,158,066 5,639,097 5,602,682 4,879,832 5,178,159
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 391 % 249 573 963 551 376 498 206
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ALL CLASSES 1989 1988 1987
<S> <C> <C> <C>
--------- ----------- --------------
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) 6,193,674 6,332,021 6,285,550
- -------------------------
Portfolio turnover rate
(annualized) 152 178 139
- -------------------------
</TABLE>
13
<PAGE> 21
SHORT-INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
AUGUST 1 JANUARY 10
YEAR ENDED TO TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31, JULY 31,
CLASS A SHARES 1996 1995 1995 1994 1993 1992
------------ ------------ --------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.08 8.09 8.11 8.63 8.65 8.59
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .54 .09 .54 .48 .53 .29
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.20) (.01) (.03) (.44) (.03) .11
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .34 .08 .51 .04 .50 .40
- ------------------------------------------------------------------------------------------------------------------------
Less dividends from:
Distribution from net investment income .53 .09 .53 .45 .52 .34
- ------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- .11 -- --
- ------------------------------------------------------------------------------------------------------------------------
Total dividends .53 .09 .53 .56 .52 .34
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.89 8.08 8.09 8.11 8.63 8.65
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 4.25% 1.00 6.58 .41 6.01 4.87
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (NOT ANNUALIZED):
Expenses 1.15% 1.05 1.06 1.06 1.04 .95
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 6.65 6.56 6.65 5.85 6.06 7.48
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AUGUST 1 FEBRUARY 1
YEAR ENDED TO TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31, JULY 31,
CLASS B SHARES 1996 1995 1995 1994 1993 1992 1991 1990 1989
------------ ------------ --------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $8.05 8.06 8.08 8.61 8.64 8.27 8.42 8.70 8.50
- ------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .46 .08 .47 .40 .45 .58 .69 .72 .36
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) (.20) (.01) (.03) (.44) (.02) .36 (.14) (.27) .14
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .26 .07 .44 (.04) .43 .94 .55 .45 .50
- ------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .46 .08 .46 .38 .46 .57 .70 .72 .30
- ------------------------------------------------------------------------------------------------------------------------
Distribution from net realized
gain -- -- -- .11 -- -- -- .01 --
- ------------------------------------------------------------------------------------------------------------------------
Total dividends .46 .08 .46 .49 .46 .57 .70 .73 .30
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.85 8.05 8.06 8.08 8.61 8.64 8.27 8.42 8.70
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 3.28% .87 5.68 (.48) 5.13 11.76 6.85 5.52 5.99
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(NOT ANNUALIZED):
Expenses 1.97% 1.91 1.87 1.93 1.87 1.89 2.07 2.10 2.24
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 5.83 5.70 5.84 4.95 5.23 6.84 8.19 8.60 8.50
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 22
SHORT-INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
MAY 31
YEAR ENDED AUGUST 1 TO YEAR ENDED TO
SEPTEMBER 30, SEPTEMBER 30, JULY 31, JULY 31,
CLASS C SHARES 1996 1995 1995 1994
------------- ------------- ---------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.06 8.06 8.08 8.09
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .47 .09 .47 .07
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.20) (.01) (.03) (.01 )
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .27 .08 .44 .06
- ------------------------------------------------------------------------------------------------------------------------
Less dividends from net investment income .47 .08 .46 .07
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.86 8.06 8.06 8.08
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 3.36% 1.00 5.73 .77
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.85% 1.74 1.78 1.83
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 5.95 5.87 5.93 5.54
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31,
ALL CLASSES 1996 1995 1995 1994 1993 1992 1991 1990
------------ ------------ ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of period (in
thousands) $ 204,021 239,619 246,248 266,640 283,249 191,716 104,279 51,741
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%)
(annualized) 180% 173 597 916 339 120 180 89
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES FOR ALL FUNDS:
Total return does not reflect the effect of any sales charges. The Adjustable
Rate, Diversified, Government, High Yield and Income and Capital Funds are
separate Massachusetts business trusts and the Cash Reserves, Mortgage and
Short-Intermediate Government Funds are separate portfolios of Kemper
Portfolios, a Massachusetts business trust. See "Capital Structure."
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following information sets forth each Fund's investment objective and
policies. Each Fund's returns and net asset value will fluctuate (except that
the Cash Reserves Fund seeks to maintain a net asset value of $1.00 per share)
and there is no assurance that any Fund will achieve its objective.
ADJUSTABLE RATE FUND. The Adjustable Rate Fund seeks high current income
consistent with low volatility of principal. Under normal market conditions, the
Fund will, as a fundamental policy, invest at least 65% of its total assets in
adjustable rate securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities"). See "Government
Fund" below concerning U.S. Government Securities and the risks related to those
securities, including the fact that the government guarantee of such securities
in the Fund's portfolio does not guarantee the net asset value of the Fund's
shares. The Fund is designed for the investor who seeks a higher yield than a
stable price money market fund or an insured bank certificate of deposit and
less fluctuation in net asset value than a longer-term bond fund; unlike money
market funds, however, the Fund does not seek to maintain a stable net asset
value and, unlike an insured bank certificate of deposit, the Fund's shares are
not insured. There is no assurance that the Fund will achieve its objective.
15
<PAGE> 23
Adjustable rate securities bear interest at rates that adjust at periodic
intervals in response to changes in market levels of interest rates generally.
As the interest rates are reset periodically, yields on such securities will
gradually align themselves to reflect changes in market interest rates. The
adjustable interest rate feature of the securities in which the Fund invests
generally will act as a buffer to reduce sharp changes in the Fund's net asset
value in response to normal interest rate fluctuations. As the interest rates on
the Fund's investments are reset periodically, yields of portfolio securities
will gradually align themselves to reflect changes in market rates and should
cause the net asset value of the Fund's shares to fluctuate less dramatically
than it would if the Fund invested in long-term, fixed rate securities.
Adjustable rate securities allow the Fund to participate in increases in
interest rates through periodic adjustments in the interest rate resulting in
both higher current yields and lower price fluctuations. During periods of
declining interest rates, of course, the coupon rates may readjust downward,
resulting in lower yields to the Fund. Further, because of this feature, the
value of adjustable rate mortgages is unlikely to rise during periods of
declining interest rates to the same extent as fixed rate instruments. As with
other mortgage-backed securities, interest rate declines may result in
accelerated prepayment of mortgages, and the proceeds from such prepayments must
be reinvested at lower prevailing interest rates. However, during periods of
rising interest rates, changes in the coupon rate lag behind changes in the
market rate, possibly resulting in a lower net asset value until the coupon
resets to market rates. Thus, investors could suffer some principal loss if they
sold their shares of the Fund before the interest rates on portfolio investments
are adjusted to reflect current market rates. During periods of extreme
fluctuations in interest rates, the Fund's net asset value will fluctuate as
well.
The Fund may invest without limit in Mortgage-Backed Securities, as described
under "Mortgage Fund" below. Mortgage-Backed Securities can have either a fixed
rate of interest or an adjustable rate. Adjustable rate mortgage securities in
which the Fund generally invests would have the same characteristics as
described above with respect to adjustable rate securities. In addition, since
most mortgage securities in the Fund's portfolio will generally have annual
reset caps of 100 to 200 basis points (1-2%), fluctuation in interest rates
above these levels could cause such mortgage securities to "cap out" and to
behave more like long-term, fixed rate debt securities.
To help protect the value of the Fund's portfolio from interest rate
fluctuations, the Fund may engage in interest rate swaps and purchase interest
rate "caps" and "floors." The Fund will enter into these transactions primarily
to preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing. The Fund intends to use these transactions as a hedge
and not as a speculative investment. There is no assurance that these
transactions will be successful. The Fund will not sell interest rate caps or
floors that it does not own.
Interest rate swaps are the exchange by the Fund with another party of their
respective commitments to pay or receive interest with respect to a notional
(agreed upon) principal amount, for example, an exchange of floating rate
payments for fixed rate payments. Interest rate swaps are generally entered into
to permit the party seeking a floating or fixed rate obligation, as the case may
be, the opportunity to acquire such obligation at a lower rate than is directly
available in the credit market. The success of such a transaction depends in
large part on the availability of fixed rate obligations at a low enough coupon
rate to cover the cost involved.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor.
The Fund may also invest up to 35% of its total assets in securities other than
adjustable rate U.S. Government Securities including, without limitation,
privately issued Mortgage-Backed Securities, commercial paper and other debt
obligations of corporations and other business organizations, certificates of
deposit, bankers' acceptances and time deposits and other debt securities such
as convertible securities and preferred stocks. These securities will, at the
time of purchase, be rated within the two highest grades (Aaa or Aa) assigned by
Moody's Investors
16
<PAGE> 24
Service, Inc.("Moody's"), or (AAA or AA) by Standard & Poor's Corporation
("S&P"), or will be non-rated but of comparable quality in the opinion of the
investment manager.
The Fund also may invest in obligations collateralized by a portfolio or pool of
mortgages, Mortgage-Backed Securities, U.S. Government Securities or other
assets and may engage in options and financial futures transactions, securities
lending, delayed delivery transactions and other portfolio strategies. See
"Additional Investment Information" below.
Additional information concerning the Adjustable Rate Fund appears in the
"Additional Information--Adjustable Rate Fund" section under "Investment
Policies and Techniques" in the Statement of Additional Information.
CASH RESERVES FUND. The Cash Reserves Fund seeks maximum current income to the
extent consistent with stability of principal from a portfolio of the following
types of U.S. Dollar denominated money market instruments that mature in 12
months or less:
1. Obligations of, or guaranteed by, the U.S. or Canadian Governments, their
agencies or instrumentalities. The two broad categories of U.S. Government debt
instruments are: (a) direct obligations of the U.S. Treasury and (b) securities
issued or guaranteed by agencies and instrumentalities of the U.S. Government.
Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government are backed by the full faith and credit of the United States and
others are backed exclusively by the agency or instrumentality with limited
rights of the issuer to borrow from the U.S. Treasury.
2. Bank certificates of deposit, time deposits or bankers' acceptances limited
to U.S. banks or Canadian chartered banks having total assets in excess of $1
billion.
3. Bank certificates of deposit, time deposits or bankers' acceptances of U.S.
branches of foreign banks having total assets in excess of $10 billion.
4. Commercial paper rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P, or
commercial paper or notes issued by companies with an unsecured debt issue
outstanding currently rated A or higher by Moody's or S&P where the obligation
is on the same or a higher level of priority as the rated issue, and investments
in other corporate obligations such as publicly traded bonds, debentures and
notes rated A or higher by Moody's or S&P.
5. Repurchase agreements of obligations which are suitable for investment under
the categories set forth above. Repurchase agreements are discussed under
"Additional Investment Information" below.
In addition, the Fund limits its investments to securities that meet the quality
and diversification requirements of Rule 2a-7 under the Investment Company Act
of 1940. See "Net Asset Value."
To the extent the Fund purchases Eurodollar certificates of deposit issued by
London branches of U.S. banks, or commercial paper issued by foreign entities,
consideration will be given to their marketability, possible restrictions on
international currency transactions and regulations imposed by the domicile
country of the foreign issuer. Eurodollar certificates of deposit may not be
subject to the same regulatory requirements as certificates issued by U.S. banks
and associated income may be subject to the imposition of foreign taxes. The
Fund will normally invest at least 25% of its net assets in instruments issued
by domestic or foreign banks. As a result, the Fund may be more adversely
affected by changes in market or economic conditions and other circumstances
affecting the banking industry than it would be if the Fund's assets were not so
concentrated.
The Fund seeks to maintain its net asset value at $1.00 per share by valuing its
portfolio of investments on the amortized cost method in accordance with Rule
2a-7. While the Fund will make every effort to maintain a fixed net asset value
of $1.00 per share, there can be no assurance that this objective will be
achieved. See "Net Asset Value."
The Fund may invest in instruments bearing rates of interest that are adjusted
periodically or which "float" continuously according to formulae intended to
minimize fluctuations in values of the instruments ("Variable Rate Securities").
The interest rate of Variable Rate Securities is ordinarily determined by
reference to or is a percentage of an objective standard. Generally, the changes
in the interest rate on Variable Rate Securities reduce the fluctuation in the
market value of such securities. Accordingly, as interest rates decrease or
increase, the
17
<PAGE> 25
potential for capital appreciation or depreciation is less than for fixed rate
obligations. Some Variable Rate Securities ("Variable Rate Demand Securities")
have a demand feature entitling the purchaser to resell the securities to the
issuer at an amount approximately equal to amortized cost or the principal
amount thereof plus accrued interest. As is the case for other Variable Rate
Securities, the interest rate on Variable Rate Demand Securities varies
according to some objective standard intended to minimize fluctuation in the
values of the instruments. The Fund determines the maturity of Variable Rate
Securities in accordance with Securities and Exchange Commission rules that
allow the Fund to consider certain of such instruments as having maturities
earlier than the maturity date on the face of the instrument.
SECTION 4(2) PAPER. Subject to its investment objectives and policies, the Fund
may invest in commercial paper issued by major corporations under the Securities
Act of 1933 in reliance on the exemption from registration afforded by Section
3(a)(3) thereof. Such commercial paper may be issued only to finance current
transactions and must mature in nine months or less. Trading of such commercial
paper is conducted primarily by institutional investors through investment
dealers, and individual investor participation in the commercial paper market is
very limited. The Fund also may invest in commercial paper issued in reliance on
the so-called "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 ("Section 4(2) paper"). Section 4(2)
paper is restricted as to disposition under the federal securities laws, and
generally is sold to institutional investors such as the Fund who agree that
they are purchasing the paper for investment and not with a view to public
distribution. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) paper normally is resold to other institutional investors like the
Fund through or with the assistance of the issuer or investment dealers who make
a market in the Section 4(2) paper, thus providing liquidity. The investment
manager considers the legally restricted but readily saleable Section 4(2) paper
to be liquid; however, pursuant to procedures approved by the Board of Trustees,
if a particular investment in Section 4(2) paper is not determined to be liquid,
that investment will be included within the limitation on illiquid securities.
The investment manager monitors the liquidity of the Fund's investments in
Section 4(2) paper on a continuing basis. See "Investment Restrictions" in the
Statement of Additional Information.
DIVERSIFIED FUND. The Diversified Fund seeks high current return. The Fund
pursues its objective by investing primarily in fixed income securities and
dividend-paying common stocks and by writing options. Current return includes
interest income, common stock dividends and any net short-term gains.
Investment in fixed income securities will include corporate debt obligations,
U.S. and Canadian Government securities, obligations of U.S. and Canadian
banking institutions, convertible securities, preferred stocks, and cash and
cash equivalents, including repurchase agreements. Investment in equity
securities will primarily be in dividend-paying common stocks. The percentage of
assets invested in fixed income and equity securities will vary from time to
time depending upon the judgment of the investment manager as to general market
and economic conditions, trends in yields and interest rates and changes in
fiscal or monetary policies. The Fund may invest up to 50% of its total assets
in foreign securities that are traded principally in securities markets outside
the United States. Foreign securities present certain risks in addition to those
presented by domestic securities, including risks associated with currency
fluctuations, possible imposition of foreign governmental regulations or taxes
adversely affecting portfolio securities and generally different degrees of
liquidity, market volatility and availability of information. See "Special Risk
Factors--Foreign Securities" below.
The Fund may invest without limit in high yield, fixed income securities,
commonly referred to as "junk bonds," that are in the lower rating categories
and those that are non-rated. The high yield, fixed income securities (debt and
preferred stock issues, including convertibles and assignments or participations
in loans) in which the Fund may invest normally offer a current yield or yield
to maturity that is significantly higher than the yield available from
securities rated in the four highest categories assigned by S&P or Moody's. The
characteristics of the securities in the Fund's portfolio, such as the maturity
and the type of issuer, will affect yields and yield differentials, which vary
over time. The actual yield realized by the investor is subject, among other
things, to the Fund's expenses and the investor's transaction costs.
18
<PAGE> 26
The Fund may also purchase options on securities and index options, purchase and
sell financial futures contracts and options on financial futures contracts,
engage in foreign currency transactions, engage in delayed delivery transactions
and lend its portfolio securities. See "Special Risk Factors--Foreign
Securities" and "Additional Investment Information" below. Under normal market
conditions, the Fund will invest at least 65% of its total assets in income
producing investments. In periods of unusual market conditions, the Fund may,
for defensive purposes, temporarily retain all or any part of its assets in cash
or cash equivalents.
There are market and investment risks with any security and the value of an
investment in the Fund will fluctuate over time. In seeking to achieve its
investment objective, the Fund will invest in fixed income securities based on
the investment manager's analysis without relying on any published ratings. The
Fund will invest in a particular fixed income security if in the investment
manager's view, the increased yield offered, regardless of published ratings, is
sufficient to compensate for a reasonable element of assumed risk. Since
investments will be based upon the investment manager's analysis rather than
upon published ratings, achievement of the Fund's goals may depend more upon the
abilities of the investment manager than would otherwise be the case.
Investments in lower rated or non-rated securities, while generally providing
greater income and opportunity for gain than investments in higher rated
securities, entail greater risk of loss of income and principal. See "Special
Risk Factors--High Yield (High Risk) Bonds" below and "Appendix--Ratings of
Investments" in the Statement of Additional Information.
Since interest rates vary with changes in economic, market, political and other
conditions, there can be no assurance that historic interest rates are
indicative of rates that may prevail in the future. The values of fixed income
securities in the Fund's portfolio will fluctuate depending upon market factors
and inversely with current interest rate levels. The market value of equity
securities in the Fund's portfolio will also fluctuate with market and other
conditions.
GOVERNMENT FUND. The Government Fund seeks high current income, liquidity and
security of principal by investing in obligations issued or guaranteed by the
U.S. Government or its agencies, and by obtaining rights to acquire such
securities. The Fund's yield and net asset value will fluctuate and there can be
no assurance that the Fund will attain its objective.
The Fund intends to invest some or all of its assets in Government National
Mortgage Association ("GNMA") Certificates of the modified pass-through type.
These GNMA Certificates are debt securities issued by a mortgage banker or other
mortgagee and represent an interest in one or a pool of mortgages insured by the
Federal Housing Administration or guaranteed by the Veterans Administration.
GNMA guarantees the timely payment of monthly installments of principal and
interest on modified pass-through Certificates at the time such payments are
due, whether or not such amounts are collected by the issuer of these
Certificates on the underlying mortgages.
The National Housing Act provides that the full faith and credit of the United
States is pledged to the timely payment of principal and interest by GNMA of
amounts due on these GNMA Certificates, and an assistant attorney general of the
United States has rendered an opinion that this guarantee by GNMA is a general
obligation of the United States backed by its full faith and credit.
Mortgages included in single family residential mortgage pools backing an issue
of GNMA Certificates have a maximum maturity of 30 years. Scheduled payments of
principal and interest are made to the registered holders of GNMA Certificates
(such as the Fund) each month. Unscheduled prepayments of mortgages included in
these pools occur as a result of the prepayment or refinancing of such mortgages
by homeowners or as a result of the foreclosure of such mortgages. Such
prepayments are passed through to the registered holders of GNMA Certificates
with the regular monthly payments of principal and interest, which has the
effect of reducing future payments on such Certificates. That portion of monthly
payments received by the Fund which represents interest and discount will be
included in the Fund's net investment income. See "Dividends and Taxes."
Principal payments on a GNMA Certificate will be reinvested by the Fund.
The balance of the Fund's assets, other than those invested in GNMA Certificates
and options and financial futures contracts as discussed below, will be invested
in obligations issued or guaranteed by the United States or
19
<PAGE> 27
by its agencies. There are two broad categories of U.S. Government-related debt
instruments: (a) direct obligations of the U.S. Treasury, and (b) securities
issued or guaranteed by U.S. Government agencies. Examples of direct obligations
of the U.S. Treasury are Treasury Bills, Notes, Bonds and other debt securities
issued by the U.S. Treasury. These instruments are backed by the "full faith and
credit" of the United States. They differ primarily in interest rates, the
length of maturities and the dates of issuance. Some obligations issued or
guaranteed by agencies of the U.S. Government are backed by the full faith and
credit of the United States (such as Maritime Administration Title XI Ship
Financing Bonds and Agency for International Development Housing Guarantee
Program Bonds) and others are backed only by the rights of the issuer to borrow
from the U.S. Treasury (such as Federal Home Loan Bank Bonds and Federal
National Mortgage Association Bonds). With respect to securities supported only
by the credit of the issuing agency or by an additional line of credit with the
U.S. Treasury, there is no guarantee that the U.S. Government will provide
support to such agencies and such securities may involve risk of loss of
principal and interest. U.S. Government Securities may include "zero coupon"
securities that have been stripped by the U.S. Government of their unmatured
interest coupons (see "Investment Policies and Techniques--Zero Coupon
Government Securities" in the Statement of Additional Information for a
discussion of their features and risks) and collateralized obligations issued or
guaranteed by a U.S. Government agency or instrumentality (see "Collateralized
Obligations" below).
U.S. Government Securities of the type in which the Fund may invest have
historically involved little risk of loss of principal if held to maturity. The
government guarantee of the U.S. Government Securities in the Fund's portfolio,
however, does not guarantee the net asset value of the shares of the Fund. There
are market risks inherent in all investments in securities and the value of an
investment in the Fund will fluctuate over time. Normally, the value of the
Fund's investments varies inversely with changes in interest rates. For example,
as interest rates rise the value of the Fund's investments will tend to decline,
and as interest rates fall the value of the Fund's investments will tend to
increase. In addition, the potential for appreciation in the event of a decline
in interest rates may be limited or negated by increased principal prepayments
in respect to certain Mortgage-Backed Securities, such as GNMA Certificates.
Prepayments of high interest rate Mortgage-Backed Securities during times of
declining interest rates will tend to lower the return of the Fund and may even
result in losses to the Fund if some securities were acquired at a premium.
Moreover, during periods of rising interest rates, prepayments of
Mortgage-Backed Securities may decline, resulting in the extension of the Fund's
average portfolio maturity. As a result, the Fund's portfolio may experience
greater volatility during periods of rising interest rates than under normal
market conditions. With respect to U.S. Government Securities supported only by
the credit of the issuing agency or by an additional line of credit with the
U.S. Treasury, there is no guarantee that the U.S. Government will provide
support to such agencies and such securities may involve risk of loss of
principal and interest. The Fund will not invest in Mortgage-Backed Securities
issued by private issuers.
The Fund may also write (sell) and purchase options on securities, index
options, financial futures contracts and options on financial futures contracts
in connection with attempts to hedge its portfolio investments and not for
speculation. See "Additional Investment Information" below.
HIGH YIELD FUND. The primary objective of the High Yield Fund is to achieve the
highest level of current income obtainable from a professionally managed,
diversified portfolio of fixed income securities which the investment adviser
considers consistent with reasonable risk. As a secondary objective, the Fund
will seek capital gain where consistent with its primary objective.
The high yield, fixed income securities (debt and preferred stock issues,
including convertibles and assignments or participations in loans) in which the
Fund intends to invest are commonly referred to as "junk bonds" and normally
offer a current yield or yield to maturity that is significantly higher than the
yield available from securities rated in the four highest categories assigned by
S&P or Moody's. The characteristics of the securities in the Fund's portfolio,
such as the maturity and the type of issuer, will affect yields and yield
differentials, which vary over time. The actual yield realized by the investor
is subject, among other things, to the Fund's expenses and the investor's
transaction costs.
20
<PAGE> 28
There are market and investment risks with any security and the value of an
investment in the Fund may fluctuate over time. In seeking to achieve its
investment objectives, the Fund will invest in fixed income securities based on
the investment manager's analysis without relying on published ratings. The Fund
will invest in a particular security if in the view of the investment manager
the increased yield offered, regardless of published ratings, is sufficient to
compensate for a reasonable element of assumed risk. Since investments will be
based upon the investment manager's analysis rather than upon published ratings,
achievement of the Fund's goals may depend more upon the abilities of the
investment manager than would otherwise be the case. Investment in high yield
securities, while providing greater income and opportunity for gain than
investment in higher rated securities, entails relatively greater risk of loss
of income and principal. See "Special Risk Factors--High Yield (High Risk)
Bonds" below and "Appendix--Ratings of Investments" in the Statement of
Additional Information.
As a secondary objective, the Fund will seek capital gain where consistent with
its primary objective. However, the Fund intends to hold portfolio securities to
maturity unless yields on alternative investments, based on current market
prices, are more attractive than those on securities held in the Fund's
portfolio or unless the investment manager determines defensive strategies
should be implemented.
The Fund anticipates that under normal circumstances 90 to 100% of its assets
will be invested in fixed income securities (debt and preferred stock issues,
including convertibles). The Fund may invest in common stocks, rights or other
equity securities when consistent with the Fund's objectives, but will generally
hold such equity investments only as a result of purchases of unit offerings of
fixed income securities which include such securities or in connection with an
actual or proposed conversion or exchange of fixed income securities.
The Fund may invest all or a portion of its assets in money market instruments
such as obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the three highest grades by Moody's or S&P;
commercial paper rated within the two highest grades by either of such rating
services; bank certificates of deposit or bankers' acceptances of domestic or
Canadian chartered banks having total assets in excess of $1 billion; and any of
the foregoing investments subject to short-term repurchase agreements (an
instrument under which the purchaser acquires ownership of the underlying
obligation and the seller agrees, at the time of sale, to repurchase the
obligation at a mutually agreed upon time and price). The Fund may also purchase
and sell options on securities, index options, financial futures contracts and
options on financial futures contracts in connection with attempts to hedge its
portfolio investments and not for speculation; and it may purchase foreign
securities and engage in foreign currency transactions. See "Special Risk
Factors--Foreign Securities" and "Additional Investment Information" below.
INCOME AND CAPITAL FUND. The Income and Capital Fund seeks as high a level of
current income as is consistent with prudent investment management, preservation
of capital and ready marketability of its portfolio by investing primarily in a
diversified portfolio of investment grade debt securities. Specifically, at
least 90% of the Fund's assets will be invested in the following categories: (a)
corporate debt securities which are rated Aaa, Aa, A or Baa by Moody's or AAA,
AA, A or BBB by S&P; (b) obligations of, or guaranteed by, the United States,
its agencies or instrumentalities; (c) obligations (payable in U.S. Dollars) of,
or guaranteed by, the government of Canada or any instrumentality or political
subdivision thereof; (d) commercial paper rated Prime-1 or Prime-2 by Moody's or
A-1 or A-2 by S&P; (e) bank certificates of deposit or bankers' acceptances
issued by domestic or Canadian chartered banks having total deposits in excess
of $1 billion; (f) options on securities, index options, financial futures
contracts and options on financial futures contracts as described under
"Additional Investment Information" in connection with attempts to hedge its
portfolio investments and not for speculation; and (g) cash and cash
equivalents.
There are market and investment risks with any security and the value of an
investment in the Fund may fluctuate over time. Normally, the value of the
Fund's investments varies inversely with changes in interest rates. There can be
no assurance that the objective of the Fund will be achieved. Corporate debt
securities rated within the four highest grades by Moody's or S&P are generally
considered to be "investment grade." Like higher rated securities, securities
rated in the BBB or Baa categories are considered to have adequate capacity to
pay principal and interest, although they may have fewer protective provisions
than higher rated securities and thus may be adversely affected by severe
economic circumstances and are considered to have speculative characteristics.
The
21
<PAGE> 29
Fund may invest up to 10% of its total assets in fixed income securities that
are rated below BBB by S&P and Baa by Moody's or are non-rated. For a discussion
of lower rated and non-rated securities, commonly referred to as "junk bonds,"
and related risks, see "Special Risk Factors--High Yield (High Risk) Bonds"
below and "Appendix--Ratings of Investments" in the Statement of Additional
Information. The Fund may also invest in foreign securities and engage in
foreign currency transactions. See "Special Risk Factors--Foreign Securities"
below.
MORTGAGE FUND. The Mortgage Fund seeks maximum current return from a portfolio
of U.S. Government Securities. Additionally, the Fund may engage in options and
financial futures transactions which relate to U.S. Government Securities and
may purchase or sell securities on a when-issued or delayed delivery basis. See
"Additional Investment Information" below for a discussion of such transactions
applicable to the Fund.
As a non-fundamental policy, at least 65% of the Fund's total assets normally
will be invested in "Mortgage-Backed Securities." Mortgage-Backed Securities are
securities that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans secured by real property. There are
currently three basic types of Mortgage-Backed Securities: (a) those issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities,
such as the Government National Mortgage Association ("Ginnie Mae" or "GNMA"),
the Federal National Mortgage Association ("Fannie Mae" or "FNMA") and the
Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"); (b) those
issued by private issuers that represent an interest in or are collateralized by
Mortgage-Backed Securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities; and (c) those issued by private issuers that
represent an interest in or are collateralized by whole mortgage loans or
Mortgage-Backed Securities without a government guarantee but usually having
some form of private credit enhancement. The dominant issuers or guarantors of
Mortgage-Backed Securities today are GNMA, FNMA and FHLMC. GNMA creates mortgage
securities from pools of government guaranteed or insured (Federal Housing
Authority or Veterans Administration) mortgages originated by mortgage bankers,
commercial banks, and savings and loan associations. FNMA and FHLMC issue
Mortgage-Backed Securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks, credit
unions and mortgage bankers. Mortgage-Backed Securities issued by GNMA, FNMA and
FHLMC are considered U.S. Government Securities. The Fund will not invest in
Mortgage-Backed Securities issued by private issuers.
U.S. Government Securities of the type in which the Fund may invest have
historically involved little risk of loss of principal if held to maturity. The
government guarantee of the securities in the Fund, however, does not guarantee
the net asset value of the shares of the Fund. There are market risks inherent
in all investments in securities and the value of an investment in the Fund will
fluctuate over time. Normally, the value of the Fund's investments varies
inversely with changes in interest rates. For example, as interest rates rise,
the value of the Fund's investments will tend to decline and, as interest rates
fall, the value of the Fund's investments will tend to increase. In addition,
the potential for appreciation in the event of a decline in interest rates may
be limited or negated by increased principal prepayments in respect to certain
Mortgage-Backed Securities, such as GNMA Certificates. Prepayment of high
interest rate Mortgage-Backed Securities during times of declining interest
rates will tend to lower the return of the Fund and may even result in losses to
the Fund if some securities were acquired at a premium. Moreover, during periods
of rising interest rates, prepayments of Mortgage-Backed Securities may decline,
resulting in the extension of the Fund's average portfolio maturity. As a
result, the Fund's portfolio may experience greater volatility during periods of
rising interest rates than under normal market conditions.
SHORT-INTERMEDIATE GOVERNMENT FUND. The Short-Intermediate Government Fund
seeks, with equal emphasis, high current income and preservation of capital from
a portfolio composed primarily of short and intermediate-term U.S. Government
Securities. Under normal market conditions, the Fund will, as a fundamental
policy, invest at least 65% of its total assets in U.S. Government Securities
and repurchase agreements of U.S. Government Securities. See "Government Fund"
above for a discussion of U.S. Government Securities and the risks related to
those securities, including the fact that the government guarantee of U.S.
Government Securities in the Fund does not guarantee the net asset value of the
shares of the Fund.
22
<PAGE> 30
Under normal market conditions, the Fund will maintain a Dollar-weighted average
portfolio maturity of more than two years but less than five years. The maturity
of a security held by the Fund will generally be considered to be the time
remaining until repayment of the principal amount of such security, except that
the maturity of a security may be considered to be a shorter period in the case
of (a) contractual rights to dispose of a security, because such rights limit
the period during which the Fund bears a market risk with respect to the
security, and (b) Mortgage-Backed Securities, because of possible prepayment of
principal on the mortgages underlying such securities. Short and
intermediate-term securities generally are more stable and less susceptible to
principal decline than longer term securities. While short and intermediate-term
securities in most cases offer lower yields than securities with longer
maturities, the Fund will seek to enhance income through limited investment in
fixed income securities other than U.S. Government Securities. The investment
manager believes that investment in short and intermediate-term securities
allows the Fund to seek both high current income and preservation of capital.
There is, however, no assurance that the Fund's objective will be achieved. The
return and net asset value of the Fund will fluctuate over time.
Up to 35% of the total assets of the Fund may be invested in fixed income
securities other than U.S. Government Securities. Such other fixed income
securities include: (a) corporate debt securities that are rated at the time of
purchase within the four highest grades by either Moody's (Aaa, Aa, A, or Baa)
or S&P (AAA, AA, A, or BBB); (b) commercial paper that is rated at the time of
purchase within the two highest grades by either Moody's (Prime-1 or Prime-2) or
S&P (A-1 or A-2); (c) bank certificates of deposit (including term deposits) or
bankers' acceptances issued by domestic banks (including their foreign branches)
and Canadian chartered banks having total assets in excess of $1 billion; and
(d) repurchase agreements with respect to any of the foregoing. Corporate debt
securities rated within the four highest grades by Moody's or S&P are generally
considered to be "investment grade." Like higher rated securities, securities
rated in the BBB or Baa categories are considered to have adequate capacity to
pay principal and interest, although they may have fewer protective provisions
than higher rated securities and thus may be adversely affected by severe
economic circumstances and are considered to have speculative characteristics.
During temporary defensive periods when the investment manager deems it
appropriate, the Fund may invest all or a portion of its assets in cash or
short-term high quality money market instruments, including short-term U.S.
Government Securities and repurchase agreements with respect to such securities.
The yields on these securities tend to be lower than the yields on other
securities to be purchased by the Fund.
The Fund may purchase or sell securities on a when-issued or delayed delivery
basis. The Fund may invest in collateralized obligations which, consistent with
the limitations reflected above, may be privately issued or may be issued or
guaranteed by U.S. Government agencies or instrumentalities. The Fund also may
engage in options or financial futures transactions in connection with attempts
to hedge its portfolio investments and not for speculation. See "Additional
Investment Information" below.
SPECIAL RISK FACTORS--HIGH YIELD (HIGH RISK) BONDS. As stated above, the
Diversified Fund may and the High Yield Fund does invest a substantial portion
of their assets in fixed income securities offering high current income. Subject
to its specific investment objective and policies as described above, the Income
and Capital Fund may invest up to 10% of its assets in such securities. Such
high yield (high risk), fixed income securities ordinarily will be in the lower
rating categories (securities rated below the fourth category) of recognized
rating agencies or will be non-rated. Lower-rated and non-rated securities,
which are commonly referred to as "junk bonds," have widely varying
characteristics and quality. These lower rated and non-rated fixed income
securities are considered, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation and generally will involve more credit risk than securities in
the higher rating categories. Accordingly, an investment in the Diversified or
High Yield Funds may not constitute a complete investment program and may not be
appropriate for all investors.
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do those of higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower rated securities also are more sensitive to economic conditions than are
higher rated securities. Adverse
23
<PAGE> 31
publicity and investor perceptions regarding lower rated bonds, whether or not
based on fundamental analysis, may depress the prices for such securities. These
and other factors adversely affecting the market value of high yield securities
will adversely affect each Fund's net asset value.
The investment philosophy of the Diversified and High Yield Funds with respect
to high yield (high risk) bonds is based upon the premise that over the long
term a broadly diversified portfolio of high yield fixed income securities
should, even taking into account possible losses, provide a higher net return
than that achievable on a portfolio of higher rated securities. The Funds seek
to achieve the highest yields possible while reducing relative risk through (a)
broad diversification, (b) credit analysis by the investment manager of the
issuers in which the Funds invest, (c) purchase of high yield securities at
discounts from par or stated value when practicable and (d) monitoring and
seeking to anticipate changes and trends in the economy and financial markets
that might affect the prices of portfolio securities. The investment manager's
judgment as to the "reasonableness" of the risk involved in any particular
investment will be a function of its experience in managing fixed income
investments and its evaluation of general economic and financial conditions, a
specific issuer's business and management, cash flow, earnings coverage of
interest and dividends, ability to operate under adverse economic conditions,
and fair market value of assets, and of such other considerations as the
investment manager may deem appropriate. The investment manager, while seeking
maximum current yield, will monitor current corporate developments with respect
to portfolio securities and potential investments and to broad trends in the
economy. In some circumstances, defensive strategies may be implemented to
preserve or enhance capital even at the sacrifice of current yield. Defensive
strategies, which may be used singly or in any combination, may include, but are
not limited to, investments in discount securities or investments in money
market instruments as well as futures and options strategies.
High yield (high risk) securities frequently are issued by corporations in the
growth stage of their development. They may also be issued in connection with a
corporate reorganization or a corporate takeover. Companies that issue such high
yielding securities often are highly leveraged and may not have available to
them more traditional methods of financing. Therefore, the risk associated with
acquiring the securities of such issuers generally is greater than is the case
with higher rated securities. For example, during an economic downturn or
recession, highly leveraged issuers of high yield securities may experience
financial stress. During such periods, such issuers may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations may also be adversely affected by specific
corporate developments, or the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. The risk of
loss from default by the issuer is significantly greater for the holders of high
yield securities because such securities are generally unsecured and are often
subordinated to other creditors of the issuer. Although some risk is inherent in
all securities ownership, holders of fixed income securities have a claim on the
assets of the issuer prior to the holders of common stock. Therefore, an
investment in fixed income securities generally entails less risk than an
investment in common stock of the same issuer.
A Fund may have difficulty disposing of certain high yield (high risk)
securities because they may have a thin trading market. Because not all dealers
maintain markets in all high yield securities, the Funds anticipate that such
securities could be sold only to a limited number of dealers or institutional
investors. The lack of a liquid secondary market may have an adverse effect on
the market price and a Fund's ability to dispose of particular issues and may
also make it more difficult for a Fund to obtain accurate market quotations for
purposes of valuing the Fund's assets. Market quotations generally are available
on many high yield issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
Zero coupon securities and pay-in-kind bonds involve additional special
considerations. Zero coupon securities are debt obligations that do not entitle
the holder to any periodic payments of interest prior to maturity or a specified
cash payment date when the securities begin paying current interest (the "cash
payment date") and therefore are issued and traded at a discount from their face
amount or par value. The market prices of zero coupon securities are generally
more volatile than the market prices of securities that pay interest
periodically and are likely to respond to changes in interest rates to a greater
degree than do securities paying interest currently
24
<PAGE> 32
having similar maturities and credit quality. Zero coupon, pay-in-kind or
deferred interest bonds carry additional risk in that, unlike bonds that pay
interest throughout the period to maturity, a Fund will realize no cash until
the cash payment date unless a portion of such securities is sold and, if the
issuer defaults, a Fund may obtain no return at all on its investment.
Current federal income tax law requires the holder of a zero coupon security or
of certain pay-in-kind bonds (bonds which pay interest through the issuance of
additional bonds) to accrue income with respect to these securities prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and avoid liability for federal income and excise taxes, a
Fund will be required to distribute income accrued with respect to these
securities and may be required to dispose of portfolio securities under
disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.
Additional information concerning high yield (high risk) securities appears
under "Appendix A--Portfolio Composition of High Yield Bonds" and "Appendix
B--Ratings of Investments."
SPECIAL RISK FACTORS--FOREIGN SECURITIES. The Diversified, High Yield and Income
and Capital Funds have the discretion to invest a portion of their assets in
foreign securities that are traded principally in securities markets outside the
United States. These Funds currently limit investment in foreign securities not
publicly traded in the United States to 50% of total assets in the case of the
Diversified Fund and 25% of total assets in the case of the High Yield and
Income and Capital Funds. These Funds may also invest without limit in U.S.
Dollar denominated American Depository Receipts ("ADRs"), which are bought and
sold in the United States and are not subject to the preceding limitation. In
connection with their foreign securities investments, these Funds may, to a
limited extent, engage in foreign currency exchange, options and futures
transactions as a hedge and not for speculation. See "Additional Investment
Information--Options and Financial Futures Transactions and Foreign Currency
Transactions." The Cash Reserves Fund and the Short-Intermediate Government
Funds may, subject to their respective quality standards, invest in U.S.
Dollar-denominated securities of foreign issuers.
Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possible imposition of exchange controls.
The prices of such securities may be more volatile than those of domestic
securities and the markets for such securities may be less liquid. In addition,
there may be less publicly available information about foreign issuers than
about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks and listed companies abroad than in the United States.
With respect to certain foreign countries, there is a possibility of
expropriation or diplomatic developments that could affect investment in these
countries.
EMERGING MARKETS. While a Fund's investments in foreign securities will
principally be in developed countries, a Fund may invest in countries considered
by the Fund's investment manager to be developing or "emerging" markets, which
involve exposure to economic structures that are generally less diverse and
mature than in the United States, and to political systems that may be less
stable. A developing or emerging market country can be considered to be a
country that is in the initial stages of its industrialization cycle. Currently,
emerging markets generally include every country in the world other than the
United States, Canada, Japan, Australia, New Zealand, Hong Kong, Singapore and
most Western European countries. Currently, investing in many emerging markets
may not be desirable or feasible because of the lack of adequate custody
arrangements for a Fund's assets, overly burdensome repatriation and similar
restrictions, the lack of organized and liquid securities markets, unacceptable
political risks or other reasons. As opportunities to invest in securities in
emerging markets develop, a Fund may
25
<PAGE> 33
expand and further broaden the group of emerging markets in which it invests. In
the past, markets of developing or emerging market countries have been more
volatile than the markets of developed countries; however, such markets often
have provided higher rates of return to investors. The investment manager
believes that these characteristics can be expected to continue in the future.
Many of the risks described above relating to foreign securities generally will
be greater for emerging markets than for developed countries. For instance,
economies in individual developing markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross domestic product,
rates of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely by economic conditions in the countries with which they
trade.
Also, the securities markets of developing countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure, regulatory and
accounting standards in many respects are less stringent than in the United
States and other developed markets. There also may be a lower level of
monitoring and regulation of developing markets and the activities of investors
in such markets, and enforcement of existing regulations has been extremely
limited.
In addition, brokerage commissions, custodial services and other costs relating
to investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging markets. Such markets
have different settlement and clearance procedures. In certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Such settlement problems may cause emerging market securities to be illiquid.
The inability of a Fund to make intended securities purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security caused by settlement problems could
result either in losses to a Fund due to subsequent declines in value of the
portfolio security or, if a Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Certain emerging
markets may lack clearing facilities equivalent to those in developed countries.
Accordingly, settlements can pose additional risks in such markets and
ultimately can expose a Fund to the risk of losses resulting from a Fund's
inability to recover from a counterparty.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading securities may cease or may be
substantially curtailed and prices for a Fund's portfolio securities in such
markets may not be readily available. A Fund's portfolio securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Trustees.
Investment in certain emerging market securities is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in certain emerging market securities and increase the costs
and expenses of a Fund. Emerging markets may require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments, the market could impose temporary
restrictions on foreign capital remittances.
FIXED INCOME. Since most foreign fixed income securities are not rated, a Fund
will invest in foreign fixed income securities based on the investment manager's
analysis without relying on published ratings. Since such investments will be
based upon the investment manager's analysis rather than upon published ratings,
achievement of a Fund's goals may depend more upon the abilities of the
investment manager than would otherwise be the case.
26
<PAGE> 34
The value of the foreign fixed income securities held by a Fund, and thus the
net asset value of the Fund's shares, generally will fluctuate with (a) changes
in the perceived creditworthiness of the issuers of those securities, (b)
movements in interest rates, and (c) changes in the relative values of the
currencies in which a Fund's investments in fixed income securities are
denominated with respect to the U.S. Dollar. The extent of the fluctuation will
depend on various factors, such as the average maturity of a Fund's investments
in foreign fixed income securities, and the extent to which a Fund hedges its
interest rate, credit and currency exchange rate risks. Many of the foreign
fixed income obligations in which a Fund will invest will have long maturities.
A longer average maturity generally is associated with a higher level of
volatility in the market value of such securities in response to changes in
market conditions.
Investments in sovereign debt, including Brady Bonds, involve special risks.
Brady Bonds are debt securities issued under a plan implemented to allow debtor
nations to restructure their outstanding commercial bank indebtedness. Foreign
governmental issuers of debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or pay
interest when due. In the event of default, there may be limited or no legal
recourse in that, generally, remedies for defaults must be pursued in the courts
of the defaulting party. Political conditions, especially a sovereign entity's
willingness to meet the terms of its fixed income securities, are of
considerable significance. Also, there can be no assurance that the holders of
commercial bank loans to the same sovereign entity may not contest payments to
the holders of sovereign debt in the event of default under commercial bank loan
agreements. In addition, there is no bankruptcy proceeding with respect to
sovereign debt on which a sovereign has defaulted, and a Fund may be unable to
collect all or any part of its investment in a particular issue.
Foreign investment in certain sovereign debt is restricted or controlled to
varying degrees, including requiring governmental approval for the repatriation
of income, capital or proceed of sales by foreign investors. These restrictions
or controls may at times limit or preclude foreign investment in certain
sovereign debt or increase the costs and expenses of a Fund. A significant
portion of the sovereign debt in which a Fund may invest is issued as part of
debt restructuring and such debt is to be considered speculative. There is a
history of defaults with respect to commercial bank loans by public and private
entities issuing Brady Bonds. All or a portion of the interest payments and/or
principal repayment with respect to Brady Bonds may be uncollateralized.
PRIVATIZED ENTERPRISES. Investments in foreign securities may include securities
issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. A Fund's investments in the
securities of privatized enterprises include privately negotiated investments in
a government or state-owned or controlled company or enterprise that has not yet
conducted an initial equity offering, investments in the initial offering of
equity securities of a state enterprise or former state enterprise and
investments in the securities of a state enterprise following its initial equity
offering.
In certain jurisdictions, the ability of foreign entities, such as a Fund, to
participate in privatizations may be limited by local law, or the price or terms
on which the Fund may be able to participate may be less advantageous than for
local investors. Moreover, there can be no assurance that governments that have
embarked on privatization programs will continue to divest their ownership of
state enterprises, that proposed privatizations will be successful or that
governments will not re-nationalize enterprises that have been privatized.
In the case of the enterprises in which a Fund may invest, large blocks of the
stock of those enterprises may be held by a small group of stockholders, even
after the initial equity offerings by those enterprises. The sale of some
portion or all of those blocks could have an adverse effect on the price of the
stock of any such enterprise.
Prior to making an initial equity offering, most state enterprises or former
state enterprises go through an internal reorganization or management. Such
reorganizations are made in an attempt to better enable these enterprises to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprises's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the
27
<PAGE> 35
government continuing to hold a controlling position in the enterprise even
after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which a Fund may invest
enjoy the protection of and receive preferential treatment from the respective
sovereigns that own or control them. After making an initial equity offering
these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
effectively operate in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
DEPOSITORY RECEIPTS. For many foreign securities, there are U.S. Dollar
denominated ADRs, which are bought and sold in the United States and are issued
by domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in the domestic bank or a correspondent bank. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers, such as changes in foreign currency exchange rates. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Fund
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs. The Funds may also
invest in securities of foreign issuers in the form of European Depository
Receipts ("EDRs") and Global Depository Receipts ("GDRs") which are receipts
evidencing an arrangement with a European bank similar to that for ADRs and are
designed for use in the European and other foreign securities markets. EDRs and
GDRs are not necessarily denominated in the currency of the underlying security.
ADDITIONAL INVESTMENT INFORMATION. A Fund will not normally engage in the
trading of securities for the purpose of realizing short-term profits, but will
adjust its portfolio as considered advisable in view of prevailing or
anticipated market conditions and its investment objective. Accordingly, a Fund
may sell fixed income securities in anticipation of a rise in interest rates and
purchase such securities for inclusion in its portfolio in anticipation of a
decline in interest rates. Frequency of portfolio turnover will not be a
limiting factor should the investment manager deem it desirable to purchase or
sell securities. The portfolio turnover rates for the Funds are listed under
"Financial Highlights." Since securities with maturities of less than one year
are excluded from portfolio turnover rate calculations, the portfolio turnover
rate for the Cash Reserves Fund is zero. High portfolio turnover (over 100%)
involves correspondingly greater brokerage commissions or other transaction
costs. Higher portfolio turnover may result in the realization of greater net
short-term capital gains. In order to continue to qualify as a regulated
investment company for federal income tax purposes, less than 30% of the annual
gross income of a Fund must be derived from the sale or other disposition of
securities and certain other investments held by a Fund for less than three
months. See "Dividends and Taxes" in the Statement of Additional Information.
A Fund (other than the Adjustable Rate, Cash Reserves and Short-Intermediate
Government Funds) may take full advantage of the entire range of maturities of
fixed income securities and may adjust the average maturity of its portfolio
from time to time, depending upon its assessment of relative yields on
securities of different maturities and its expectations of future changes in
interest rates. Thus, the average maturity of a Fund's portfolio may be
relatively short (under 5 years, for example) at some times and relatively long
(over 10 years, for example) at other times. Generally, since shorter term debt
securities tend to be more stable than longer term debt securities, the
portfolio's average maturity will be shorter when interest rates are expected to
rise and longer when interest rates are expected to fall. The effective
Dollar-weighted average portfolio maturity of the Adjustable Rate Fund generally
will range from less than one year to five years. The effective Dollar-weighted
average portfolio maturity of the Short-Intermediate Government Fund generally
will be more than two years but less than five years. The Cash Reserves Fund
will invest only in securities with remaining maturities of 12 months or less
and maintains a Dollar-weighted average portfolio maturity of 90 days or less in
accordance with Rule 2a-7 under the Investment Company Act of 1940.
The Adjustable Rate, Cash Reserves, Mortgage and Short-Intermediate Government
Funds each may not borrow money except as a temporary measure for extraordinary
or emergency purposes and then only in an amount up to one-third of the value of
its total assets in order to meet redemption requests without immediately
selling any
28
<PAGE> 36
portfolio securities. If, for any reason, the current value of a Fund's total
assets falls below an amount equal to three times the amount of its indebtedness
from money borrowed, the Fund will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary. A Fund will not
borrow for leverage purposes. The Adjustable Rate Fund may pledge up to 15% of
its total assets to secure any such borrowings.
The Diversified, Government, High Yield and Income and Capital Funds may each
borrow money only for temporary or emergency purposes and not for leverage
purposes, and then only in an amount up to 5% of its assets, in order to meet
redemption requests without immediately selling any portfolio securities or
other assets. These Funds, except for the Government Fund, may not pledge their
assets in an amount exceeding the amount of the borrowings secured by such
pledge. The Government Fund may pledge up to 7 1/2% of its assets to secure any
such borrowings.
A Fund will not purchase illiquid securities, including repurchase agreements
maturing in more than seven days, if, as a result thereof, more than 15% of the
Fund's net assets, valued at the time of the transaction, would be invested in
such securities, except that the Cash Reserves and Mortgage Funds may not
purchase illiquid securities if more than 10% of their total assets (net assets
for Cash Reserves Fund) would be invested in such securities. See "Investment
Policies and Techniques--Over-the-Counter Options" in the Statement of
Additional Information for a description of the extent to which over-the-counter
traded options are in effect considered as illiquid for purposes of a Fund's
limit on illiquid securities. Each Fund may invest in securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933. This rule permits
otherwise restricted securities to be sold to certain institutional buyers, such
as the Funds. Such securities may be illiquid and subject to a Fund's limitation
on illiquid securities. A "Rule 144A" security may be treated as liquid,
however, if so determined pursuant to procedures adopted by the Board of
Trustees. Investing in Rule 144A securities could have the effect of increasing
the level of illiquidity in a Fund to the extent that qualified institutional
buyers become uninterested for a time in purchasing Rule 144A securities.
Each Fund has adopted certain fundamental investment restrictions which are
presented in the Statement of Additional Information and that, together with the
investment objective and policies of a Fund (for the Adjustable Rate Fund,
however, only those policies specifically designated in this prospectus as
fundamental), cannot be changed without approval by holders of a majority of its
outstanding voting shares. As defined in the Investment Company Act of 1940
("1940 Act"), this means the lesser of the vote of (a) 67% of the shares of a
Fund present at a meeting where more than 50% of the outstanding shares are
present in person or by proxy; or (b) more than 50% of the outstanding shares of
a Fund. Policies of the Adjustable Rate Fund that are neither designated as
fundamental nor incorporated into any of the fundamental investment restrictions
referred to above may be changed by the Board of Trustees of the Fund without
shareholder approval.
OPTIONS AND FINANCIAL FUTURES TRANSACTIONS. A Fund (other than the Cash Reserves
Fund) may deal in options on securities and securities indexes, which options
may be listed for trading on a national securities exchange or traded
over-the-counter. In connection with their foreign securities investments, the
Diversified, High Yield and Income and Capital Funds may also purchase and sell
foreign currency options.
The Diversified and Mortgage Funds may write (sell) covered call options on up
to 100% of net assets and may write (sell) secured put options on up to 50% of
net assets. The Adjustable Rate, Government, High Yield, and Income and Capital
Funds each may write (sell) covered call and secured put options on up to 25% of
its net assets. Each such Fund may purchase put and call options provided that
no more than 5% of its net assets may be invested in premiums on such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security or other asset at the exercise price
during or at the end of the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security or
other asset at the exercise price during or at the end of the option period. The
writer of a covered call owns securities or other assets that are acceptable for
escrow and the writer of a secured put invests an amount not less than the
exercise price in eligible securities or other assets to the extent that it is
obligated as a writer. If a call written by a Fund is exercised, the Fund
foregoes any possible profit from an increase in the market price of the
underlying security or other asset over the
29
<PAGE> 37
exercise price plus the premium received. In writing puts, there is a risk that
a Fund may be required to take delivery of the underlying security or other
asset at a disadvantageous price.
Over-the-counter traded options ("OTC options") differ from exchange traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer as a result of the insolvency of such dealer or otherwise, in which event
a Fund may experience material losses. However, in writing options the premium
is paid in advance by the dealer. OTC options are available for a greater
variety of securities and other assets, and a wider range of expiration dates
and exercise prices, than for exchange traded options.
A Fund (other than the Cash Reserves Fund) may engage in financial futures
transactions. Financial futures contracts are commodity contracts that obligate
the long or short holder to take or make delivery of a specified quantity of a
financial instrument, such as a security, or the cash value of a securities
index during a specified future period at a specified price. A Fund will "cover"
futures contracts sold by the Fund and maintain in a segregated account certain
liquid assets in connection with futures contracts purchased by the Fund as
described under "Investment Policies and Techniques" in the Statement of
Additional Information. In connection with their foreign securities investments,
the Diversified, High Yield and Income and Capital Funds may also engage in
foreign currency financial futures transactions. A Fund will not enter into any
futures contracts or options on futures contracts if the aggregate of the
contract value of the outstanding futures contracts of the Fund and futures
contracts subject to outstanding options written by the Fund would exceed 50% of
the total assets of the Fund.
The Funds may engage in financial futures transactions and may use index options
as an attempt to hedge against market risks. For example, if a Fund owned
long-term bonds and interest rates were expected to rise, it could sell
financial futures contracts. If interest rates did increase, the value of the
bonds in the Fund would decline, but this decline would be offset in whole or in
part by an increase in the value of the Fund's futures contracts. If, on the
other hand, long-term interest rates were expected to decline, the Fund could
hold short-term debt securities and benefit from the income earned by holding
such securities, while at the same time the Fund could purchase futures
contracts on long-term bonds or the cash value of a securities index. Thus, the
Fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them. The futures contracts and short-term debt
securities could then be liquidated and the cash proceeds used to buy long-term
bonds.
Futures contracts entail risks. If the investment manager's judgment about the
general direction of interest rates, markets or exchange rates is wrong, the
overall performance may be poorer than if no such contracts had been entered
into. There may be an imperfect correlation between movements in prices of
futures contracts and portfolio assets being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. For example, if
participants in the futures market elect to close out their contracts rather
than meet margin requirements, distortions in the normal relationship between
the underlying assets and futures market could result. Price distortions also
could result if investors in futures contracts decide to make or take delivery
of underlying securities or other assets rather than engage in closing
transactions because of the resultant reduction in the liquidity of the futures
market. In addition, because, from the point of view of speculators, margin
requirements in the futures market are less onerous than margin requirements in
the cash market, increased participation by speculators in the futures market
could cause temporary price distortions. Due to the possibility of price
distortions in the futures market and because of the imperfect correlation
between movements in the prices of securities or other assets and movements in
the prices of futures contracts, a correct forecast of market trends by the
investment manager still may not result in a successful hedging transaction. If
any of these events should occur, a Fund could lose money on the financial
futures contracts and also on the value of its portfolio assets. The costs
incurred in connection with futures transactions could reduce a Fund's return.
Index options involve risks similar to those risks relating to transactions in
financial futures contracts described above. Also, an option purchased by a Fund
may expire worthless, in which case a Fund would lose the premium paid therefor.
30
<PAGE> 38
A Fund may engage in futures transactions only on commodities exchanges or
boards of trade. A Fund will not engage in transactions in index options,
financial futures contracts or related options for speculation, but only as an
attempt to hedge against changes in interest rates or market conditions
affecting the values of securities which the Fund owns or intends to purchase.
FOREIGN CURRENCY TRANSACTIONS. The Diversified, High Yield and Income and
Capital Funds may each invest a limited portion of its assets in securities
denominated in foreign currencies. These Funds may engage in foreign currency
transactions in connection with their investments in foreign securities but will
not speculate in foreign currency exchange.
The value of the foreign securities investments of a Fund measured in U.S.
Dollars may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. A Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded directly between currency traders (usually
large commercial banks) and their customers.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may want to establish the U.S. Dollar cost
or proceeds, as the case may be. By entering into a forward contract in U.S.
Dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the Fund is able to protect itself against a
possible loss between trade and settlement dates resulting from an adverse
change in the relationship between the U.S. Dollar and such foreign currency.
However, this tends to limit potential gains that might result from a positive
change in such currency relationships. A Fund may also hedge its foreign
currency exchange rate risk by engaging in foreign currency financial futures
and options transactions.
When the investment manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. Dollar, it may enter
into a forward contract to sell an amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. The forecasting of short-term currency market movement is extremely
difficult and whether such a short-term hedging strategy will be successful is
highly uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a contract. Accordingly, it may be
necessary for a Fund to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the security is less
than the amount of foreign currency the Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver.
A Fund will not enter into forward contracts or maintain a net exposure in such
contracts where the Fund would be obligated to deliver an amount of foreign
currency in excess of the value of the Fund's securities or other assets
denominated in that currency. The Diversified, High Yield and Income and Capital
Funds do not intend to enter into forward contracts for the purchase of a
foreign currency if they would have more than 15% of the value of their total
assets committed to such contracts. The Funds segregate cash or liquid
securities to the extent required by applicable regulation in connection with
forward foreign currency exchange contracts entered into for the purchase of a
foreign currency. A Fund generally does not enter into a forward contract with a
term longer than one year.
DERIVATIVES. In addition to options and financial futures transactions,
consistent with its objective, each Fund may invest in a broad array of
financial instruments and securities in which the value of the instrument or
security is
31
<PAGE> 39
"derived" from the performance of an underlying asset or a "benchmark" such as a
security index, an interest rate or a foreign currency ("derivatives").
Derivatives are most often used to manage investment risk, to increase or
decrease exposure to an asset class or benchmark (as a hedge or to enhance
return), or to create an investment position indirectly (often because it is
more efficient or less costly than direct investment). The types of derivatives
used by each Fund and the techniques employed by the investment manager may
change over time as new derivatives and strategies are developed or regulatory
changes occur.
SPECIAL RISK FACTORS--OPTIONS, FUTURES, FOREIGN CURRENCIES AND OTHER
DERIVATIVES. The Statement of Additional Information contains further
information about the characteristics, risks and possible benefits of options,
futures, foreign currency and other derivative transactions. See "Investment
Policies and Techniques" in the Statement of Additional Information. The
principal risks are: (a) possible imperfect correlation between movements in the
prices of options, currencies, futures or other derivatives contracts and
movements in the prices of the securities or currencies hedged, used for cover
or that the derivatives intended to replicate; (b) lack of assurance that a
liquid secondary market will exist for any particular option, futures, foreign
currency or other derivatives contract at any particular time; (c) the need for
additional skills and techniques beyond those required for normal portfolio
management; (d) losses on futures contracts resulting from market movements not
anticipated by the investment manager; (e) the possible need to defer closing
out certain options, futures or other derivatives contracts in order to continue
to qualify for beneficial tax treatment afforded "regulated investment
companies" under the Internal Revenue Code; and (f) the possible non-performance
of the counter-party to the derivative contract.
DELAYED DELIVERY TRANSACTIONS. Any of the Funds (other than the Cash Reserves
Fund) may purchase or sell portfolio securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions involve a
commitment by a Fund to purchase or sell securities with payment and delivery to
take place in the future (not to exceed 120 days from trade date for the
Government Fund) in order to secure what is considered to be an advantageous
price or yield to the Fund at the time of entering into the transaction. The
value of fixed yield securities to be delivered in the future will fluctuate as
interest rates vary. Because a Fund is required to set aside cash or other
liquid securities to satisfy its commitments to purchase when-issued or delayed
delivery securities, flexibility to manage the Fund's investments may be limited
if commitments to purchase when-issued or delayed delivery securities were to
exceed 25% of the value of its assets.
To the extent a Fund engages in when-issued or delayed delivery transactions, it
will do so for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies. A Fund reserves the right to sell
these securities before the settlement date if deemed advisable.
In when-issued or delayed delivery transactions, delivery of the securities
occurs beyond normal settlement periods, but the Fund would not pay for such
securities or start earning interest on them until they are delivered. However,
when the Fund purchases securities on a when-issued or delayed delivery basis,
it immediately assumes the risks of ownership, including the risk of price
fluctuation. Failure to deliver a security purchased on a when-issued or delayed
delivery basis may result in a loss or missed opportunity to make an alternative
investment. Depending on market conditions, the Fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which its
total assets, including the value of when-issued and delayed delivery securities
it holds, exceed its net assets.
REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements, under
which it acquires ownership of a security and the broker-dealer or bank agrees
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the Fund's holding period. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
might have expenses in enforcing its rights, and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The securities underlying a repurchase agreement will be
marked-to-market every business day so that the value of such securities is at
least equal to the investment value of the repurchase agreement, including any
accrued interest thereon. In addition, the Fund must take physical possession of
the security or receive written confirmation of the purchase and a custodial or
safekeeping receipt from a third party or be recorded as the owner of the
security through the Federal
32
<PAGE> 40
Reserve Book-Entry System. Repurchase agreements will be limited to transactions
with financial institutions believed by the investment manager to present
minimal credit risk. The investment manager will monitor on an on-going basis
the creditworthiness of the broker-dealers and banks with which the Funds may
engage in repurchase agreements. Repurchase agreements maturing in more than
seven days will be considered as illiquid for purposes of the Funds' limitations
on illiquid securities.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Funds (other than the Government Fund) may lend securities
(principally to broker-dealers) without limit where such loans are callable at
any time and are continuously secured by segregated collateral (cash or other
liquid securities) equal to no less than the market value, determined daily, of
the securities loaned. The Funds will receive amounts equal to dividends or
interest on the securities loaned. The Funds will also earn income for having
made the loan. Any cash collateral pursuant to these loans will be invested in
short-term money market instruments. As with other extensions of credit, there
are risks of delay in recovery or even loss of rights in the collateral should
the borrower of the securities fail financially. However, the loans would be
made only to firms deemed by the investment manager to be of good standing, and
when the investment manager believes the potential earnings to justify the
attendant risk. Management will limit such lending to not more than one-third of
the value of a Fund's total assets.
COLLATERALIZED OBLIGATIONS. Subject to its investment objective and policies, a
Fund may purchase collateralized obligations, including interest only ("IO") and
principal only ("PO") securities. A collateralized obligation is a debt security
issued by a corporation, trust or custodian, or by a U.S. Government agency or
instrumentality, that is collateralized by a portfolio or pool of mortgages,
Mortgage-Backed Securities, U.S. Government Securities or other assets. The
issuer's obligation to make interest and principal payments is secured by the
underlying pool or portfolio of securities. Collateralized obligations issued or
guaranteed by a U.S. Government agency or instrumentality, such as the Federal
Home Loan Mortgage Corporation, are considered U.S. Government Securities for
purposes of this prospectus. Privately-issued collateralized obligations
collateralized by a portfolio of U.S. Government Securities are not direct
obligations of the U.S. Government or any of its agencies or instrumentalities
and are not considered U.S. Government Securities for purposes of this
prospectus. A variety of types of collateralized obligations are available
currently and others may become available in the future.
Since the collateralized obligations may be issued in classes with varying
maturities and interest rates, the investor may obtain greater predictability of
maturity than with direct investments in mortgage-backed securities. Classes
with shorter maturities may have lower volatility and lower yield while those
with longer maturities may have higher volatility and higher yield. This
provides the investor with greater control over the characteristics of the
investment in a changing interest rate environment. With respect to interest
only and principal only securities, an investor has the option to select from a
pool of underlying collateral the portion of the cash flows that most closely
corresponds to the investor's forecast of interest rate movements. These
instruments tend to be highly sensitive to prepayment rates on the underlying
collateral and thus place a premium on accurate prepayment projections by the
investor.
A Fund (other than the Cash Reserves Fund) may invest in collateralized
obligations whose yield floats inversely against a specified index rate. These
"inverse floaters" are more volatile than conventional fixed or floating rate
collateralized obligations and the yield thereon, as well as the value thereof,
will fluctuate in inverse proportion to changes in the index upon which interest
rate adjustments are based. As a result, the yield on an inverse floater will
generally increase when market yields (as reflected by the index) decrease and
decrease when market yields increase. The extent of the volatility of inverse
floaters depends on the extent of anticipated changes in market rates of
interest. Generally, inverse floaters provide for interest rate adjustments
based upon a multiple of the specified interest index, which further increases
their volatility. The degree of additional volatility will be directly
proportional to the size of the multiple used in determining interest rate
adjustments.
Additional information concerning collateralized obligations is contained in the
Statement of Additional Information under "Investment Policies and
Techniques--Collateralized Obligations."
33
<PAGE> 41
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Zurich Kemper Investments, Inc. ("ZKI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, is the investment manager of each Fund and
provides each Fund with continuous professional investment supervision. ZKI is
one of the largest investment managers in the country and has been engaged in
the management of investment funds for more than forty-eight years. ZKI and its
affiliates provide investment advice and manage investment portfolios for the
Kemper Funds, affiliated insurance companies and other corporate, pension,
profit-sharing and individual accounts representing approximately $76 billion
under management (including approximately $16 billion in U.S. Government
securities). ZKI acts as investment manager or principal underwriter for 30
open-end and seven closed-end investment companies, with 77 separate investment
portfolios, representing more than 2.5 million shareholder accounts. ZKI is an
indirect subsidiary of Zurich Insurance Company, an internationally recognized
company providing services in life and non-life insurance, reinsurance and asset
management.
Responsibility for overall management of each Fund rests with its Board of
Trustees and officers. Professional investment supervision is provided by ZKI.
The investment management agreements provide that ZKI shall act as each Fund's
investment adviser, manage its investments and provide it with various services
and facilities. Zurich Investment Management Limited ("ZIML"), 1 Fleet Place,
London, U.K. EC4M 7RQ, an affiliate of ZKI, is the sub-adviser for the
Diversified, High Yield, and Income and Capital Funds. ZIML is an indirect
subsidiary of Zurich Insurance Company and has served as sub-adviser for mutual
funds since December, 1996 and investment adviser for certain institutional
accounts since August, 1988. Under the terms of the Sub-Advisory Agreement
between ZIML and ZKI, ZIML renders investment advisory and management services
with regard to such portion of the Fund's portfolio as may be allocated to ZIML
by ZKI from time to time for management of foreign securities, including foreign
currency transactions and related investments. ZKI pays ZIML for its services a
sub-advisory fee, payable monthly at the annual rate of .30% of the portion of
the average daily net assets of the Fund allocated by ZKI to ZIML for
management.
J. Patrick Beimford, Jr. (since October, 1995 and from 1981 through May, 1995)
is a portfolio co-manager with Richard L. Vandenberg (since March, 1996) of the
Government Fund. Mr. Beimford (since October, 1995 and from 1992 through May,
1995) is also a portfolio co-manager with Mr. Vandenberg (since March, 1996) of
the Mortgage Fund. Mr. Vandenberg (since March, 1996) is also a portfolio
co-manager with Mr. Beimford (since December 1996) of the Short-Intermediate
Government Fund. Mr. Vandenberg (since March, 1996) and Elizabeth A. Byrnes
(since 1994) are portfolio co-managers of the Adjustable Rate Fund. Mr. Beimford
joined ZKI in April 1976 and is currently an Executive Vice President and Chief
Investment Officer--Fixed Income Investments of ZKI and a Vice President of each
Fund. He received a B.S.I.M. in Business from Purdue University, West Lafayette,
Indiana, and an M.B.A. in Finance from the University of Chicago, Chicago,
Illinois. Mr. Beimford is a Chartered Financial Analyst. Mr. Vandenberg joined
ZKI in March, 1996 and is a Senior Vice President of ZKI and a Vice President of
the Government, Mortgage, Adjustable Rate and Short-Intermediate Government
Funds. Immediately prior to joining ZKI, he was a senior vice president and
portfolio manager of an investment management firm. He received a B.B.A. and
M.B.A., both in Finance, Investments and Banking, from the University of
Wisconsin, Madison, Wisconsin. Ms. Byrnes joined ZKI in 1982 and is a First Vice
President of ZKI and a Vice President of the Adjustable Rate Fund. She received
a B.A. from Miami University, Oxford, Ohio.
Frank J. Rachwalski, Jr. is the portfolio manager of the Cash Reserves Fund. He
has served in this capacity since the Fund commenced operations in February
1984. Mr. Rachwalski joined ZKI in January 1973 and is currently a Senior Vice
President of ZKI and a Vice President of the Fund. He received a B.B.A. and an
M.B.A. from Loyola University, Chicago, Illinois.
Michael A. McNamara (since 1990) and Harry E. Resis, Jr. (since 1992) are the
portfolio co-managers of the High Yield Fund. Mr. McNamara joined ZKI in
February 1972 and is a Senior Vice President of ZKI and a Vice
34
<PAGE> 42
President of the Fund. He received a B.S. in Business Administration from the
University of Missouri, St. Louis, Missouri, and an M.B.A. in Finance from
Loyola University, Chicago, Illinois. Mr. Resis joined ZKI in June, 1988 and is
currently a Senior Vice President of ZKI and a Vice President of the Fund. He
received a B.A. in Finance from Michigan State University, East Lansing,
Michigan.
Robert Cessine is the portfolio manager (since 1994) and a Vice President of the
Income and Capital Fund. Mr. Cessine joined ZKI in 1993 and is a Senior Vice
President of ZKI and director of investment grade corporate and sovereign bond
research. Before joining ZKI in 1993, Mr. Cessine was a senior corporate bond
analyst and chairman of the bond selection committee of an investment management
company. He received a B.S. in Economics from the University of Wisconsin,
Madison, Wisconsin, an M.S. in Agricultural and Resource Economics from the
University of Maryland, Baltimore/College Park, Maryland and an M.S. in Finance
from the University of Wisconsin, Madison, Wisconsin. Mr. Cessine is a Chartered
Financial Analyst.
Diversified Income Fund is managed by a team of portfolio managers who are
specialists in the basic sectors in which it invests. Messrs J. Patrick
Beimford, Jr., Robert S. Cessine, Gordon K. Johns, Michael A. McNamara, Harry E.
Resis, Jr., and Jonathan W. Trutter are the members of the team. Mr. Johns
joined Kemper in 1988 and is managing director of ZIML in London. Previously, he
was head of international fixed income fund management at an investment bank in
London. He received a B.A. in law from Balliol College in Oxford, United
Kingdom. Mr. Trutter is a First Vice President of ZKI. Before joining ZKI in
1989, he was a vice president in commercial banking. Mr. Trutter has an A.B.
with dual majors in East Asian Languages and International Relations from the
University of Southern California, Los Angeles California and an M.B.A. from
Kellogg Graduate School of Management at Northwestern University, Chicago,
Illinois. He is also a Certified Public Accountant. See above for information on
the background of Messrs. Beimford, Cessine, McNamara and Resis.
The Funds pay ZKI investment management fees, payable monthly, at the annual
rates shown below. Before May 31, 1994, the Funds paid fees under different fee
schedules that are described in "Investment Manager and Underwriter" in the
Statement of Additional Information.
<TABLE>
<CAPTION>
ADJUSTABLE RATE, INCOME DIVERSIFIED
AND CAPITAL, MORTGAGE CASH AND
AVERAGE DAILY NET ASSETS AND SHORT-INTERMEDIATE GOV'T RESERVES HIGH YIELD GOVERNMENT
- -------------------------------------------- ---------------------------- -------- ---------- ----------
<S> <C> <C> <C> <C>
$0 - $250 million........................... .55% .40% .58% .45%
$250 million - $1 billion................... .52 .38 .55 .43
$1 billion - $2.5 billion................... .50 .35 .53 .41
$2.5 billion - $5 billion................... .48 .32 .51 .40
$5 billion - $7.5 billion................... .45 .30 .48 .38
$7.5 billion - $10 billion.................. .43 .28 .46 .36
$10 billion - $12.5 billion................. .41 .26 .44 .34
Over $12.5 billion.......................... .40 .25 .42 .32
</TABLE>
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with each Fund, Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, a wholly owned
subsidiary of ZKI, is the principal underwriter and distributor of each Fund's
shares and acts as agent of each Fund in the sale of its shares. KDI bears all
its expenses of providing services pursuant to the distribution agreement,
including the payment of any commissions. KDI provides for the preparation of
advertising or sales literature and bears the cost of printing and mailing
prospectuses to persons other than shareholders. KDI bears the cost of
qualifying and maintaining the qualification of Fund shares for sale under the
securities laws of the various states and each Fund bears the expense of
registering its shares with the Securities and Exchange Commission. KDI may
enter into related selling group agreements with various broker-dealers,
including affiliates of KDI, that provide distribution services to investors.
KDI also may provide some of the distribution services.
35
<PAGE> 43
CLASS A SHARES. KDI receives no compensation from the Funds as principal
underwriter for Class A shares and pays all expenses of distribution of each
Fund's Class A shares under the distribution agreements not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays or
allows concessions or discounts to firms for the sale of each Fund's shares.
CLASS B SHARES. For its services under the distribution agreement, KDI receives
a fee from each Fund, payable monthly, at the annual rate of .75% of average
daily net assets of each Fund attributable to Class B shares. This fee is
accrued daily as an expense of Class B shares. KDI also receives any contingent
deferred sales charges. See "Redemption or Repurchase of Shares--Contingent
Deferred Sales Charge--Class B Shares." KDI currently compensates firms for
sales of Class B shares at a commission rate of 3.75%.
CLASS C SHARES. For its services under the distribution agreement, KDI receives
a fee from each Fund, payable monthly, at the annual rate of .75% of average
daily net assets of each Fund attributable to Class C shares. This fee is
accrued daily as an expense of Class C shares. KDI currently advances to firms
the first year distribution fee at a rate of .75% of the purchase price of Class
C shares. For periods after the first year, KDI currently pays firms for sales
of Class C shares a distribution fee, payable quarterly, at an annual rate of
.75% of net assets attributable to Class C shares maintained and serviced by the
firm and the fee continues until terminated by KDI or a Fund. KDI also receives
any contingent deferred sales charges. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Class C Shares."
RULE 12B-1 PLAN. Since each distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares. The table below shows amounts paid in connection with
each Fund's Rule 12b-1 Plan during its 1996 fiscal year.
<TABLE>
<CAPTION>
DISTRIBUTION FEES CONTINGENT DEFERRED
DISTRIBUTION EXPENSES PAID BY FUND SALES CHARGES PAID
INCURRED BY UNDERWRITER TO UNDERWRITER TO UNDERWRITER
------------------------- --------------------- ---------------------
FUND CLASS B CLASS C CLASS B CLASS C CLASS B CLASS C
- --------------------------------- ----------- --------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate.................. $ 139,000 55,000 42,000 9,000 19,000 0
Cash Reserves.................... $ 6,023,000 508,000 1,380,000 48,000 766,000 1,000
Diversified...................... $ 3,685,000 169,000 1,909,000 33,000 446,000 0
Government....................... $ 2,702,000 262,000 475,000 51,000 181,000 1,000
High Yield....................... $13,577,000 1,437,000 7,450,000 245,000 1,324,000 3,000
Income and Capital............... $ 3,045,000 185,000 572,000 31,000 146,000 1,000
Mortgage......................... $ 2,619,000 47,000 9,328,000 12,000 2,147,000 0
Short-Intermediate Government+... $ 777,000 173,000 1,403,000 25,000 486,000 1,000
</TABLE>
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of a Fund to make payments to KDI pursuant to the Plan will cease
and the Fund will not be required to make any payments past the termination
date. Thus, there is no legal obligation for the Fund to pay any expenses
incurred by KDI in excess of its fees under a Plan, if for any reason the Plan
is terminated in accordance with its terms. Future fees under the Plan may or
may not be sufficient to reimburse KDI for its expenses incurred.
ADMINISTRATIVE SERVICES. KDI also provides information and administrative
services for shareholders of each Fund pursuant to administrative services
agreements ("administrative agreements"). KDI may enter into related
arrangements with various financial services firms, such as broker-dealer firms
or banks ("firms"), that provide services and facilities for their customers or
clients who are shareholders of the Funds. Such administrative services and
assistance may include, but are not limited to, establishing and maintaining
shareholder accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding each Fund and its
36
<PAGE> 44
special features and such other services as may be agreed upon from time to time
and permitted by applicable statute, rule or regulation. KDI bears all its
expenses of providing services pursuant to the administrative agreement,
including the payment of any service fees. For services under the administrative
agreements, each Fund pays KDI a fee, payable monthly, at an annual rate of up
to .25% of average daily net assets of Class A, B and C shares of such Fund.
With respect to Class A shares, KDI then pays each firm a service fee at an
annual rate of (a) up to .15% of net assets (.25% for the Cash Reserves,
Mortgage and Short-Intermediate Government Funds) of those accounts that it
maintains and services for each Fund attributable to shares acquired prior to
October 1, 1993, and (b) up to .25% of net assets of those accounts that it
maintains and services for each Fund attributable to Class A shares acquired on
or after October 1, 1993. With respect to Class B shares and Class C shares, KDI
pays each firm a service fee, payable quarterly, at an annual rate of up to .25%
of net assets of those accounts in the Fund that it maintains and services
attributable to Class B shares and Class C shares, respectively. Firms to which
service fees may be paid include broker-dealers affiliated with KDI.
CLASS A SHARES. For Class A shares, a firm becomes eligible for the service fee
based on assets in the accounts in the month following the month of purchase and
the fee continues until terminated by KDI or a Fund. The fees are calculated
monthly and paid quarterly.
CLASS B AND CLASS C SHARES. KDI currently advances to firms the first year
service fee at a rate of up to .25% of the purchase price of such shares. For
periods after the first year, KDI currently intends to pay firms a service fee
at a rate of up to .25% (calculated monthly and paid quarterly) of the net
assets attributable to Class B and Class C shares maintained and serviced by the
firm and the fee continues until terminated by KDI or the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreements not paid to firms to compensate
itself for administrative functions performed for each Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which there is a firm listed on a Fund's records and it is intended
that KDI will pay all the administrative services fee that it receives from each
Fund to firms in the form of service fees. The effective administrative services
fee rate to be charged against all assets of each Fund while this procedure is
in effect will depend upon the proportion of Fund assets that is in accounts for
which there is a firm of record, as well as, with respect to Class A shares
(except for the Cash Reserves, Mortgage and Short-Intermediate Government
Funds), the date when shares representing such assets were purchased. In
addition, KDI may, from time to time, from its own resources, pays certain firms
additional amounts for ongoing administrative services and assistance provided
to their customers and clients who are shareholders of the Funds.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary
Trust Company ("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as
custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of each Fund maintained in the United States. For Funds that invest in foreign
securities, The Chase Manhattan Bank, Chase MetroTech Center, Brooklyn, New York
11245, as custodian, has custody of all securities and cash of each Fund held
outside the United States. IFTC also is the Funds' transfer agent and
dividend-paying agent. Pursuant to a services agreement with IFTC, Kemper
Service Company, an affiliate of ZKI, serves as "Shareholder Service Agent" of
the Funds and as such, performs all of IFTC's duties as transfer agent and
dividend-paying agent. For a description of shareholder service agent fees
payable to the Shareholder Service Agent, see "Investment Manager and
Underwriter" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS. ZKI and ZIML place all orders for purchases and sales of
a Fund's securities. Subject to seeking best execution of orders, ZKI and ZIML
may consider sales of shares of a Fund and other funds managed by ZKI or its
affiliates as a factor in selecting broker-dealers. See "Portfolio Transactions"
in the Statement of Additional Information.
37
<PAGE> 45
DIVIDENDS AND TAXES
DIVIDENDS. The Cash Reserves Fund's net investment income is declared as a
dividend daily, and dividends are reinvested or paid in cash monthly. Each other
Fund normally declares and distributes monthly dividends of net investment
income and distributes any net realized short-term and long-term capital gains
at least annually.
Dividends paid by a Fund as to each class of its shares will be calculated in
the same manner, at the same time and on the same day. The level of income
dividends per share (as a percentage of net asset value) will be lower for Class
B and Class C shares than for Class A shares primarily as a result of the
distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same amount for each
class.
Income dividends and capital gain dividends, if any, of a Fund will be credited
to shareholder accounts in full and fractional shares of the same class of that
Fund at net asset value, except that, upon written request to the Shareholder
Service Agent, a shareholder may select one of the following options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
(2) To receive income and capital gain dividends in cash.
Any dividends of a Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have dividends of a Fund
invested in shares of the same class of another Kemper Fund at the net asset
value of such class of such other fund. See "Special Features--Class A
Shares--Combined Purchases" for a list of such other Kemper Funds. To use this
privilege of investing dividends of a Fund in shares of another Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends. The Funds reinvest dividend checks (and future
dividends) in shares of that same Fund and class if checks are returned as
undeliverable. Dividends and other distributions in the aggregate amount of $10
or less are automatically reinvested in shares of the same Fund unless the
shareholder requests that such policy not be applied to the shareholder's
account.
TAXES. Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code (the "Code") and, if so
qualified, will not be liable for federal income taxes to the extent its
earnings are distributed. Dividends derived from net investment income and net
short-term capital gains are taxable to shareholders as ordinary income and
long-term capital gain dividends are taxable to shareholders as long-term
capital gain regardless of how long the shares have been held and whether
received in cash or shares. Long-term capital gain dividends received by
individual shareholders are taxed at a maximum rate of 28%. Dividends declared
in October, November or December to shareholders of record as of a date in one
of those months and paid during the following January are treated as paid on
December 31 of the calendar year declared. A portion of the dividends paid by
the Diversified or High Yield Funds may qualify for the dividends received
deduction available to corporate shareholders. However, it is anticipated that
only a small portion, if any, of the dividends paid by such Funds will so
qualify. No portion of the dividends paid by the Adjustable Rate, Cash Reserves,
Government, Income and Capital, Mortgage or Short-Intermediate Government Funds
will qualify for the dividends received deduction.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, will be taxable to the shareholder. If the net asset value of
shares were reduced below the shareholder's cost by dividends representing gains
realized on sales of securities, such dividends would be a return of investment
though taxable as stated above.
Fund dividends that are derived from interest on direct (but not guaranteed)
obligations of the U.S. Government and certain of its agencies and
instrumentalities may be exempt from state and local taxes in certain states. In
other states, arguments can be made that such distributions should be exempt
from state and local taxes based on federal law, 31 U.S.C. Section 3124, and the
U.S. Supreme Court's interpretation of that provision in AMERICAN BANK AND TRUST
CO. v. DALLAS COUNTY, 463 U.S. 855 (1983). Shareholders should consult their tax
advisers regarding the possible exclusion of such portion of their dividends for
state and local income tax purposes.
38
<PAGE> 46
Each Fund is required by law to withhold 31% of taxable dividends and redemption
proceeds paid to certain shareholders who do not furnish a correct taxpayer
identification number (in the case of individuals, a social security number) and
in certain other circumstances. Trustees of qualified retirement plans and
403(b)(7) accounts are required by law to withhold 20% of the taxable portion of
any distribution that is eligible to be "rolled over." The 20% withholding
requirement does not apply to distributions from Individual Retirement Accounts
("IRAs") or any part of a distribution that is transferred directly to another
qualified retirement plan, 403(b)(7) account, or IRA. Shareholders should
consult with their tax advisers regarding the 20% withholding requirement.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving dividend reinvestment and periodic
investment and redemption programs. Information for income tax purposes,
including information regarding any foreign taxes and credits, will be provided
after the end of the calendar year. Shareholders are encouraged to retain copies
of their account confirmation statements or year-end statements for tax
reporting purposes, including information regarding any foreign taxes and
credits. However, those who have incomplete records may obtain historical
account transaction information at a reasonable fee.
When more than one shareholder resides at the same address, certain reports and
communications to be delivered to such shareholders may be combined in the same
mailing package, and certain duplicate reports and communications may be
eliminated. Similarly, account statements to be sent to such shareholders may be
combined in the same mailing package or consolidated into a single statement.
However, a shareholder may request that the foregoing policies not be applied to
the shareholder's account.
NET ASSET VALUE
For each Fund except the Cash Reserves Fund, the net asset value per share is
determined separately for each class by dividing the value of the Fund's net
assets attributable to that class by the number of shares of that class
outstanding. The per share net asset value of the Class B and Class C shares of
a Fund (other than the Cash Reserves Fund) will generally be lower than that of
the Class A shares of the Fund because of the higher expenses borne by the Class
B and Class C shares. Fixed income securities are valued by using market
quotations, or independent pricing services that use prices provided by market
makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Portfolio securities
that are primarily traded on a domestic securities exchange or securities listed
on the NASDAQ National Market are valued at the last sale price on the exchange
or market where primarily traded or listed or, if there is no recent sale price
available, at the last current bid quotation. Portfolio securities that are
primarily traded on foreign securities exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges where
primarily traded. A security that is listed or traded on more than one exchange
is valued at the quotation on the exchange determined to be the primary market
for such security by the Board of Trustees or its delegates. Securities not so
traded or listed are valued at the last current bid quotation if market
quotations are available. Equity options are valued at the last sale price
unless the bid price is higher or the ask price is lower, in which event such
bid or asked price is used. Exchange traded fixed income options are valued at
the settlement price established each day by the board of trade or exchange on
which they are traded. Over-the-counter traded options are valued based upon
current prices provided by market makers. Financial futures and options thereon
are valued at the settlement price established each day by the board of trade or
exchange on which they are traded. Other securities and assets are valued at
fair value as determined in good faith by the Board of Trustees. Because of the
need to obtain prices as of the close of trading on various exchanges throughout
the world, the calculation of net asset value of a Fund investing in foreign
securities does not necessarily take place contemporaneously with the
determination of the prices of the Fund's foreign securities, which may be made
prior to the determination of net asset value. For purposes of determining the
net asset value of a Fund investing in foreign securities, all assets and
liabilities initially expressed in foreign currency values will be converted
into U.S. Dollar values at the mean between the bid and offered quotations of
such currencies against U.S. Dollars as last quoted by a recognized dealer. If
an event were to occur, after the value of a security was so established but
39
<PAGE> 47
before the net asset value per share was determined, which was likely to
materially change the net asset value, then that security would be valued using
fair value determinations by the Board of Trustees or its delegates. On each day
the New York Stock Exchange (the "Exchange") is open for trading, the net asset
value is determined as of the earlier of 3:00 p.m. Chicago time or the close of
the Exchange.
For the Cash Reserves Fund, the net asset value per share is determined
separately for each class as of the earlier of 3:00 p.m. Chicago time or the
close of the Exchange on each day the Exchange is open for trading. The Fund
seeks to maintain a net asset value of $1.00 per share in each class but there
is no assurance that it will do so. The net asset value per share of a class is
determined by dividing the Fund's net assets attributable to that class by the
total number of shares of the class outstanding. The Fund values its portfolio
instruments at amortized cost, which means that they are valued at their
acquisition cost (as adjusted for amortization of premium or discount) rather
than at current market value. Calculations are made to compare the value of its
investments valued at amortized cost with market-based values. Market-based
values 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 Fund's $1.00 per share net asset value,
calculated at amortized cost, and the net asset value per share calculated by
reference to market-based quotations, or if there is any other deviation which
the Board of Trustees believes would result in a material dilution to
shareholders or purchasers, the Board of Trustees will promptly consider what
action, if any, should be initiated. In order to value its investments at
amortized cost, the Fund purchases only securities with a maturity of 12 months
or less and maintains a Dollar-weighted average portfolio maturity of 90 days or
less. In addition, the Fund limits its portfolio investments to securities that
meet the quality and diversification requirements of Rule 2a-7. See "Investment
Objectives, Policies and Risk Factors--Cash Reserves Fund."
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of each Fund (other than the
Cash Reserves Fund), are sold to investors subject to an initial sales charge.
Class A shares of the Cash Reserves Fund exchanged into Class A shares of
another Kemper Mutual Fund are subject to the applicable sales charge of the
Kemper Mutual Fund at the time of the exchange. Class B shares are sold without
an initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of each Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. See,
also, "Summary of Expenses." Each
40
<PAGE> 48
class has distinct advantages and disadvantages for different investors, and
investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
---------------------------------- ------------------------ ----------------------------------
<S> <C> <C> <C>
Class A* Maximum initial sales charge of None Initial sales charge waived or
4.5% of the public offering price reduced for certain purchases
(3.5% for the Adjustable Rate and
Short-Intermediate Government
Funds)
Class B Maximum contingent deferred sales 0.75% Shares convert to Class A shares
charge of 4% of redemption six years after issuance
proceeds; declines to zero after
six years
Class C Contingent deferred sales charge 0.75% No conversion feature
of 1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
- ---------------
* No initial sales charge applies to purchases of Class A shares of the Cash
Reserves Fund, but the applicable sales charge applies for exchanges into
Class A shares of other Kemper Mutual Funds.
The minimum initial investment for each Fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $250 and the minimum subsequent investment is $50. Under
an automatic investment plan, such as Bank Direct Deposit, Payroll Direct
Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion. In order to begin accruing income dividends as soon as
possible, purchasers may wire payment to the Fund's custodian, Investors
Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri 64105.
The Cash Reserves Fund seeks to be as fully invested as possible at all times in
order to achieve maximum income. Since the Fund will be investing in instruments
which normally require immediate payment in Federal Funds (monies credited to a
bank's account with its regional Federal Reserve Bank), the Fund has adopted
certain procedures for the convenience of its shareholders and to ensure that
the Fund receives investable funds. (a) WIRE TRANSFER. Orders received by wire
transfer in the form of Federal Funds will be effected at the next determined
net asset value after receipt by the Fund's Shareholder Service Agent and such
shares will receive the dividend for the next calendar day following the day
when the purchase is effective. If payment is wired in Federal Funds, the
payment should be wired to Investors Fiduciary Trust Company, 127 West 10th
Street, Kansas City, Missouri 64105, the custodian for the Fund. If payment is
to be wired, the firm which services the account should handle the details of
the transaction. (b) CHECK. Orders for purchase accompanied by a check or other
negotiable bank draft will be accepted and effected as of the close of the
Exchange on the business day following receipt and such shares will receive the
dividend for the next calendar day following the day when the purchase is
effective. (c) DEALER TRADES. Orders processed through dealers or other
financial services firms, including trades via Fund/SERV, will be effected at
the net asset value effective on the trade date. These purchases will begin
earning dividends the calendar day following the payment date. See "Dividends
and Taxes" for more information.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
41
<PAGE> 49
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES. The public offering price of
Class A shares for purchasers of the Adjustable Rate and Short-Intermediate
Government Funds choosing the initial sales charge alternative is the net asset
value plus a sales charge, as set forth below.
ADJUSTABLE RATE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS
<TABLE>
<CAPTION>
Sales Charge
----------------------------------
Allowed
to
As a Dealers
As a Percentage as a
Percentage of Percentage
of Net of
Offering Asset Offering
Amount of Purchase Price Value* Price
---- ---- ----
<S> <C> <C> <C>
Less than $100,000......................................... 3.50% 3.63% 3.00%
$100,000 but less than $250,000............................ 3.00 3.09 2.50
$250,000 but less than $500,000............................ 2.50 2.56 2.25
$500,000 but less than $1 million.......................... 2.00 2.04 1.75
$1 million and over........................................ .00** .00** ***
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
*** Commission is payable by KDI as discussed below.
The public offering price of Class A shares for purchasers of the Diversified,
Government, High Yield, Income and Capital and Mortgage Funds choosing the
initial sales charge alternative is the net asset value plus a sales charge, as
set forth below.
DIVERSIFIED, GOVERNMENT, HIGH YIELD, INCOME AND CAPITAL AND MORTGAGE FUNDS
<TABLE>
<CAPTION>
Sales Charge
----------------------------------
Allowed
to
As a Dealers
As a Percentage as a
Percentage of Percentage
of Net of
Offering Asset Offering
Amount of Purchase Price Value* Price
---- ---- ----
<S> <C> <C> <C>
Less than $100,000......................................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000............................ 3.50 3.63 3.00
$250,000 but less than $500,000............................ 2.60 2.67 2.25
$500,000 but less than $1 million.......................... 2.00 2.04 1.75
$1 million and over........................................ .00** .00** ***
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
*** Commission is payable by KDI as discussed below.
Each Fund receives the entire net asset value of all its Class A shares sold.
KDI, the Funds' principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow up to the full applicable sales charge, as
shown in the above table, during periods and for transactions specified in such
notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of a Fund may be purchased at net asset value to the extent that
the amount invested represents the net proceeds from a redemption of shares of a
mutual fund for which ZKI or an affiliate does not serve as investment manager
("non-Kemper Fund") provided that: (a) the investor has previously paid either
an initial sales charge in connection with the purchase of the non-Kemper Fund
shares redeemed or a contingent deferred sales charge in connection with the
redemption of the non-Kemper Fund shares, and (b) the purchase of Fund shares is
made within 90 days after the date of such redemption. To make such a purchase
at net asset value, the investor or the investor's dealer must, at the time of
purchase, submit a request that the purchase be processed at net asset value
pursuant to this privilege. KDI may in its discretion compensate firms for sales
of Class A shares
42
<PAGE> 50
under this privilege at a commission rate of .50% of the amount of Class A
shares purchased. The redemption of the shares of the non-Kemper fund is, for
federal income tax purposes, a sale upon which a gain or loss may be realized.
Class A shares of a Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in such Fund or other Kemper Mutual
Funds listed under "Special Features--Class A Shares--Combined Purchases" totals
at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features;" or (b) a participant-directed qualified
retirement plan described in Code Section 401(a) or a participant-directed
non-qualified deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 200 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of shares purchased under
the Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of a Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, .50% on the next $45 million and .25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount recordkeeping system made available
through Kemper Service Company. For purposes of determining the appropriate
commission percentage to be applied to a particular sale, KDI will consider the
cumulative amount invested by the purchaser in a Fund and other Kemper Mutual
Funds listed under "Special Features--Class A Shares--Combined Purchases,"
including purchases pursuant to the "Combined Purchases," "Letter of Intent" and
"Cumulative Discount" features referred to above. The privilege of purchasing
Class A shares of a Fund at net asset value under the Large Order NAV Purchase
Privilege is not available if another net asset value purchase privilege also
applies (including the purchase of Class A shares of the Cash Reserves Fund).
Effective on February 1, 1996, Class A shares of a Fund or any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be purchased at net asset value in any amount by members of the plaintiff
class in the proceeding known as HOWARD AND AUDREY TABANKIN, ET AL. V. KEMPER
SHORT-TERM GLOBAL INCOME FUND, ET AL., Case No. 93 C 5231 (N.D. IL). This
privilege is generally non-transferrable and continues for the lifetime of
individual class members and for a ten year period for non-individual class
members. To make a purchase at net asset value under this privilege, the
investor must, at the time of purchase, submit a written request that the
purchase be processed at net asset value pursuant to this privilege specifically
identifying the purchaser as a member of the "Tabankin Class." Shares purchased
under this privilege will be maintained in a separate account that includes only
shares purchased under this privilege. For more details concerning this
privilege, class members should refer to the Notice of (1) Proposed Settlement
with Defendants; and (2) Hearing to Determine Fairness of Proposed Settlement,
dated August 31, 1995, issued in connection with the aforementioned court
proceeding. For sales of Fund shares at net asset value pursuant to this
privilege, KDI may at its discretion pay investment dealers and other financial
services firms a concession, payable quarterly, at an annual rate of up to .25%
of net assets attributable to such shares maintained and serviced by the firm. A
firm becomes eligible for the concession based upon assets in accounts
attributable to shares purchased under this privilege in the month after the
month of purchase and the concession continues until terminated by KDI. The
privilege of purchasing Class A shares of a Fund at net asset value under this
privilege is not available if another net asset value purchase privilege also
applies (including the purchase of Class A shares of the Cash Reserves Fund).
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
a Fund, its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and
43
<PAGE> 51
employees of broker-dealers having selling group agreements with KDI and
officers, directors and employees of service agents of the Funds, for themselves
or their spouses or dependent children; (c) shareholders who owned shares of
Kemper-Dreman Fund, Inc. ("KDF") on September 8, 1995, and have continuously
owned shares of KDF (or a Kemper Fund acquired by exchange of KDF shares) since
that date, for themselves or members of their families, and (d) any trust or
pension, profit-sharing or other benefit plan for only such persons. Class A
shares may be sold at net asset value in any amount to selected employees
(including their spouses and dependent children) of banks and other financial
services firms that provide administrative services related to order placement
and payment to facilitate transactions in shares of the Funds for their clients
pursuant to an agreement with KDI or one of its affiliates. Only those employees
of such banks and other firms who as part of their usual duties provide services
related to transactions in Fund Class A shares may purchase Fund shares at net
asset value hereunder. Class A shares may be sold at net asset value in any
amount to unit investment trusts sponsored by Ranson & Associates, Inc. In
addition, unitholders of unit investment trusts sponsored by Ranson &
Associates, Inc. or its predecessors may purchase a Fund's Class A shares at net
asset value through reinvestment programs described in the prospectuses of such
trusts that have such programs. Class A shares of a Fund may be sold at net
asset value through certain investment advisers registered under the Investment
Advisers Act of 1940 and other financial services firms that adhere to certain
standards established by KDI, including a requirement that such shares be sold
for the benefit of their clients participating in an investment advisory program
under which such clients pay a fee to the investment adviser or other firm for
portfolio management and other services. Such shares are sold for investment
purposes and on the condition that they will not be resold except through
redemption or repurchase by the Funds. The Funds may also issue Class A shares
at net asset value in connection with the acquisition of the assets of or merger
or consolidation with another investment company, or to shareholders in
connection with the investment or reinvestment of income and capital gain
dividends.
Class A shares of a Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of .50% of the
amount of Class A shares purchased.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge-- Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of a Fund will automatically convert to Class A shares of the
same Fund six years after issuance on the basis of the relative net asset value
per share. Class B shareholders of the Funds who originally acquired their
shares as Initial Shares of Kemper Portfolios, formerly known as Kemper
Investment Portfolios ("KIP"), hold them subject to the same conversion period
schedule as that of their KIP Portfolio. Class B shares originally
44
<PAGE> 52
representing Initial Shares of a KIP Portfolio will automatically convert to
Class A shares of the applicable Fund six years after issuance of the Initial
Shares for shares issued on or after February 1, 1991 and seven years after
issuance of the Initial Shares for shares issued before February 1, 1991. The
purpose of the conversion feature is to relieve holders of Class B shares from
the distribution services fee when they have been outstanding long enough for
KDI to have been compensated for distribution related expenses. For purposes of
conversion to Class A shares, shares purchased through the reinvestment of
dividends and other distributions paid with respect to Class B shares in a
shareholder's Fund account will be converted to Class A shares on a pro rata
basis.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of a
Fund is the next determined net asset value. No initial sales charge is imposed.
Since Class C shares are sold without an initial sales charge, the full amount
of the investor's purchase payment will be invested in Class C shares for his or
her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
C Shares." KDI currently advances to firms the first year distribution fee at a
rate of .75% of the purchase price of such shares. For periods after the first
year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of .75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
WHICH ARRANGEMENT IS BETTER FOR YOU? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment, and for the
Cash Reserves Fund, the other Kemper Mutual Fund into which the investor may
wish to exchange in the future. Investors making investments that qualify for
reduced sales charges might consider Class A shares. Investors who prefer not to
pay an initial sales charge and who plan to hold their investment for more than
six years might consider Class B shares. Investors who prefer not to pay an
initial sales charge but who plan to redeem their shares within six years might
consider Class C shares. Orders for Class B shares or Class C shares for
$500,000 or more will be declined. Orders for Class B shares or Class C shares
by employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent will be invested
instead in Class A shares at net asset value where the combined subaccount value
in a Fund or other Kemper Mutual Funds listed under "Special Features--Class A
Shares--Combined Purchases" is in excess of $5 million including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features described under "Special Features." For more information
about the three sales arrangements, consult your financial representative or the
Shareholder Service Agent. Financial services firms may receive different
compensation depending upon which class of shares they sell.
GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Fund for their clients, and KDI may pay them a transaction fee up to
the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. KDI does not believe that termination of a
relationship with a bank would result in any material adverse consequences to a
Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of a Fund sold by the firm under the following conditions: (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct "roll over" of a distribution from a qualified retirement plan
account maintained on a participant subaccount record keeping system provided by
Kemper Service Company, (iii) the registered representative placing the trade is
a member of ProStar, a group of persons designated by KDI in acknowledgement of
their dedication to the employee benefit plan area and (iv) the purchase is not
otherwise subject to a commission.
45
<PAGE> 53
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell shares
of the Funds. Non-cash compensation includes luxury merchandise and trips to
luxury resorts. In some instances, such discounts, commissions or other
incentives will be offered only to certain firms that sell or are expected to
sell during specified time periods certain minimum amounts of shares of the
Funds or other funds underwritten by KDI.
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day ("trade
date"). The Funds reserve the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly. Collection may take
significantly longer for a check drawn on a foreign bank than for a check drawn
on a domestic bank. Therefore, if an order is accompanied by a check drawn on a
foreign bank, funds must normally be collected before shares will be purchased.
See "Purchase and Redemption of Shares" in the Statement of Additional
Information.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Funds' shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Funds' shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Funds' transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Funds through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Funds through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
The Funds reserve the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders. Also, from time to time, each
Fund may temporarily suspend the offering of any class of its shares to new
investors. During the period of such suspension, persons who are already
shareholders of such class of the Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require a Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Funds' transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. When certificates for shares have been
issued, they must be mailed to or deposited with the Shareholder Service Agent,
along with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank,
46
<PAGE> 54
member firm of a national securities exchange or other eligible financial
institution. The redemption request and stock power must be signed exactly as
the account is registered including any special capacity of the registered
owner. Additional documentation may be requested, and a signature guarantee is
normally required, from institutional and fiduciary account holders, such as
corporations, custodians (e.g., under the Uniform Transfers to Minors Act),
executors, administrators, trustees or guardians.
The redemption price for shares of a Fund will be the net asset value per share
of that Fund next determined following receipt by the Shareholder Service Agent
of a properly executed request with any required documents as described above.
Payment for shares redeemed will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request
accompanied by any outstanding share certificates in proper form for transfer.
When a Fund is asked to redeem shares for which it may not have yet received
good payment (i.e., purchases by check, EXPRESS-Transfer or Bank Direct
Deposit), it may delay transmittal of redemption proceeds until it has
determined that collected funds have been received for the purchase of such
shares, which will be up to 10 days from receipt by a Fund of the purchase
amount. The redemption within two years of Class A shares purchased at net asset
value under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"), the redemption of Class B shares within six years
may be subject to a contingent deferred sales charge (see "Contingent Deferred
Sales Charge--Class B Shares" below), and the redemption of Class C shares
within the first year following purchase may be subject to a contingent deferred
sales charge (see "Contingent Deferred Sales Charge--Class C Shares" below).
Because of the high cost of maintaining small accounts, the Funds reserve the
right to redeem an account (and, in the case of Class B shares, impose any
applicable contingent deferred sales charge) that falls below the minimum
investment level, currently $1,000, as a result of redemptions. Currently,
Individual Retirement Accounts and employee benefit plan accounts are not
subject to this procedure. A shareholder will be notified in writing and will be
allowed 60 days to make additional purchases to bring the account value up to
the minimum investment level before a Fund redeems the shareholder's account.
The investment required to reach that level may be made at net asset value
(without any initial sales charge in the case of Class A shares).
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. A Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The SHAREHOLDER WILL BEAR THE RISK OF LOSS,
including loss resulting from fraudulent or unauthorized transactions, as long
as the reasonable verification procedures are followed. The verification
procedures include recording instructions, requiring certain identifying
information before acting upon instructions and sending written confirmations.
TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by
47
<PAGE> 55
written instruction to the Shareholder Service Agent with signatures guaranteed.
Telephone requests may be made by calling 1-800-621-1048. Shares purchased by
check or through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed
under this privilege of redeeming shares by telephone request until such shares
have been owned for at least 10 days. This privilege of redeeming shares by
telephone request or by written request without a signature guarantee may not be
used to redeem shares held in certificated form and may not be used if the
shareholder's account has had an address change within 30 days of the redemption
request. During periods when it is difficult to contact the Shareholder Service
Agent by telephone, it may be difficult to use the telephone redemption
privilege, although investors can still redeem by mail. The Funds reserve the
right to terminate or modify this privilege at any time.
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which each Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of a Fund can be redeemed and proceeds sent by federal wire
transfer to a single previously designated account. Requests received by the
Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value of the Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption request of $250,000 or more may be delayed by the Fund for up to
seven days if ZKI deems it appropriate under then current market conditions.
Once authorization is on file, the Shareholder Service Agent will honor requests
by telephone at 1-800-621-1048 or in writing, subject to the limitations on
liability described under "General" above. The Funds are not responsible for the
efficiency of the federal wire system or the account holder's financial services
firm or bank. The Funds currently do not charge the account holder for wire
transfers. The account holder is responsible for any charges imposed by the
account holder's firm or bank. There is a $1,000 wire redemption minimum
(including any contingent deferred sales charge). To change the designated
account to receive wire redemption proceeds, send a written request to the
Shareholder Service Agent with signatures guaranteed as described above or
contact the firm through which shares of the Fund were purchased. Shares
purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may not be
redeemed by wire transfer until such shares have been owned for at least 10
days. Account holders may not use this privilege to redeem shares held in
certificated form. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the expedited
redemption privilege. The Funds reserve the right to terminate or modify this
privilege at any time.
CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and .50% if they
are redeemed during the second year following purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a) or a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase
48
<PAGE> 56
of the shares being redeemed becomes totally disabled (as evidenced by a
determination by the federal Social Security Administration); (e) redemptions
under a Fund's Systematic Withdrawal Plan at a maximum of 10% per year of the
net asset value of the account; and (f) redemptions of shares whose dealer of
record at the time of the investment notifies KDI that the dealer waives the
commission applicable to such Large Order NAV Purchase.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED
AFTER SALES
PURCHASE CHARGE
- ---------- ----------
<S> <C>
First..................................................................... 4%
Second.................................................................... 3%
Third..................................................................... 3%
Fourth.................................................................... 2%
Fifth..................................................................... 2%
Sixth..................................................................... 1%
</TABLE>
Class B shareholders who originally acquired their shares as Initial Shares of
Kemper Portfolios, formerly known as Kemper Investment Portfolios, hold them
subject to the same CDSC schedule that applied when those shares were purchased,
as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEAR OF ---------------------------------------------------------------------------------------
REDEMPTION SHARES PURCHASED ON OR AFTER
AFTER SHARES PURCHASED ON OR AFTER FEBRUARY 1, 1991 AND BEFORE SHARES PURCHASED BEFORE
PURCHASE MARCH 1, 1993 MARCH 1, 1993 FEBRUARY 1, 1991
------------------------ ---------------------------- ---------------------------- -----------------------
<S> <C> <C> <C>
First................... 4% 3% 5%
Second.................. 3% 3% 4%
Third................... 3% 2% 3%
Fourth.................. 2% 2% 2%
Fifth................... 2% 1% 2%
Sixth................... 1% 1% 1%
</TABLE>
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below) and (d) for redemptions made
pursuant to any IRA systematic withdrawal based on the shareholder's life
expectancy including, but not limited to, substantially equal periodic payments
described in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2;
and (e) for redemptions to satisfy required minimum distributions after age
70 1/2 from an IRA account (with the maximum amount subject to this waiver being
based only upon the shareholder's Kemper IRA accounts). The contingent deferred
sales charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to 10% of the total value of
plan assets invested in a Fund), (c) redemptions in connection with
distributions qualifying under the hardship provisions of the Internal Revenue
Code and (d) redemptions representing returns of excess contributions to such
plans.
49
<PAGE> 57
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features--Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts) and (f) for any participant-directed
redemption of shares held by employer sponsored employee benefit plans
maintained on the subaccount record keeping system made available by the
Shareholder Service Agent.
CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of a Fund's Class B shares and that 16 months
later the value of the shares has grown by $1,000 through reinvested dividends
and by an additional $1,000 in appreciation to a total of $12,000. If the
investor were then to redeem the entire $12,000 in share value, the contingent
deferred sales charge would be payable only with respect to $10,000 because
neither the $1,000 of reinvested dividends nor the $1,000 of share appreciation
is subject to the charge. The charge would be at the rate of 3% ($300) because
it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 1996 will be eligible for the second year's charge if redeemed on or
after December 1, 1997. In the event no specific order is requested, the
redemption will be made first from shares representing reinvested dividends and
then from the earliest purchase of shares. KDI receives any contingent deferred
sales charge directly.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of a Fund
(other than shares of the Cash Reserves Fund purchased directly at net asset
value) or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" may reinvest up to the full amount redeemed at net
asset value at the time of the reinvestment in Class A shares of a Fund or of
the other listed Kemper Mutual Funds. A shareholder of a Fund or other Kemper
Mutual Fund who redeems Class A shares purchased under the Large Order NAV
Purchase Privilege (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares") or Class B shares or Class C shares and incurs a
contingent deferred sales charge may reinvest up to the full amount redeemed at
net asset value at the time of the reinvestment in Class A shares, Class B
shares or Class C shares, as the case may be, of a Fund or of other Kemper
Mutual Funds. The amount of any contingent deferred sales charge also will be
reinvested. These reinvested shares will retain their original cost and purchase
date for purposes of the contingent deferred sales charge. Also, a holder of
Class B shares who has redeemed shares may reinvest up to the full amount
redeemed, less any applicable contingent deferred sales charge that may have
been imposed upon the redemption of such shares, at net asset value in Class A
shares of a Fund or of the other Kemper Mutual Funds listed under "Special
Features--Class A Shares--Combined Purchases." Purchases through the
reinvestment privilege are subject to the minimum investment requirements
applicable to the shares being purchased and may only be made for Kemper Mutual
Funds available for sale in the shareholder's state of residence as listed under
"Special Features--Exchange Privilege." The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the redemption. If a loss is realized on the redemption of a Funds'
shares, the reinvestment in the same Fund may be subject to the "wash sale"
rules if made within 30 days of the redemption, resulting in a postponement of
the recognition of such loss for federal income tax purposes. The reinvestment
privilege may be terminated or modified at any time.
50
<PAGE> 58
SPECIAL FEATURES
CLASS A SHARES -- COMBINED PURCHASES. Each Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Diversified Income Fund,
Kemper High Yield Fund, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Adjustable Rate
U.S. Government Fund, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper
Target Equity Fund (series are subject to a limited offering period), Kemper
Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund, Kemper U.S.
Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper-Dreman Fund,
Inc., Kemper Value+Growth Fund, Kemper Quantitative Equity Fund, Kemper Horizon
Fund, Kemper Europe Fund and Kemper Asian Growth Fund ("Kemper Mutual Funds").
Except as noted below, there is no combined purchase credit for direct purchases
of shares of Kemper Money Funds, Cash Equivalent Fund, Tax-Exempt California
Money Market Fund, Cash Account Trust, Tax-Exempt New York Money Market Fund or
Investors Cash Trust ("Money Market Funds"), which are not considered "Kemper
Mutual Funds" for purposes hereof. For purposes of the Combined Purchases
feature described above as well as for the Letter of Intent and Cumulative
Discount features described below, employer sponsored employee benefit plans
using the subaccount record keeping system made available through the
Shareholder Service Agent may include: (a) Money Market Funds as "Kemper Mutual
Funds," (b) all classes of shares of any Kemper Mutual Fund, and (c) the value
of any other plan investments, such as guaranteed investment contracts and
employer stock, maintained on such subaccount record keeping system.
CLASS A SHARES -- LETTER OF INTENT. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation credit" toward the completion of the Letter, but
no price adjustment will be made on such shares. Only investments in Class A
shares of a Fund are included for this privilege.
CLASS A SHARES -- CUMULATIVE DISCOUNT. Class A shares of a Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a Fund being purchased, the value of all Class A shares of
the above mentioned Kemper Mutual Funds (computed at the maximum offering price
at the time of the purchase for which the discount is applicable) already owned
by the investor.
CLASS A SHARES -- AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.
51
<PAGE> 59
CLASS A SHARES. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Tax-Exempt New York
Money Market Fund and Investors Cash Trust are available on exchange but only
through a financial services firm having a services agreement with KDI.
Class A shares of a Fund purchased under the Large Order NAV Purchase Privilege
may be exchanged for Class A shares of another Kemper Mutual Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of the contingent deferred sales charge.
CLASS B SHARES. Class B shares of a Fund and Class B shares of any other Kemper
Mutual Fund listed under "Special Features --Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class B
shares may be exchanged without any contingent deferred sales charge being
imposed at the time of exchange. For purposes of the contingent deferred sales
charge that may be imposed upon the redemption of the Class B shares received on
exchange, amounts exchanged retain their original cost and purchase date.
CLASS C SHARES. Class C shares of a Fund and Class C shares of any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class C
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For determining whether there is a contingent deferred
sales charge that may be imposed upon the redemption of the Class C shares
received by exchange, they retain the cost and purchase date of the shares that
were originally purchased and exchanged.
GENERAL. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15 Day Hold Policy"). For purposes of
determining whether the 15 Day Hold Policy applies to a particular exchange, the
value of the shares to be exchanged shall be computed by aggregating the value
of shares being exchanged for all accounts under common control, direction, or
advice, including without limitation, accounts administered by a financial
services firm offering market timing, asset allocation or similar services. The
total value of shares being exchanged must at least equal the minimum investment
requirement of the Kemper Fund into which they are being exchanged. Exchanges
are made based on relative dollar values of the shares involved in the exchange.
There is no service fee for an exchange; however, dealers or other firms may
charge for their services in effecting exchange transactions. Exchanges will be
effected by redemption of shares of the fund held and purchase of shares of the
other fund. For federal income tax purposes, any such exchange constitutes a
sale upon which a gain or loss may be realized, depending upon whether the value
of the shares being exchanged is more or less than the shareholder's adjusted
cost basis of such shares. Shareholders interested in exercising the exchange
privilege may obtain prospectuses of the other funds from dealers, other firms
or KDI. Exchanges may be accomplished by a written request to Kemper Service
Company, Attention: Exchange Department, P.O. Box 419557, Kansas City, Missouri
64141-6557, or by telephone if the shareholder has given authorization. Once the
authorization is on file, the Shareholder Service Agent will honor requests by
telephone at 1-800-621-1048, subject to the limitations on liability under
"Redemption or Repurchase of Shares -- General." Any share certificates must be
deposited prior to any exchange of such shares. During periods when it is
difficult to contact the Shareholder Service Agent by telephone, it may be
difficult to use the telephone exchange privilege. The exchange privilege is not
a right and may be suspended, terminated or modified at any time. Except as
otherwise permitted by applicable regulations, 60 days' prior written notice of
any termination or material change will be provided. Exchanges may only be made
for
52
<PAGE> 60
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 Tax-Exempt New York Money Market Fund is available for sale only
in New York, Connecticut, New Jersey and Pennsylvania.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the other
Kemper Fund. Exchanges are subject to the terms and conditions described above
under "Exchange Privilege" except that the $1,000 minimum investment requirement
for the Kemper Fund acquired on exchange is not applicable. This privilege may
not be used for the exchange of shares held in certificated form.
EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in a Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from ANY PERSON to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048 Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable time to act upon the request.
EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
BANK DIRECT DEPOSIT. A shareholder may purchase additional shares of a Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, investments are made automatically (minimum $50 maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder
authorizes the Fund and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to Kemper Service Company, P.O. Box 419415, Kansas
City, Missouri 64141-6415. Termination by a shareholder will become effective
within thirty days after the Shareholder Service Agent has received the request.
A Fund may immediately terminate a shareholder's Plan in the event that any item
is unpaid by the shareholder's financial institution. The Funds may terminate or
modify this privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in a Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in a Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) A Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of a Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount up to $50,000 to be paid to the owner or
a designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to Individual Retirement Accounts. The
minimum periodic payment is $100. The maximum annual rate at which Class B
shares may be redeemed (and Class A shares purchased under the Large Order NAV
Purchase Privilege and Class C
53
<PAGE> 61
shares in their first year following the purchase) under a systematic withdrawal
plan is 10% of the net asset value of the account. Shares are redeemed so that
the payee will receive payment approximately the first of the month. Any income
and capital gain dividends will be automatically reinvested at net asset value.
A sufficient number of full and fractional shares will be redeemed to make the
designated payment. Depending upon the size of the payments requested and
fluctuations in the net asset value of the shares redeemed, redemptions for the
purpose of making such payments may reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, a Fund will not knowingly permit additional investments of less
than $2,000 if the investor is at the same time making systematic withdrawals.
KDI will waive the contingent deferred sales charge on redemptions of Class A
shares purchased under the Large Order NAV Purchase Privilege, Class B shares
and Class C shares made pursuant to a systematic withdrawal plan. The right is
reserved to amend the systematic withdrawal plan on 30 days' notice. The plan
may be terminated at any time by the investor or the Funds.
TAX-SHELTERED RETIREMENT PLANS. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
- - Individual Retirement Accounts ("IRAs") with IFTC as custodian. This includes
Simplified Employee Pension Plan ("SEP") IRA accounts and prototype documents.
- - 403(b)(7) Custodial Accounts also with IFTC as custodian. This type of plan is
available to employees of most non-profit organizations.
- - Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans and materials for establishing
them are available from the Shareholder Service Agent upon request. The
brochures for plans with IFTC as custodian describe the current fees payable to
IFTC for its services as custodian. Investors should consult with their own tax
advisers before establishing a retirement plan.
PERFORMANCE
A Fund may advertise several types of performance information for a class of
shares, including "yield" and, for each Fund except the Cash Reserves Fund,
"average annual total return" and "total return." The Cash Reserves Fund also
may advertise its "effective yield." Performance information will be computed
separately for Class A, Class B and Class C shares. Each of these figures is
based upon historical results and is not representative of the future
performance of any class of a Fund. A Fund with fees or expenses being waived or
absorbed by ZKI may also advertise performance information before and after the
effect of the fee waiver or expense absorption.
A Fund's yield is a measure of the net investment income per share earned over a
specific one month or 30-day period (seven-day period for the Cash Reserves
Fund) expressed as a percentage of the maximum offering price of the Fund's
shares at the end of the period. Yield is an annualized figure, which means that
it is assumed that a Fund generates the same level of net investment income over
a one year period. The effective yield for the Cash Reserves Fund is calculated
similarly, but the net investment income earned is assumed to be compounded when
annualized. The Cash Reserves Fund's effective yield will be slightly higher
than its yield due to this compounding. Net investment income is assumed to be
compounded semiannually when it is annualized for Funds other than the Cash
Reserves Fund.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in a Fund
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter (or
if such periods have
54
<PAGE> 62
not yet elapsed, at the end of a shorter period corresponding to the life of the
Fund for performance purposes). Average annual total return figures represent
the average annual percentage change over the period in question. Total return
figures represent the aggregate percentage or dollar value change over the
period in question.
A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged bond indexes including, but not limited to, the Salomon
Brothers High Grade Corporate Bond Index, the Lehman Brothers Adjustable Rate
Index, the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Government/
Corporate Bond Index, the Salomon Brothers Long-Term High Yield Index, the
Salomon Brothers 30 Year GNMA Index and the Merrill Lynch Market Weighted Index
and may also be compared to the performance of other mutual funds or mutual fund
indexes with similar objectives and policies as reported by independent mutual
fund reporting services such as Lipper Analytical Services, Inc. ("Lipper").
Lipper performance calculations are based upon changes in net asset value with
all dividends reinvested and do not include the effect of any sales charges.
Information may be quoted from publications such as MORNINGSTAR, INC., THE WALL
STREET JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE,
USA TODAY, INSTITUTIONAL INVESTOR and REGISTERED REPRESENTATIVE. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit and other bank products, money market
funds and U.S. Treasury obligations. Bank product performance may be based upon,
among other things, the BANK RATE MONITOR National Index(TM) or various
certificate of deposit indexes. Money market fund performance may be based upon,
among other things, the IBC/Donoghue's Money Fund Report(R) or Money Market
Insight(R), reporting services on money market funds. Performance of U.S.
Treasury obligations may be based upon, among other things, various U.S.
Treasury bill indexes. Certain of these alternative investments may offer fixed
rates of return and guaranteed principal and may be insured. Economic indicators
may include, without limitation, indicators of market rate trends and cost of
funds, such as Federal Home Loan Bank Board 11th District Cost of Funds Index
("COFI").
A Fund may depict the historical performance of the securities in which the Fund
may invest over periods reflecting a variety of market or economic conditions
either alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A Fund may also describe its
portfolio holdings and depict its size or relative size compared to other mutual
funds, the number and make-up of its shareholder base and other descriptive
factors concerning the Fund.
The yield or price volatility of a Fund (particularly the Adjustable Rate Fund)
may be compared to various securities, such as U.S. Government Securities, or
indexes, such as the COFI referred to above or the Constant Maturity Treasury
Index ("CMT") published by the Federal Reserve Board. A Fund may include in its
sales literature and shareholder reports a quotation of the current
"distribution rate" for the Fund. Distribution rate is simply a measure of the
level of dividends distributed for a specified period. It differs from yield,
which is a measure of the income actually earned by the Fund's investments, and
from total return, which is a measure of the income actually earned by, plus the
effect of any realized and unrealized appreciation or depreciation of, such
investments during the period. Distribution rate is, therefore, not intended to
be a complete measure of performance. Distribution rate may sometimes be greater
than yield since, for instance, it may include gains from the sale of options or
other short-term and possibly long-term gains (which may be non-recurring) and
may not include the effect of amortization of bond premiums. As reflected under
"Investment Objectives, Policies and Risk Factors--Additional Investment
Information," option writing can limit the potential for capital appreciation.
Class A shares of each Fund other than the Cash Reserves Fund are sold at net
asset value plus a maximum sales charge of 4.5% of the offering price (3.5% for
the Adjustable Rate and Short-Intermediate Government Funds). While the maximum
sales charge is normally reflected in a Fund's Class A performance figures,
certain total return calculations may not include such charge and those results
would be reduced if it were included. Class B shares and Class C shares are sold
at net asset value. Redemptions of Class B shares within the first six years
after purchase may be subject to a contingent deferred sales charge that ranges
from 4% during the first year to 0% after six years. Redemption of Class C
shares within the first year after purchase may be subject to a 1% contingent
55
<PAGE> 63
deferred sales charge. Average annual total return figures do, and total return
figures may, include the effect of the contingent deferred sales charge for the
Class B shares and Class C shares that may be imposed at the end of the period
in question. Performance figures for the Class B shares and Class C shares not
including the effect of the applicable contingent deferred sales charge would be
reduced if it were included.
Each Fund's returns and net asset value will fluctuate and shares of a Fund are
redeemable by an investor at the then current net asset value, which may be more
or less than original cost, except that the Cash Reserves Fund seeks to maintain
a net asset value of $1.00 per share. Redemption of Class B shares and Class C
shares may be subject to a contingent deferred sales charge as described above.
Additional information concerning each Fund's performance appears in the
Statement of Additional Information. Additional information about each Fund's
performance also appears in its Annual Report to Shareholders, which is
available without charge from the applicable Fund.
CAPITAL STRUCTURE
The Adjustable Rate, Diversified, Government, High Yield and Income and Capital
Funds are open-end management investment companies, organized as separate
business trusts under the laws of Massachusetts. The Adjustable Rate Fund was
organized as a business trust under the laws of Massachusetts on May 28, 1987.
Prior to January 1, 1992, the Fund was known as "Kemper Enhanced Government
Income Fund." The Diversified Fund was organized as a business trust under the
laws of Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
Option Income Fund, Inc., a Maryland corporation organized in 1977. Prior to
February 1, 1989, the Fund was known as "Kemper Option Income Fund." The
Government Fund was organized as a business trust under the laws of
Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
U.S. Government Securities Fund, Inc., a Maryland corporation (formerly known as
Kemper Fund For Government Guaranteed Securities, Inc.) organized in 1980 as
successor to a Pennsylvania business trust organized in 1977. The High Yield
Fund was organized as a business trust under the laws of Massachusetts on
October 24, 1985. Effective January 31, 1986, that Fund pursuant to a
reorganization succeeded to the assets and liabilities of Kemper High Yield
Fund, Inc., a Maryland corporation organized in 1977. The Income and Capital
Fund was organized as a business trust under the laws of Massachusetts on
October 24, 1985. Effective January 31, 1986, that Fund pursuant to a
reorganization succeeded to the assets and liabilities of Kemper Income and
Capital Preservation Fund, Inc., a Maryland corporation organized in 1972. The
Cash Reserves, Mortgage and Short-Intermediate Government Funds are separate
series, or "Portfolios", of Kemper Portfolios ("KP"), an open-end management
investment company organized as a business trust under the laws of Massachusetts
on August 9, 1985. Effective November 20, 1987, KP pursuant to a reorganization
succeeded to the assets and liabilities of Investment Portfolios, Inc., a
Maryland corporation organized on March 26, 1982. After such reorganization, KP
was known as Investment Portfolios until February 1, 1991, and thereafter until
May 28, 1994, as Kemper Investment Portfolios, when the name of KP became
"Kemper Portfolios." Until December 1, 1989, the Mortgage Fund was known as the
"Government Plus Portfolio" and prior to May 28, 1994, the Mortgage Fund was
known as the "Government Portfolio." Prior to May 28, 1994, the Cash Reserves
Fund was known as the Money Market Portfolio, and the Short-Intermediate
Government Fund was known as the Short-Intermediate Government Portfolio.
Each Fund may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having no par value, which may be divided by
the Board of Trustees into classes of shares. While only shares of a single
Portfolio are presently being offered by each Fund (other than those Funds that
are Portfolios of Kemper Portfolios), the Board of Trustees of each Fund may
authorize the issuance of additional classes and additional Portfolios if deemed
desirable, each with its own investment objective, policies and restrictions.
Since the Funds may offer multiple Portfolios, each is known as a "series
company." Shares of a Portfolio have equal noncumulative voting rights and equal
rights with respect to dividends, assets and liquidation of such Portfolio and
are subject to any preferences, rights or privileges of any classes of shares of
the Portfolio. Currently, each Fund offers four classes of shares. These are
Class A, Class B and Class C shares, as well as Class I shares, which have
different expenses, which may affect performance, and that are available for
purchase exclusively by the
56
<PAGE> 64
following investors: (a) tax-exempt retirement plans of ZKI and its affiliates;
and (b) the following investment advisory clients of ZKI and its investment
advisory affiliates that invest at least $1 million in a Fund: (1) unaffiliated
benefit plans, such as qualified retirement plans (other than individual
retirement accounts and self-directed retirement plans); (2) unaffiliated banks
and insurance companies purchasing for their own accounts; and (3) endowment
funds of unaffiliated non-profit organizations. Shares of each Fund have equal
noncumulative voting rights except that Class B and Class C shares have separate
and exclusive voting rights with respect to each Fund's Rule 12b-1 Plan. Shares
of each class also have equal rights with respect to dividends, assets and
liquidation of such Fund subject to any preferences (such as resulting from
different Rule 12b-1 distribution fees), rights or privileges of any classes of
shares of a Fund. Shares of each Fund are fully paid and nonassessable when
issued, are transferable without restriction and have no preemptive or
conversion rights. The Funds are not required to hold annual shareholder
meetings and do not intend to do so. However, they will hold special meetings as
required or deemed desirable for such purposes as electing trustees, changing
fundamental policies or approving an investment management agreement. Subject to
the Agreement and Declaration of Trust of each Fund, shareholders may remove
trustees. If shares of more than one Portfolio for any Fund are outstanding,
shareholders will vote by Portfolio and not in the aggregate or by class except
when voting in the aggregate is required under the 1940 Act, such as for the
election of trustees, or when voting by class is appropriate.
57
<PAGE> 65
APPENDIX--PORTFOLIO COMPOSITION OF HIGH YIELD BONDS
The table below reflects the composition by quality rating of the portfolios of
the Diversified and High Yield Funds. Percentages for each Fund reflect the net
asset weighted average of the percentage for each category on the last day of
each month in the twelve month period ended October 31, 1996. The table reflects
the percentage of total net assets represented by fixed income securities rated
by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P"), by unrated fixed income securities and by other assets. The percentage
shown reflects the higher of the Moody's or S&P rating. U.S. Government
securities, whether or not rated, are reflected as Aaa and AAA (highest
quality). Cash equivalents include money market instruments, repurchase
agreements, net payables and receivables, treasuries with a maturity of less
than one year and cash. Other assets include options, financial futures
contracts and equity securities. As noted under "Investment Objectives, Policies
and Risk Factors" the Diversified and High Yield Funds invest in high yielding,
fixed income securities without relying upon published ratings. The allocations
in the table are not necessarily representative of the composition of the
portfolios at other times. Portfolio composition will change over time.
END OF THE MONTH COMPOSITION OF PORTFOLIO BY QUALITY AS AN AVERAGE PERCENTAGE OF
NET ASSETS (NOVEMBER 1, 1995-OCTOBER 31, 1996)
<TABLE>
<CAPTION>
HIGH
MOODY'S/S&P RATING DIVERSIFIED YIELD GENERAL DEFINITION OF
CATEGORY FUND FUND BOND QUALITY
- ------------------------------- ---- ---- -----------------------------
<S> <C> <C> <C>
Cash Equivalents............... (2)% 6%
Aaa/AAA........................ 48 1 Highest quality
Aa/AA.......................... 3 0 High quality
A/A............................ 2 0 Upper medium grade
Baa/BBB........................ 4 0 Medium grade
Ba/BB.......................... 14 21 Some speculative elements
B/B............................ 22 61 Speculative
Caa/CCC........................ 1 5 More speculative
Ca/CC, C/C..................... 0 0 Very speculative
D.............................. 0 0 In default
Not Rated...................... 7 3
Other Assets................... 1 2
---- ----
Net Assets..................... 100% 100%
</TABLE>
The description of each bond quality category set forth in the table above is
intended to be a general guide and not a definitive statement as to how Moody's
and S&P define such rating category. A more complete description of the rating
categories is set forth under "Appendix--Ratings of Investments" in the
Statement of Additional Information. The ratings of Moody's and S&P represent
their opinions as to the quality of the securities that they undertake to rate.
It should be emphasized, however, that ratings are relative and subjective and
are not absolute standards of quality.
58
<PAGE> 66
PROSPECTUS
KEMPER FIXED
INCOME FUNDS
DECEMBER 20, 1996
--------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND
KEMPER CASH RESERVES FUND
KEMPER DIVERSIFIED INCOME FUND
KEMPER U.S. GOVERNMENT
SECURITIES FUND
KEMPER HIGH YIELD FUND
KEMPER INCOME AND CAPITAL
PRESERVATION FUND
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE
GOVERNMENT FUND
--------------
KEMPER
[KEMPER LOGO]
[KEMPER LOGO] Kemper
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
KFIF-1 (12/95) [RECYCLED PAPER LOGO]
SRI 610112
<PAGE> 67
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
CROSS-REFERENCE SHEET
BETWEEN ITEMS ENUMERATED IN PART B
OF FORM N-1A AND STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
ITEM NUMBER LOCATION IN STATEMENT OF
OF FORM N-1A ADDITIONAL INFORMATION
- --------------------------------------------- ---------------------------------------------
<S> <C> <C>
10. Cover Page............................... Cover Page
11. Table of Contents........................ Table of Contents
12. General Information and History.......... Inapplicable
13. Investment Objectives and Policies....... Investment Restrictions; Investment Policies
and Techniques
14. Management of the Fund................... Investment Manager and Underwriter;
Officers and Trustees
15. Control Persons and Principal Holders of
Securities............................... Officers and Trustees
16. Investment Advisory and Other Services... Investment Manager and Underwriter
17. Brokerage Allocation and Other
Practices................................ Portfolio Transactions
18. Capital Stock and Other Securities....... Dividends and Taxes;
Shareholder Rights
19. Purchase, Redemption and Pricing of
Securities Being Offered................. Purchase and Redemption of Shares
20. Tax Status............................... Dividends and Taxes
21. Underwriters............................. Investment Manager and Underwriter
22. Calculation of Performance Data.......... Performance
23. Financial Statements..................... Financial Statements
</TABLE>
<PAGE> 68
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 20, 1996
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND (THE "ADJUSTABLE
RATE FUND")
KEMPER CASH RESERVES FUND (THE "CASH RESERVES FUND")
KEMPER DIVERSIFIED INCOME FUND (THE "DIVERSIFIED FUND")
KEMPER U.S. GOVERNMENT SECURITIES FUND (THE "GOVERNMENT FUND")
KEMPER HIGH YIELD FUND (THE "HIGH YIELD FUND")
KEMPER INCOME AND CAPITAL PRESERVATION FUND (THE "INCOME AND
CAPITAL FUND")
KEMPER U.S. MORTGAGE FUND (THE "MORTGAGE FUND")
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
(THE "SHORT-INTERMEDIATE GOVERNMENT FUND")
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the combined
Statement of Additional Information for each of the funds (the "Funds") listed
above. It should be read in conjunction with the combined prospectus of the
Funds dated December 20, 1996. The prospectus may be obtained without charge
from the Funds.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Investment Restrictions................................................. B-1
Investment Policies and Techniques...................................... B-12
Portfolio Transactions.................................................. B-20
Investment Manager and Underwriter...................................... B-22
Purchase and Redemption of Shares....................................... B-29
Dividends and Taxes..................................................... B-30
Performance............................................................. B-32
Officers and Trustees................................................... B-48
Shareholder Rights...................................................... B-53
Appendix--Rating of Investments......................................... B-54
</TABLE>
The financial statements appearing in each Fund's 1996 Annual Report to
Shareholders are incorporated herein by reference. The Annual Report for the
Fund for which this Statement of Additional Information is requested accompanies
this document.
KFIF-13 12/95 (LOGO)printed on recycled paper
<PAGE> 69
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental investment restrictions which,
together with the investment objective and fundamental policies of such Fund,
cannot be changed without approval of a majority of its outstanding voting
shares. As defined in the Investment Company Act of 1940, this means the lesser
of the vote of (a) 67% of the shares of the Fund present at a meeting where more
than 50% of the outstanding shares are present in person or by proxy or (b) more
than 50% of the outstanding shares of the Fund.
THE ADJUSTABLE RATE FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of the total value of the Fund's assets would be invested in
securities of that issuer.
(2) Purchase more than 10% of any class of voting securities of any issuer.
(3) Make loans to others provided that the Fund may purchase debt obligations or
repurchase agreements and it may lend its securities in accordance with its
investment objective and policies.
(4) Borrow money except as a temporary measure for extraordinary or emergency
purposes, and then only in an amount up to one-third of the value of its total
assets, in order to meet redemption requests without immediately selling any
portfolio securities. If, for any reason, the current value of the Fund's total
assets falls below an amount equal to three times the amount of its indebtedness
from money borrowed, the Fund will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary. The Fund will not
borrow for leverage purposes and will not purchase securities or make
investments while borrowings are outstanding.
(5) Pledge, hypothecate, mortgage or otherwise encumber more than 15% of its
total assets and then only to secure borrowings permitted by restriction 4
above. (The collateral arrangements with respect to options, financial futures
and delayed delivery transactions and any margin payments in connection
therewith are not deemed to be pledges or other encumbrances.)
(6) Purchase securities on margin, except to obtain such short-term credits as
may be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with options and financial futures transactions.
(7) Make short sales of securities or maintain a short position for the account
of the Fund unless at all times when a short position is open it owns an equal
amount of such securities or owns securities which, without payment of any
further consideration, are convertible into or exchangeable for securities of
the same issue as, and equal in amount to, the securities sold short and unless
not more than 10% of the Fund's total assets is held as collateral for such
sales at any one time.
(8) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may the Fund purchase put or call
options if more than 5% of the Fund's net assets would be invested in premiums
on put and call options, combinations thereof or similar options; however, the
Fund may buy or sell options on financial futures contracts.
(9) Purchase securities (other than securities of the U.S. Government, its
agencies or instrumentalities including collateralized obligations thereof) if
as a result of such purchase 25% or more of the Fund's total assets would be
invested in any one industry.
(10) Invest in commodities or commodity futures contracts, although it may buy
or sell financial futures contracts and options on such contracts; or in real
estate, although it may invest in securities which are secured by real estate
and securities of issuers which invest or deal in real estate.
B-1
<PAGE> 70
(11) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(12) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 4 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Fund has adopted the following non-fundamental restrictions, which may
be changed by the Board of Trustees without shareholder approval. The Adjustable
Rate Fund may not:
(i) Invest more than 5% of the Fund's total assets in securities of issuers
(other than obligations of, or guaranteed by, the U.S. Government, its agencies
or instrumentalities including collateralized obligations thereof) which with
their predecessors have a record of less than three years continuous operations.
(ii) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
(iii) Invest for the purpose of exercising control or management of another
issuer.
(iv) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
(v) Invest more than 15% of its net assets in illiquid securities.
(vi) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(vii) Invest in oil, gas, and other mineral leases.
(viii) Purchase or sell real property (including limited partnership interests
but excluding readily marketable interests in real estate investment trusts and
readily marketable securities of companies which invest in real estate).
(ix) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in restricted securities and securities of issuers which
with their predecessors have a record of less than three years continuous
operation will not exceed 15% of total assets.
(x) Invest more than 10% of its total assets in securities of real estate
investment trusts.
THE CASH RESERVES FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities or make investments other than in accordance with its
investment objective and policies.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of the value of the Fund's net assets would be invested in
securities of that issuer.
(3) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
B-2
<PAGE> 71
(4) Invest more than 5% of the Fund's total assets in securities of issuers
(other than obligations of, or guaranteed by, the U.S. Government, its agencies
or instrumentalities) which with their predecessors have a record of less than
three years continuous operation.
(5) Enter into repurchase agreements if more than 10% of the Fund's net assets
valued at the time of the transaction would be subject to repurchase agreements
maturing in more than seven days.
(6) Make loans to others (except through the purchase of debt obligations or
repurchase agreements or by lending its portfolio securities in accordance with
its investment objective and policies).
(7) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its total
assets (any such borrowings under this section will not be collateralized). If,
for any reason, the current value of the Fund's total assets falls below an
amount equal to three times the amount of its indebtedness from money borrowed,
the Fund will, within three business days, reduce its indebtedness to the extent
necessary. [The Fund will not borrow for leverage purposes, and while borrowings
are outstanding securities will not be purchased.]
(8) Concentrate more than 25% of the Fund's net assets in any one industry;
provided, however, that the Fund intends, under normal conditions, to invest
more than 25% of its net assets in instruments issued by banks in accordance
with its investment objective and policies.
(9) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of Kemper Portfolios or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and together
they own more than 5% of the securities of such issuer.
(10) Invest more than 5% of the Fund's total assets in securities restricted as
to disposition under the federal securities laws (except commercial paper issued
under Section 4(2) of the Securities Act of 1933) and no more than 10% of its
assets will be invested in securities which are considered illiquid. [Repurchase
agreements maturing in more than 7 days are considered illiquid for purposes of
this restriction.]
(11) Invest for the purpose of exercising control or management of another
issuer.
(12) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
(13) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
(14) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(15) Issue senior securities as defined in the Investment Company Act of 1940.
(16) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions.
(17) Engage in put or call option transactions.
(18) Invest in commodities or commodity futures contracts; or in real estate,
although it may invest in securities which are secured by real estate and
securities of issuers which invest or deal in real estate.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund has
adopted the following non-fundamental restrictions, which may be changed by the
Board of Trustees without shareholder approval. The Cash Reserves Fund may not:
(i) Invest in oil, gas or other mineral exploration or development programs.
B-3
<PAGE> 72
(ii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(iii) Invest in limited partnership interests in real estate.
THE DIVERSIFIED FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) With respect to 75% of the Fund's total assets, purchase securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in securities of that issuer, or (b) the
Fund would hold more than 10% of the outstanding voting securities of that
issuer.
(2) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited and the Fund
may lend its portfolio securities as described in the prospectus.
(3) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or pledge the Fund's securities or receivables or
transfer or assign or otherwise encumber them in an amount exceeding the amount
of the borrowing secured thereby.
(4) Engage in margin purchases except to obtain such short-term credits as may
be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with financial futures and options transactions;
nor may the Fund make short sales of securities or maintain a short position
unless, at all times when a short position is open, the Fund owns an equal
amount of such securities or securities convertible into or exchangeable for
securities, without payment of additional consideration, which are equal in
amount to and of the same issue as the securities sold short and such securities
are not subject to outstanding call options, and unless not more than 10% of the
Fund's net assets is held as collateral for such sales at any one time.
(Management does not intend to make such sales except for the purpose of
deferring realization of gain or loss for federal income tax purposes.)
(5) Write (sell) put or call options, combinations thereof or similar options;
nor may it purchase put or call options if more than 5% of the Fund's net assets
would be invested in premiums on the purchase of put and call options,
combinations thereof or similar options; except that the Fund may write covered
call options with respect to its portfolio securities or securities indices, or
write secured put options; and the Fund may enter into closing transactions with
respect to such options, and may buy or sell options on financial futures
contracts.
(6) Concentrate more than 25% of the value of its assets in any one industry.
Water, communications, electric and gas utilities shall each be considered a
separate industry.
(7) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options of such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(8) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(9) Issue senior securities except as permitted under the Investment Company Act
of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 3 in the latest
fiscal year, though it
B-4
<PAGE> 73
may borrow in the future as permitted by that investment restriction. The Fund
has adopted the following non-fundamental restrictions, which may be changed by
the Board of Trustees without shareholder approval. The Diversified Fund may
not:
(i) Invest more than 5% of the Fund's total assets in securities of issuers
which with their predecessors have a record of less than three years continuous
operation, and equity securities of issuers which are not readily marketable.
(ii) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
(iii) Invest for the purpose of exercising control or management of another
issuer.
(iv) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
(v) Purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets, unless
immediately thereafter not more than (i) 3% of the total outstanding voting
stock of such company would be owned by the Fund, (ii) 5% of the Fund's total
assets would be invested in any one such company, and (iii) 10% of the Fund's
total assets would be invested in such securities.
(vi) Invest more than 15% of its net assets in illiquid securities.
(vii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(viii) Invest in oil, gas, and other mineral leases.
(ix) Purchase or sell real property (including limited partnership interests but
excluding readily marketable interests in real estate investment trusts and
readily marketable securities of companies which invest in real estate).
(x) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in restricted securities and securities of issuers which
with their predecessors have a record of less than three years continuous
operation will not exceed 15% of total assets.
(xi) Invest more than 10% of its total assets on securities of real estate
investment assets.
THE GOVERNMENT FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase any securities other than obligations issued or guaranteed by the
United States Government or its agencies, some of which may be subject to
repurchase agreements, except that the Fund may engage in options and financial
futures transactions.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the Fund's total assets would be invested in securities
of that issuer.
(3) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in premiums
on put and call options, combinations thereof or similar options; however, the
Fund may buy or sell options on financial futures contracts.
B-5
<PAGE> 74
(4) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts; or in real
estate (including real estate limited partnerships), although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate including real estate investment trusts.
(5) Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the value of the Fund's assets at the time of such
borrowing; or mortgage, pledge or hypothecate any assets except in connection
with any such borrowing and in amounts not in excess of 7 1/2% of the value of
the Fund's assets at the time of such borrowing. (This borrowing provision is
not for investment leverage, but solely to facilitate management of the
portfolio by enabling the Fund to meet redemption requests where the liquidation
of portfolio securities is deemed to be disadvantageous or inconvenient.)
Borrowings may take the form of a sale of portfolio securities accompanied by a
simultaneous agreement as to their repurchase.
(6) Make loans, except that the Fund may purchase or hold debt obligations in
accordance with the investment restrictions set forth in paragraph 1 above and
may enter into repurchase agreements for such securities, and may lend its
portfolio securities against collateral consisting of cash, or securities issued
or guaranteed by the U.S. Government or its agencies, which is equal at all
times to at least 100% of the value of the securities loaned.
(7) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the disposition of portfolio
securities.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 5 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Government Fund has adopted the following non-fundamental restriction
which may be changed by the Board of Trustees without shareholder approval. The
Government Fund may not:
(1) Invest more than 15% of its net assets in illiquid securities.
THE HIGH YIELD FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) With respect to 75% of the Fund's total assets, purchase securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in securities of that issuer, or (b) the
Fund would hold more than 10% of the outstanding voting securities of that
issuer.
(2) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objectives and policies are not prohibited and it may
lend its securities as discussed under "Investment Objectives, Policies and Risk
Factors -- Additional Investment Information" in the prospectus.
(3) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or pledge the Fund's securities or receivables or
transfer or assign or otherwise encumber them in an amount exceeding the amount
of the borrowing secured thereby.
(4) Invest more than 25% of the Fund's total assets in fixed income securities
which are payable in currencies other than United States Dollars. (Investments
in such securities may involve risks which differ from investments in securities
of U.S. issuers, such as future political and economic developments, the
possible imposition of governmental restrictions and taxes, as well as currency
fluctuation.)
(5) Engage in margin purchases except to obtain such short-term credits as may
be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with financial futures and options transactions;
nor may the Fund make short sales of securities or maintain a short position
unless, at all times when
B-6
<PAGE> 75
a short position is open, the Fund owns an equal amount of such securities or
securities convertible into or exchangeable for securities, without payment of
additional consideration, which are equal in amount to and of the same issue as
the securities sold short and such securities are not subject to outstanding
call options, and unless not more than 10% of the Fund's net assets is held as
collateral for such sales at any one time. (Management does not intend to make
such sales except for the purpose of deferring realization of gain or loss for
federal income tax purposes.)
(6) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in premiums
on put and call options, combinations thereof or similar options; however, the
Fund may buy or sell options on financial futures contracts.
(7) Concentrate more than 25% of the value of its assets in any one industry.
Water, communications, electric and gas utilities shall each be considered a
separate industry.
(8) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(9) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(10) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 3 in the latest
fiscal year; though it may borrow in the future as permitted by that investment
restriction. The Fund has adopted the following non-fundamental restrictions,
which may be changed by the Board of Trustees without shareholder approval. The
High Yield Fund may not:
(i) Invest more than 5% of the Fund's total assets in securities of issuers
which with their predecessors have a record of less than three years continuous
operation, and equity securities of issuers which are not readily marketable.
(ii) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
(iii) Invest for the purpose of exercising control or management of another
issuer.
(iv) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
(v) Purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets, unless
immediately thereafter not more than (i) 3% of the total outstanding voting
stock of such company would be owned by the Fund, (ii) 5% of the Fund's total
assets would be invested in any one such company, and (iii) 10% of the Fund's
total assets would be invested in such securities.
(vi) Invest more than 15% of its net assets in illiquid securities.
(vii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
B-7
<PAGE> 76
(viii) Invest in oil, gas, and other mineral leases.
(ix) Purchase or sell real property (including limited partnership interests,
but excluding readily marketable interests in real estate investment trusts and
readily marketable securities of companies which invest in real estate).
(x) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in restricted securities and securities of issuers which
with their predecessors have a record of less than three years continuous
operation will not exceed 15% of total assets.
(xi) Invest more than 10% of its total assets in securities of real estate
investment trusts.
THE INCOME AND CAPITAL FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Invest in securities other than those specified under "Investment
Objectives, Policies and Risk Factors" in the prospectus. This restriction does
not prevent the Fund from holding common stocks or other corporate securities
not qualifying as debt obligations if such securities are acquired through
conversion provisions of debt securities or from corporate reorganizations. Nor
does it prevent the holding of debt securities whose quality rating is reduced
by the rating services below those specified under "Investment Objectives,
Policies and Risk Factors" after purchase by the Fund.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States or Canadian governments, their agencies or
instrumentalities) if, as a result, more than 5% of the Fund's total assets
would be invested in securities of that issuer.
(3) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
(4) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited and the Fund
may lend its portfolio securities as described under "Investment Objectives,
Policies and Risk Factors -- Additional Investment Information" in the
prospectus.
(5) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or pledge the Fund's securities or receivables or
transfer or assign or otherwise encumber them in an amount exceeding the amount
of the borrowing secured thereby.
(6) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and options transactions.
(7) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in premiums
on put and call options, combinations thereof or similar options; however, the
Fund may buy or sell options on financial futures contracts.
(8) Concentrate more than 25% of the value of its assets in any one industry.
Water, communications, electric and gas utilities shall each be considered a
separate industry.
(9) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
B-8
<PAGE> 77
(10) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(11) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 5 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Fund has adopted the following non-fundamental restrictions, which may
be changed by the Board of Trustees without shareholder approval. The Income and
Capital Fund may not:
(i) Invest more than 5% of the Fund's total assets in securities of issuers
which with their predecessors have a record of less than three years continuous
operation, and equity securities of issuers which are not readily marketable.
(ii) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
(iii) Invest for the purpose of exercising control or management of another
issuer.
(iv) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
(v) Purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets.
(vi) Invest more than 15% of its net assets in illiquid securities.
(vii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(viii) Invest in oil, gas, and other mineral leases.
(ix) Purchase or sell real property (including limited partnership interests but
excluding readily marketable interests in real estate investment trusts and
readily marketable securities of companies which invest in real estate).
(x) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in restricted securities and securities of issuers which
with their predecessors have a record of less than three years continuous
operation will not exceed 15% of total assets.
(xi) Invest more than 10% of its total assets in securities of real estate
investment assets.
THE MORTGAGE FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities or make investments other than in accordance with its
investment objective and policies.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of the value of the Fund's net assets would be invested in
securities of that issuer.
B-9
<PAGE> 78
(3) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
(4) Invest more than 5% of the Fund's total assets in securities of issuers
(other than obligations of, or guaranteed by, the U.S. Government, its agencies
or instrumentalities) which with their predecessors have a record of less than
three years continuous operation.
(5) Enter into repurchase agreements if more than 10% of the Fund's net assets
valued at the time of the transaction would be subject to repurchase agreements
maturing in more than seven days.
(6) Make loans to others (except through the purchase of debt obligations or
repurchase agreements or by lending its portfolio securities in accordance with
its investment objective and policies).
(7) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its total
assets (any such borrowings under this section will not be collateralized). If,
for any reason, the current value of the Fund's total assets falls below an
amount equal to three times the amount of its indebtedness from money borrowed,
the Fund will, within three business days, reduce its indebtedness to the extent
necessary. [The Fund will not borrow for leverage purposes, and while borrowings
are outstanding securities will not be purchased.]
(8) Concentrate more than 25% of the Fund's net assets in any one industry.
(9) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of Kemper Portfolios or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and together
they own more than 5% of the securities of such issuer.
(10) Invest more than 5% of the Fund's total assets in securities restricted as
to disposition under the federal securities laws (except commercial paper issued
under Section 4(2) of the Securities Act of 1933) and no more than 10% of its
assets will be invested in securities which are considered illiquid. [Repurchase
agreements maturing in more than 7 days are considered illiquid for purposes of
this restriction.]
(11) Invest for the purpose of exercising control or management of another
issuer.
(12) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
(13) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
(14) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(15) Issue senior securities as defined in the Investment Company Act of 1940.
(16) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and option transactions.
(17) Write (sell) put or call options, combinations thereof or similar options
except that the Fund may write covered call options on up to 100% of the Fund's
net assets and may write secured put options on up to 50% of the Fund's net
assets; nor may the Fund purchase put or call options if more than 5% of the
Fund's net assets would be invested in premiums on put and call options,
combinations thereof or similar options; however, the Fund may buy or sell
options on financial futures contracts.
(18) Invest in commodities or commodity futures contracts although the Fund may
buy or sell financial futures contracts and options on such contracts; or in
real estate, although it may invest in securities which are secured by real
estate and securities of issuers which invest or deal in real estate.
B-10
<PAGE> 79
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or total assets will not be considered a violation. The Fund
did not borrow money as permitted by investment restriction number 7 in the
latest fiscal year, and it has no present intention of borrowing during the
current year. The Fund has adopted the following non-fundamental restrictions,
which may be changed by the Board of Trustees without shareholder approval. The
Mortgage Fund may not:
(i) Invest in oil, gas or other mineral exploration or development programs.
(ii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(iii) Invest in limited partnership interests in real estate.
THE SHORT-INTERMEDIATE GOVERNMENT FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities or make investments other than in accordance with its
investment objective and policies.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of the value of the Fund's net assets would be invested in
securities of that issuer.
(3) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
(4) Make loans to others (except through the purchase of debt obligations or
repurchase agreements or by lending its portfolio securities in accordance with
its investment objective and policies).
(5) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its total
assets (any such borrowings under this section will not be collateralized). If,
for any reason, the current value of the Fund's total assets falls below an
amount equal to three times the amount of its indebtedness from money borrowed,
the Fund will, within three business days, reduce its indebtedness to the extent
necessary. [The Fund will not borrow for leverage purposes, and while borrowings
are outstanding securities will not be purchased.]
(6) Concentrate more than 10% of the Fund's net assets in any one industry.
(7) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(8) Issue senior securities except as permitted under the Investment Company Act
of 1940.
(9) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and option transactions.
(10) Engage in put or call option transactions; however, the Fund may write
(sell) put or call options on up to 25% of its net assets and may purchase put
or call options if no more than 5% of its net assets would be invested in
premiums on put and call options, combinations thereof or similar options; and
the Fund may buy and sell options on financial futures contracts.
(11) Invest in commodities or commodity futures contracts, although it may buy
or sell financial futures contracts and options on such contracts; or in real
estate, although it may invest in securities which are secured by real estate
and securities of issuers which invest or deal in real estate.
B-11
<PAGE> 80
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 5 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Fund has adopted the following non-fundamental restrictions, which may
be changed by the Board of Trustees without shareholder approval. The Short-
Intermediate Government Fund may not:
(i) Invest more than 5% of the Fund's total assets in securities of issuers
(other than obligations of, or guaranteed by, the U.S. Government, its agencies
or instrumentalities, including collateralized obligations thereof) which with
their predecessors have a record of less than three years continuous operation.
(ii) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of Kemper Portfolios or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and together
they own more than 5% of the securities of such issuer.
(iii) Invest for the purpose of exercising control or management of another
issuer.
(iv) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
(v) Purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets. This
restriction does not apply to the Fund to the extent that certain collateralized
obligations may be considered to be issued by an "investment company" (see
"Investment Policies and Techniques --Collateralized Obligations").
(vi) Invest more than 15% of its net assets in illiquid securities.
(vii) Invest in oil, gas or other mineral exploration or development programs.
(viii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(ix) Invest in limited partnership interests in real estate.
(x) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in restricted securities and securities of issuers which
with their predecessors have a record of less than three years continuous
operation will not exceed 15% of total assets.
(xi) Invest more than 10% of its total assets in securities of real estate
investment trusts.
INVESTMENT POLICIES AND TECHNIQUES
GENERAL. Each Fund may engage in options and financial futures and other
derivatives transactions in accordance with its respective investment objectives
and policies. Each such Fund intends to engage in such transactions if it
appears to the investment manager to be advantageous to do so in order to pursue
its investment objective and also to hedge against the effects of market risks
but not for speculative purposes. The Cash Reserves Fund does not engage in
options and futures transactions. The use of futures and options, and possible
benefits and attendant risks, are discussed below along with information
concerning other investment policies and techniques.
OPTIONS ON SECURITIES. A Fund (other than the Cash Reserves Fund) may write
(sell) "covered" call options on securities as long as it owns the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price of
the "covered" option, or
B-12
<PAGE> 81
will establish and maintain for the term of the option a segregated account
consisting of cash or other liquid securities ("eligible securities") to the
extent required by applicable regulation in connection with the optioned
securities. A Fund may write "covered" put options provided that, as long as the
Fund is obligated as a writer of a put option, the Fund will own an option to
sell the underlying securities subject to the option, having an exercise price
equal to or greater than the exercise price of the "covered" option, or it will
deposit and maintain in a segregated account eligible securities having a value
equal to or greater than the exercise price of the option. A call option gives
the purchaser the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price during or at the end of the option
period. A put option gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying security at the exercise price during or at
the end of the option period. The premium received for writing an option will
reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to such market price, the price
volatility of the underlying security, the option period, supply and demand and
interest rates. The Funds may write or purchase spread options, which are
options for which the exercise price may be a fixed dollar spread or yield
spread between the security underlying the option and another security that is
used as a bench mark. The exercise price of an option may be below, equal to or
above the current market value of the underlying security at the time the option
is written. The buyer of a put who also owns the related security is protected
by ownership of a put option against any decline in that security's price below
the exercise price less the amount paid for the option. The ability to purchase
put options allows a Fund to protect capital gains in an appreciated security it
owns, without being required to actually sell that security. At times a Fund
would like to establish a position in a security upon which call options are
available. By purchasing a call option, a Fund is able to fix the cost of
acquiring the security, this being the cost of the call plus the exercise price
of the option. This procedure also provides some protection from an unexpected
downturn in the market, because a Fund is only at risk for the amount of the
premium paid for the call option which it can, if it chooses, permit to expire.
During the option period the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain in the amount of the premium received.
If the covered call option writer has to sell the underlying security because of
the exercise of a call option, it realizes a gain or loss from the sale of the
underlying security, with the proceeds being increased by the amount of the
premium.
If a secured put option expires unexercised, the writer realizes a gain from the
amount of the premium. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized loss to the extent that the current market value of the
underlying security is less than the exercise price of the put option. However,
this would be offset in whole or in part by gain from the premium received.
OVER-THE-COUNTER OPTIONS. As indicated in the prospectus (see "Investment
Objectives, Policies and Risk Factors"), the Funds (other than the Cash Reserves
Fund) may deal in over-the-counter traded options ("OTC options"). OTC options
differ from exchange traded options in several respects. They are transacted
directly with dealers and not with a clearing corporation, and there is a risk
of nonperformance by the dealer as a result of the insolvency of such dealer or
otherwise, in which event a Fund may experience material losses. However, in
writing options the premium is paid in advance by the dealer. OTC options are
available for a greater variety of securities, and a wider range of expiration
dates and exercise prices, than are exchange traded options. Since there is no
exchange, pricing is normally done by reference to information from market
makers, which information is carefully monitored by the investment manager and
verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will
B-13
<PAGE> 82
exist for any particular option at any specific time. Consequently, a Fund may
be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when a Fund writes an OTC option, it generally can close
out that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a purchaser of such put or call option
might also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The Funds understand the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The investment manager
disagrees with this position and has found the dealers with which it engages in
OTC options transactions generally agreeable to and capable of entering into
closing transactions. The Funds have adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse effect of such
transactions upon the liquidity of the Funds' portfolios. A brief description of
such procedures is set forth below.
A Fund will only engage in OTC options transactions with dealers that have been
specifically approved by the investment manager pursuant to procedures adopted
by the Fund's Board of Trustees. The investment manager believes that the
approved dealers should be able to enter into closing transactions if necessary
and, therefore, present minimal credit risks to a Fund. The investment manager
will monitor the creditworthiness of the approved dealers on an ongoing basis. A
Fund currently will not engage in OTC options transactions if the amount
invested by the Fund in OTC options, plus a "liquidity charge" related to OTC
options written by the Fund, plus the amount invested by the Fund in illiquid
securities, would exceed 15% of the Fund's net assets (10% of total assets for
the Mortgage Fund). The "liquidity charge" referred to above is computed as
described below.
The Funds anticipate entering into agreements with dealers to which a Fund sells
OTC options. Under these agreements a Fund would have the absolute right to
repurchase the OTC options from the dealer at any time at a price no greater
than a price established under the agreements (the "Repurchase Price"). The
"liquidity charge" referred to above for a specific OTC option transaction will
be the Repurchase Price related to the OTC option less the intrinsic value of
the OTC option. The intrinsic value of an OTC call option for such purposes will
be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
will be the amount by which the exercise price exceeds the current market value
of the underlying security. If there is no such agreement requiring a dealer to
allow the Fund to repurchase a specific OTC option written by the Fund, the
"liquidity charge" will be the current market value of the assets serving as
"cover" for such OTC option.
OPTIONS ON SECURITIES INDICES. A Fund (other than the Cash Reserves Fund) also
may purchase and write call and put options on securities indices in an attempt
to hedge against market conditions affecting the value of securities that the
Fund owns or intends to purchase, and not for speculation. Through the writing
or purchase of index options, a Fund can achieve many of the same objectives as
through the use of options on individual securities. Options on securities
indices are similar to options on a security except that, rather than the right
to take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Unlike security options, all
settlements are in cash and gain or loss depends upon price movements in the
market generally (or in a particular industry or segment of the market), rather
than upon price movements in individual securities. Price movements in
securities that the Fund owns or intends to purchase will probably not correlate
perfectly with movements in the level of an index since the prices of such
securities may be affected by somewhat
B-14
<PAGE> 83
different factors and, therefore, the Fund bears the risk that a loss on an
index option would not be completely offset by movements in the price of such
securities.
When a Fund writes an option on a securities index, it will segregate, and
mark-to-market, eligible securities to the extent required by applicable
regulation. In addition, where the Fund writes a call option on a securities
index at a time when the contract value exceeds the exercise price, the Fund
will segregate and mark-to-market, until the option expires or is closed out,
cash or cash equivalents equal in value to such excess.
A Fund may also purchase and sell options on other appropriate indices, as
available, such as foreign currency indices. Options on a securities index
involve risks similar to those risks relating to transactions in financial
futures contracts described below. Also, an option purchased by a Fund may
expire worthless, in which case the Fund would lose the premium paid therefor.
FINANCIAL FUTURES CONTRACTS. The Funds (except the Cash Reserves Fund) may enter
into financial futures contracts for the future delivery of a financial
instrument, such as a security, or an amount of foreign currency or the cash
value of a securities index. This investment technique is designed primarily to
hedge (i.e., protect) against anticipated future changes in market conditions or
foreign exchange rates which otherwise might affect adversely the value of
securities or other assets which the Fund holds or intends to purchase. A "sale"
of a futures contract means the undertaking of a contractual obligation to
deliver the securities or the cash value of an index or foreign currency called
for by the contract at a specified price during a specified delivery period. A
"purchase" of a futures contract means the undertaking of a contractual
obligation to acquire the securities or cash value of an index or foreign
currency at a specified price during a specified delivery period. At the time of
delivery, in the case of fixed income securities pursuant to the contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate than that specified in the
contract. In some cases, securities called for by a futures contract may not
have been issued at the time the contract was written.
Although some futures contracts by their terms call for the actual delivery or
acquisition of securities or other assets, in most cases a party will close out
the contractual commitment before delivery of the underlying assets by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same month. Such a
transaction, if effected through a member of an exchange, cancels the obligation
to make or take delivery of the underlying securities or other assets. All
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded. A
Fund will incur brokerage fees when it purchases or sells contracts, and will be
required to maintain margin deposits. At the time a Fund enters into a futures
contract, it is required to deposit with its custodian, on behalf of the broker,
a specified amount of cash or eligible securities, called "initial margin." The
initial margin required for a futures contract is set by the exchange on which
the contract is traded. Subsequent payments, called "variation margin," to and
from the broker are made on a daily basis as the market price of the futures
contract fluctuates. The costs incurred in connection with futures transactions
could reduce a Fund's return. Futures contracts entail risks. If the investment
manager's judgment about the general direction of markets or exchange rates is
wrong, the overall performance may be poorer than if no such contracts had been
entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio assets being hedged. In addition, the market prices of
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because, from the point of view of speculators, the
margin requirements in the futures markets are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the
B-15
<PAGE> 84
prices of securities or other assets and movements in the prices of futures
contracts, a correct forecast of market trends by the investment manager may
still not result in a successful hedging transaction. If any of these events
should occur, the Fund could lose money on the financial futures contracts and
also on the value of its portfolio assets.
OPTIONS ON FINANCIAL FUTURES CONTRACTS. A Fund (other than the Cash Reserves
Fund) may purchase and write call and put options on financial futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the period of the option. Upon
exercise, the writer of the option delivers the futures contract to the holder
at the exercise price. A Fund would be required to deposit with its custodian
initial margin and maintenance margin with respect to put and call options on
futures contracts written by it. A Fund will establish segregated accounts or
will provide cover with respect to written options on financial futures
contracts in a manner similar to that described under "Options on Securities."
Options on futures contracts involve risks similar to those risks relating to
transactions in financial futures contracts described above. Also, an option
purchased by a Fund may expire worthless, in which case the Fund would lose the
premium paid therefor.
DELAYED DELIVERY TRANSACTIONS. The Funds (other than the Cash Reserves Fund) may
purchase or sell portfolio securities on a when-issued or delayed delivery
basis. When-issued or delayed delivery transactions involve a commitment by a
Fund to purchase or sell securities with payment and delivery to take place in
the future in order to secure what is considered to be an advantageous price or
yield to the Fund at the time of entering into the transaction. When the Fund
enters into a delayed delivery transaction, it becomes obligated to purchase
securities and it has all of the rights and risks attendant to ownership of a
security, although delivery and payment occur at a later date. The value of
fixed income securities to be delivered in the future will fluctuate as interest
rates vary. At the time a Fund makes the commitment to purchase a security on a
when-issued or delayed delivery basis, it will record the transaction and
reflect the liability for the purchase and the value of the security in
determining its net asset value. Likewise, at the time a Fund makes the
commitment to sell a security on a delayed delivery basis, it will record the
transaction and include the proceeds to be received in determining its net asset
value; accordingly, any fluctuations in the value of the security sold pursuant
to a delayed delivery commitment are ignored in calculating net asset value so
long as the commitment remains in effect. The Fund generally has the ability to
close out a purchase obligation on or before the settlement date, rather than
take delivery of the security.
To the extent a Fund engages in when-issued or delayed delivery purchases, it
will do so for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies. A Fund reserves the right to sell
these securities before the settlement date if deemed advisable.
REGULATORY RESTRICTIONS. To the extent required to comply with applicable
regulation, when purchasing a futures contract, writing a put option or entering
into a delayed delivery purchase or a forward currency exchange purchase, a Fund
will maintain eligible securities in a segregated account. A Fund will use cover
in connection with selling a futures contract.
A Fund will not engage in transactions in financial futures contracts or options
thereon for speculation, but only in an attempt to hedge against changes in
interest rates or market conditions affecting the value of securities which the
Fund holds or intends to purchase.
FOREIGN CURRENCY OPTIONS. The Diversified, High Yield and Income and Capital
Funds may engage in foreign currency options transactions. A foreign currency
option provides the option buyer with the right to buy or sell a stated amount
of foreign currency at the exercise price at a specified date or during the
option period. A call option gives its owner the right, but not the obligation,
to buy the currency, while a put option gives its owner the right, but not the
obligation, to sell the currency. The option seller (writer) is obligated to
fulfill the terms of the option sold if it is exercised. However, either seller
or buyer may close its position during the option period in the secondary market
for such options any time prior to expiration.
B-16
<PAGE> 85
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the Fund against an adverse movement in the
value of a foreign currency, it does not limit the gain which might result from
a favorable movement in the value of such currency. For example, if a Fund were
holding securities denominated in an appreciating foreign currency and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, it would not have to exercise its put. Similarly, if the Fund had
entered into a contract to purchase a security denominated in a foreign currency
and had purchased a foreign currency call to hedge against a rise in value of
the currency but instead the currency had depreciated in value between the date
of purchase and the settlement date, the Fund would not have to exercise its
call but could acquire in the spot market the amount of foreign currency needed
for settlement.
FOREIGN CURRENCY FUTURES TRANSACTIONS. As part of their financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Diversified, High Yield and Income and Capital
Funds may use foreign currency futures contracts and options on such futures
contracts. Through the purchase or sale of such contracts, a Fund may be able to
achieve many of the same objectives as through forward foreign currency exchange
contracts more effectively and possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and are traded on boards of trade and commodities
exchanges. It is anticipated that such contracts may provide greater liquidity
and lower cost than forward foreign currency exchange contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Diversified, High Yield and
Income and Capital Funds may engage in forward foreign currency transactions. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
("term") from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. These contracts are traded directly between
currency traders (usually large commercial banks) and their customers. The
investment manager believes that it is important to have the flexibility to
enter into such forward contracts when it determines that to do so is in the
best interests of a Fund. A Fund will not speculate in foreign currency
exchange.
If a Fund retains the portfolio security and engages in an offsetting
transaction with respect to a forward contract, the Fund will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between a Fund's entering into a
forward contract for the sale of foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund would
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund would suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain that might result should the value of such currency increase. A
Fund may have to convert its holdings of foreign currencies into U.S. Dollars
from time to time in order to meet such needs as Fund expenses and redemption
requests. Although foreign exchange dealers do not charge a fee for conversion,
they do realize a profit based on the difference (the "spread") between the
prices at which they are buying and selling various currencies.
A Fund will not enter into forward contracts or maintain a net exposure in such
contracts when the Fund would be obligated to deliver an amount of foreign
currency in excess of the value of the Fund's securities or other assets
denominated in that currency. See "Foreign Currency Transactions" under
"Investment Objectives, Policies and Risk Factors--Additional Investment
Information" in the prospectus. A Fund segregates eligible securities to the
extent required by applicable regulation in connection with forward foreign
currency exchange contracts entered into for the purchase of foreign currency.
The Diversified, High Yield and Income and Capital Funds do not intend to enter
into forward contracts for the purchase of a foreign currency if they would have
more than 15% of
B-17
<PAGE> 86
the value of their total assets committed to such contracts. A Fund generally
will not enter into a forward contract with a term longer than one year.
COLLATERALIZED OBLIGATIONS. A Fund will currently invest in only those
collateralized obligations that are fully collateralized and that meet the
quality standards otherwise applicable to the Fund's investments. Fully
collateralized means that the collateral will generate cash flows sufficient to
meet obligations to holders of the collateralized obligations under even the
most conservative prepayment and interest rate projections. Thus, the
collateralized obligations are structured to anticipate a worst case prepayment
condition and to minimize the reinvestment rate risk for cash flows between
coupon dates for the collateralized obligations. A worst case prepayment
condition generally assumes immediate prepayment of all securities purchased at
a premium and zero prepayment of all securities purchased at a discount.
Reinvestment rate risk may be minimized by assuming very conservative
reinvestment rates and by other means such as by maintaining the flexibility to
increase principal distributions in a low interest rate environment. The
effective credit quality of the collateralized obligations in such instances is
the credit quality of the issuer of the collateral. The requirements as to
collateralization are determined by the issuer or sponsor of the collateralized
obligation in order to satisfy rating agencies, if rated. No Fund currently
intends to invest more than 5% of its total assets in collateralized obligations
that are collateralized by a pool of credit card or automobile receivables or
other types of assets rather than a pool of mortgages, Mortgage-Backed
Securities or U.S. Government Securities. Currently, none of the Funds intends
to invest more than 10% of its total assets in inverse floaters. The Cash
Reserves Fund does not invest in inverse floaters.
Payments of principal and interest on the underlying collateral securities are
not passed through directly to the holders of the collateralized obligations as
such. Collateralized obligations often are issued in two or more classes with
varying maturities and stated rates of interest. Because interest and principal
payments on the underlying securities are not passed through directly to holders
of collateralized obligations, such obligations of varying maturities may be
secured by a single portfolio or pool of securities, the payments on which are
used to pay interest on each class and to retire successive maturities in
sequence. These relationships may in effect "strip" the interest payments from
principal payments of the underlying securities and allow for the separate
purchase of either the interest or the principal payments, sometimes called
interest only (IO) and principal only (PO) securities. Collateralized
obligations are designed to be retired as the underlying securities are repaid.
In the event of prepayment on or call of such securities, the class of
collateralized obligation first to mature generally will be paid down first.
Therefore, although in most cases the issuer of collateralized obligations will
not supply additional collateral in the event of such prepayment, there will be
sufficient collateral to secure collateralized obligations that remain
outstanding. It is anticipated that no more than 10% of a Fund's total assets
will be invested in IO and PO securities. Governmentally-issued and
privately-issued IO's and PO's will be considered illiquid for purposes of a
Fund's limitation on illiquid securities, however, the Board of Trustees of a
Fund may adopt guidelines under which governmentally-issued IO's and PO's may be
determined to be liquid.
ZERO COUPON GOVERNMENT SECURITIES. Subject to its investment objective and
policies, a Fund may invest in zero coupon U.S. Government Securities. Zero
coupon bonds are purchased at a discount from the face amount. The buyer
receives only the right to receive a fixed payment on a certain date in the
future and does not receive any periodic interest payments. These securities may
include those created directly by the U.S. Treasury and those created as
collateralized obligations through various proprietary custodial, trust or other
relationships (see "Investment Objectives, Policies and Risk Factors--Additional
Investment Information--Collateralized Obligations" in the prospectus). The
effect of owning instruments which do not make current interest payments is that
a fixed yield is earned not only on the original investment but also, in effect,
on all discount accretion during the life of the obligation. This implicit
reinvestment of earnings at the same rate eliminates the risk of being unable to
reinvest distributions at a rate as high as the implicit yield on the zero
coupon bond, but at the same time eliminates any opportunity to reinvest
earnings at higher rates. For this reason, zero coupon bonds are subject to
substantially greater price fluctuations during periods of changing market
interest rates than those of comparable securities that pay interest currently,
which fluctuation is greater as the period to maturity is longer. Zero coupon
bonds created as collateralized obligations are similar to those created through
the U.S. Treasury, but the former
B-18
<PAGE> 87
investments do not provide absolute certainty of maturity or of cash flows after
prior classes of the collateralized obligations are retired. No Fund currently
intends to invest more than 5% of its net assets in zero coupon U.S. Government
Securities during the current year.
SHORT SALES AGAINST-THE-BOX. The Adjustable Rate, Diversified and Mortgage
Funds may each make short sales against-the-box for the purpose of deferring
realization of gain or loss for federal income tax purposes. A short sale
"against-the-box" is a short sale in which the Fund owns at least an equal
amount of the securities sold short or securities convertible into or
exchangeable for, without payment of any further consideration, securities of
the same issue as, and at least equal in amount to, the securities sold short. A
Fund may engage in such short sales only to the extent that not more than 10% of
the Fund's total assets (determined at the time of the short sale) is held as
collateral for such sales. No Fund currently intends, however, to engage in such
short sales to the extent that more than 5% of its net assets will be held as
collateral therefor during the current year.
ADDITIONAL INFORMATION--ADJUSTABLE RATE FUND. The interest rates paid on the
adjustable rate securities in which the Adjustable Rate Fund invests generally
are readjusted at intervals of one year or less to an increment over some
predetermined interest rate index. There are three main categories of indices:
those based on U.S. Treasury securities, those derived from a calculated measure
such as a cost of funds index or those based on a moving average of mortgage
rates. Commonly used indices include the one-year, three-year and five-year
constant maturity Treasury rates, the three-month Treasury bill rate, the
180-day Treasury bill rate, rates on longer-term Treasury securities, the 11th
District Federal Home Loan Bank Cost of Funds, the National Median Cost of
Funds, the one-month, three-month, six-month or one-year London Interbank
Offered Rate ("LIBOR"), the prime rate of a specific bank or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury rate,
closely mirror changes in market interest rate levels. Others, such as the 11th
District Home Loan Bank Cost of Funds index, tend to lag behind changes in
market rate levels and tend to be somewhat less volatile.
The Mortgage-Backed Securities either issued or guaranteed by GNMA, FHLMC or
FNMA ("Certificates") are called pass-through Certificates because a pro rata
share of both regular interest and principal payments (less GNMA's FHLMC's or
FNMA's fees and any applicable loan servicing fees), as well as unscheduled
early prepayments on the underlying mortgage pool, are passed through monthly to
the holder of the Certificate (i.e., the Fund). The principal and interest on
GNMA securities are guaranteed by GNMA and backed by the full faith and credit
of the U.S. Government. FNMA guarantees full and timely payment of all interest
and principal, while FHLMC guarantees timely payment of interest and ultimate
collection of principal. Mortgage-Backed Securities from FNMA and FHLMC are not
backed by the full faith and credit of the United States; however, they are
generally considered to offer minimal credit risks. The yields provided by these
Mortgage-Backed Securities have historically exceeded the yields on other types
of U.S. Government Securities with comparable maturities in large measure due to
the prepayment risk discussed below.
If prepayments of principal are made on the underlying mortgages during periods
of rising interest rates, the Adjustable Rate Fund generally will be able to
reinvest such amounts in securities with a higher current rate of return.
However, the Adjustable Rate Fund will not benefit from increases in interest
rates to the extent that interest rates rise to the point where they cause the
current coupon of adjustable rate mortgages held as investments by the
Adjustable Rate Fund to exceed the maximum allowable annual or lifetime reset
limits (or "cap rates") for a particular mortgage. Also, the Adjustable Rate
Fund's net asset value could vary to the extent that current yields on
Mortgage-Backed Securities are different than market yields during interim
periods between coupon reset dates.
During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower yields to the Adjustable Rate Fund.
Further, because of this feature, the value of adjustable rate mortgages is
unlikely to rise during periods of declining interest rates to the same extent
as fixed-rate instruments. As with other Mortgage-Backed Securities, interest
rate declines may result in accelerated prepayment of mortgages, and the
proceeds from such prepayments must be reinvested at lower prevailing interest
rates.
B-19
<PAGE> 88
One additional difference between adjustable rate mortgages and fixed rate
mortgages is that for certain types of adjustable rate mortgage securities, the
rate of amortization of principal, as well as interest payments, can and does
change in accordance with movements in a specified, published interest rate
index. The amount of interest due to an adjustable rate mortgage security holder
is calculated by adding a specified additional amount, the "margin," to the
index, subject to limitations or "caps" on the maximum and minimum interest that
is charged to the mortgagor during the life of the mortgage or to maximum and
minimum changes to that interest rate during a given period. It is these special
characteristics that are unique to adjustable rate mortgages that the Fund
believes make them attractive investments in seeking to accomplish the
Adjustable Rate Fund's objective.
The Fund usually will enter into interest rate swaps on a net basis, i.e., the
two payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amounts of the two payments. The net amount of the
excess, if any, of the Fund's obligations over its entitlement with respect to
each interest rate swap will be accrued on a daily basis and an amount of cash
or high grade liquid debt securities having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account by
the Fund's custodian. To the extent that the Fund enters into interest rate
swaps on other than a net basis, the amount maintained in a segregated account
will be the full amount of the Fund's obligations, if any, with respect to such
interest rate swaps, accrued on a daily basis.
The Adjustable Rate Fund will not enter into any interest rate swap, cap or
floor transaction unless the unsecured senior debt or the claims-paying ability
of the other party thereto is rated in the highest rating category by at least
one nationally recognized rating organization at the time of entering into such
transaction. If there is a default by the other party to such a transaction, the
Adjustable Rate Fund will have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents using standardized swap documents. As a result, the
swap market has become relatively liquid. Caps and floors are more recent
innovations for which standardized documents have not yet been developed and,
accordingly, they are less liquid than swaps. It is anticipated that the
Adjustable Rate Fund will not invest more than 5% of its total assets in
interest rate caps and floors and that the aggregate notional (agreed upon)
principal amount of interest rate swaps entered into by the Fund and the
aggregate contract value of outstanding futures contracts of the Fund and
futures contracts subject to outstanding options written by the Fund will not
exceed 50% of the Fund's total assets. Because interest rate swaps and the
purchase of interest rate caps and floors will be entered into for hedging
purposes, the investment manager believes such obligations will not constitute
senior securities and, accordingly, will not treat them as being subject to the
Fund's borrowing restrictions.
PORTFOLIO TRANSACTIONS
Zurich Kemper Investments, Inc. ("ZKI") and its affiliates furnish investment
management services for the Kemper Funds and other clients including affiliated
insurance companies. Zurich Investment Management Limited ("ZIML") is the
sub-adviser for the Diversified, High Yield and Income and Capital Funds. ZKI
and its affiliates share some common research and trading facilities. ZIML is
the subadviser for other Kemper Funds. At times investment decisions may be made
to purchase or sell the same investment securities for a Fund and for one or
more of the other clients managed by ZKI or its affiliates. When two or more of
such clients are simultaneously engaged in the purchase or sale of the same
security through the same trading facility, the transactions are allocated as to
amount and price in a manner considered equitable to each.
National securities exchanges have established limitations governing the maximum
number of options in each class which may be written by a single investor or
group of investors acting in concert. An exchange may order the liquidation of
positions found to be in violation of these limits, and it may impose certain
other sanctions. These position limits may restrict the number of options a Fund
will be able to write on a particular security.
B-20
<PAGE> 89
The above mentioned factors may have a detrimental effect on the quantities or
prices of securities, options or futures contracts available to a Fund. On the
other hand, the ability of a Fund to participate in volume transactions may
produce better executions for a Fund in some cases.
ZKI and ZIML, in effecting purchases and sales of portfolio securities for the
account of a Fund, will implement each Fund's policy of seeking best execution
of orders. ZKI and ZIML may be permitted to pay higher brokerage commissions for
research services as described below. Consistent with this policy, orders for
portfolio transactions are placed with broker-dealer firms giving consideration
to the quality, quantity and nature of each firm's professional services, which
include execution, financial responsibility, responsiveness, clearance
procedures, wire service quotations and statistical and other research
information provided to a Fund and ZKI and its affiliates. Subject to seeking
best execution of an order, brokerage is allocated on the basis of all services
provided. Any research benefits derived are available for all clients of ZKI and
its affiliates. In selecting among firms believed to meet the criteria for
handling a particular transaction, ZKI and ZIML may give consideration to those
firms that have sold or are selling shares of the Funds and of other funds
managed by ZKI or its affiliates, as well as to those firms that provide market,
statistical and other research information to a Fund and ZKI and its affiliates,
although ZKI and ZIML are not authorized to pay higher commissions to firms that
provide such services, except as described below.
ZKI and ZIML may in certain instances be permitted to pay higher brokerage
commissions solely for receipt of market, statistical and other research
services as defined in Section 28(e) of the Securities Exchange Act of 1934 and
interpretations thereunder. Such services may include, among other things:
economic, industry or company research reports or investment recommendations;
computerized databases; quotation and execution equipment and software; and
research or analytical computer software and services. Where products or
services have a "mixed use," a good faith effort is made to make a reasonable
allocation of the cost of the products or services in accordance with the
anticipated research and non-research uses and the cost attributable to
non-research use is paid by ZKI or one of its affiliates in cash. Subject to
Section 28(e) and procedures adopted by the Board of Trustees of each Fund, a
Fund (except the Cash Reserves, Mortgage and Short-Intermediate Government
Funds) could pay a firm that provides research services commissions for
effecting a securities transaction for the Fund in excess of the amount other
firms would have charged for the transaction if ZKI or ZIML determines in good
faith that the greater commission is reasonable in relation to the value of the
brokerage and research services provided by the executing firm viewed in terms
either of a particular transaction or ZKI's or ZIML's overall responsibilities
to the Fund and other clients. Not all of such research services may be useful
or of value in advising a particular Fund. Research benefits will be available
for all clients of ZKI and its affiliates. The investment management fee paid by
a Fund to ZKI is not reduced because these research services are received.
The table below shows total brokerage commissions paid by each Fund for the last
three fiscal years and for the most recent fiscal year, the percentage thereof
that was allocated to firms based upon research information provided.
<TABLE>
<CAPTION>
ALLOCATED TO FIRMS
BASED ON
RESEARCH IN
FUND FISCAL 1996 FISCAL 1996 FISCAL 1995 FISCAL 1994
- ------------------------------------------- ----------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Adjustable Rate............................ $ 29,000 0% $ 99,000 $ 0
Cash Reserves.............................. $ 0 0% $ 0 $ 0
Diversified................................ $ 2,927,000 0% $ 1,323,000 $ 2,938,000
Government................................. $ 806,000 0% $ 823,000 $ 1,071,000
High Yield................................. $46,280,000 0% $21,136,000 $20,105,000
Income and Capital......................... $ 1,624,000 0% $ 1,576,000 $ 1,168,000
Mortgage................................... $ 545,000 0% $ 1,598,000+ $ 835,000
Short-Intermediate Government.............. $ 44,000 0% $ 125,000+ $ 15,000
</TABLE>
B-21
<PAGE> 90
- ---------------
+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.
The change in portfolio turnover rates during the last two fiscal years for the
Income and Capital Fund (see "Financial Highlights" in the prospectus) was due
primarily to strategies related to Government securities transactions.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Zurich Kemper Investments, Inc., 222 South Riverside Plaza,
Chicago, Illinois 60606, is each Fund's investment manager. ZKI is wholly owned
by ZKI Holding Corp. ZKI Holding Corp. is a more than 90% owned subsidiary of
Zurich Holding Company of America, Inc., which is a wholly owned subsidiary of
Zurich Insurance Company, an internationally recognized company providing
services in life and non-life insurance, reinsurance and asset management.
Pursuant to investment management agreements, ZKI acts as each Fund's investment
adviser, manages its investments, administers its business affairs, furnishes
office facilities and equipment, provides clerical, bookkeeping and
administrative services, and permits any of its officers or employees to serve
without compensation as trustees or officers of a Fund if elected to such
positions. Each investment management agreement provides that each Fund pays the
charges and expenses of its operations, including the fees and expenses of the
trustees (except those who are affiliated with ZKI), independent auditors,
counsel, custodian and transfer agent and the cost of share certificates,
reports and notices to shareholders, brokerage commissions or transaction costs,
costs of calculating net asset value, taxes and membership dues. Each Fund bears
the expenses of registration of its shares with the Securities and Exchange
Commission, while Kemper Distributors, Inc. ("KDI"), as principal underwriter,
pays the cost of qualifying and maintaining the qualification of each Fund's
shares for sale under the securities laws of the various states. ZKI has agreed
to reimburse each Fund (except the Government Fund) to the extent required by
applicable state expense limitations should all operating expenses of each Fund,
including the investment management fees of ZKI but excluding taxes, interest,
distribution fees, extraordinary expenses, brokerage commissions or transaction
costs and any other properly excludable expenses, exceed the applicable state
expense limitations. Currently, there are no state expense limitations in
effect. ZKI has agreed to reimburse the Government Fund should all operating
expenses of the Fund, including the compensation of ZKI, but excluding taxes,
interest, distribution services fee, extraordinary expenses and brokerage
commissions or transaction costs, exceed 1% of average daily net assets of the
fund on an annual basis.
The investment management agreements provide that ZKI shall not be liable for
any error of judgment or of law, or for any loss suffered by a Fund in
connection with the matters to which the agreements relate, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
ZKI in the performance of its obligations and duties, or by reason of its
reckless disregard of its obligations and duties under each agreement.
Each Fund's investment management agreement continues in effect from year to
year so long as its continuation is approved at least annually by (a) a majority
of the trustees who are not parties to such agreement or interested persons of
any such party except in their capacity as trustees of the Fund and (b) by the
shareholders or the Board of Trustees of the Fund. Each Fund's investment
management agreement may be terminated at any time upon 60 days' notice by
either party, or by a majority vote of the outstanding shares of the Fund, and
will terminate automatically upon assignment. If additional Funds become subject
to an investment management agreement, the provisions concerning continuation,
amendment and termination shall be on a Fund by Fund basis. Additional Funds may
be subject to a different agreement.
B-22
<PAGE> 91
The current investment management fee rates paid by the Funds are in the
prospectus, see "Investment Manager and Underwriter." The investment management
fees paid by each Fund for its last three fiscal years are shown in the table
below.
<TABLE>
<CAPTION>
FUND 1996 1995 1994
- ------------------------------------------------------------ ----------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate............................................. $ 627,000 887,000 1,022,000*
Cash Reserves............................................... $ 922,000 1,346,000+* 1,464,000*
Diversified................................................. $ 4,239,000 4,152,000 3,226,000
Government.................................................. $18,159,000 19,681,000 22,103,000
High Yield.................................................. $19,436,000 17,917,000 13,201,000
Income and Capital.......................................... $ 3,194,000 2,923,000 2,734,000
Mortgage.................................................... $16,340,000 21,526,000+ 28,093,000
Short-Intermediate Government............................... $ 1,230,000 1,626,000+ 1,617,000
</TABLE>
- ---------------
+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.
* Fee waivers and/or expense absorptions in effect during the period, see below.
ZKI agreed temporarily to absorb operating expenses for the Cash Reserves Fund
from October 1, 1992 to May 28, 1994. During the fiscal year ended July 31,
1994, ZKI absorbed or paid $631,000 of operating expenses for the Cash Reserves
Fund. Prior to May 31, 1994, the Cash Reserves, Mortgage and Short-Intermediate
Government Funds paid ZKI an annual investment management fee, payable monthly,
on a graduated basis of .60% of the first $5 billion of average daily net assets
of all Portfolios of Kemper Portfolios, .55% of the next $5 billion and .50% of
average daily net assets of all Portfolios subject to the agreement over $10
billion.
Beginning January 17, 1992, ZKI agreed to waive its full management fee and to
absorb all other operating expenses of the Adjustable Rate Fund through December
31, 1992. For this purpose, "operating expenses" does not include taxes,
interest, extraordinary expenses, brokerage commissions or transaction costs.
Commencing on January 1, 1993, the investment management fee and other operating
expenses were gradually reinstated at the aggregate rate (as a percentage of
average daily net assets) of .07% each month. All expenses were reinstated by
January 31, 1994. If the fee waiver had not been in effect during the fiscal
years ended August 31, 1994 ZKI would have received management fees of
$1,161,000 from the Fund. Prior to May 31, 1994, the Adjustable Rate Fund paid
ZKI an investment management fee, payable monthly, at the annual rate of .50% of
average daily net assets.
Prior to May 31, 1994, the Diversified Fund paid ZKI an investment management
fee, payable monthly, at the annual rate of .70% of average daily net assets.
Prior to May 31, 1994, the Government Fund paid ZKI an investment management
fee, payable monthly, at the annual rate of .55% of the first $200 million of
average daily net assets, .45% of the next $300 million of average daily net
assets, and .35% of average daily net assets over $500 million.
Prior to May 31, 1994, the High Yield Fund paid ZKI an investment management
fee, payable monthly, at the annual rate of .65% of the first $75 million of
average daily net assets, .55% of the next $75 million of average daily net
assets, and .50% of average daily net assets over $150 million.
Prior to May 31, 1994, the Income and Capital Fund paid ZKI an investment
management fee, payable monthly, at the annual rate of .55% of the first $200
million of average daily net assets, .45% of the next $300 million of average
daily net assets and .35% of average daily net assets over $500 million.
FUND SUB-ADVISER. ZIML, 1 Fleet Place, London, U.K. EC4M 7RQ, an affiliate of
ZKI, is the sub-adviser for the foreign securities portion of the Diversified,
High Yield, and Income and Capital Funds. ZIML acts as sub-adviser pursuant to
the terms of a Sub-Advisory Agreement between it and ZKI for each such Fund.
B-23
<PAGE> 92
Under the terms of the Sub-Advisory Agreement for a Fund, ZIML renders
investment advisory and management services with regard to that portion of the
Fund's portfolio as may be allocated to ZIML by ZKI from time to time for
management of foreign securities, including foreign currency transactions and
related investments. ZIML may, under the terms of each Sub-Advisory Agreement,
render similar services to others including other investment companies. For its
services, ZIML will receive from ZKI a monthly fee at the annual rate of .30% of
the portion of the average daily net assets of each Fund allocated by ZKI to
ZIML for management. ZIML permits any of its officers or employees to serve
without compensation as trustees or officers of the Fund if elected to such
positions.
Each Sub-Advisory Agreement provides that ZIML will not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Sub-Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
ZIML in the performance of its duties or from reckless disregard by ZIML of its
obligations and duties under the Sub-Advisory Agreement.
Each Sub-Advisory Agreement is for an initial term ending March 1, 1998 and
continues in effect from year to year so long as its continuation is approved at
least annually (a) by a majority of the trustees who are not parties to such
agreement or interested persons of any such party except in their capacity as
trustees of the Fund and (b) by the shareholders or the Board of Trustees. Each
Sub-Advisory Agreement may be terminated at any time for a Fund upon 60 days
notice by ZKI, ZIML or the Board of Trustees, or by a majority vote of the
outstanding shares of the Fund, and will terminate automatically upon assignment
or upon the termination of the Fund's investment management agreement. If
additional Funds become subject to a Sub-Advisory Agreement, the provisions
concerning continuation, amendment and termination shall be on a Fund-by-Fund
basis. Additional Funds may be subject to a different agreement. No sub-advisory
fees were paid by ZKI to ZIML for each Fund's 1996 fiscal year, although in
prior fiscal years ZKI has paid ZIML for its services to ZKI with respect to
foreign securities investments of certain Funds.
PRINCIPAL UNDERWRITER. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), KDI, a wholly owned subsidiary
of ZKI, is the principal underwriter and distributor for the shares of each Fund
and acts as agent of each Fund in the continuous offering of its shares. KDI
bears all its expenses of providing services pursuant to the distribution
agreement, including the payment of any commissions. Each Fund pays the cost for
the prospectus and shareholder reports to be set in type and printed for
existing shareholders, and KDI, as principal underwriter, pays for the printing
and distribution of copies thereof used in connection with the offering of
shares to prospective investors. KDI also pays for supplementary sales
literature and advertising costs.
Each distribution agreement continues in effect from year to year so long as
such continuance is approved for each class at least annually by a vote of the
Board of Trustees of the Fund, including the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
agreement. Each agreement automatically terminates in the event of its
assignment and may be terminated for a class at any time without penalty by a
Fund or by KDI upon 60 days notice. Termination by a Fund with respect to a
class may be by vote of a majority of the Board of Trustees, or a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the agreement, or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
Investment Company Act of 1940. The agreement may not be amended for a class to
increase the fee to be paid by a Fund with respect to such class without
approval by a majority of the outstanding voting securities of such class of the
Fund and all material amendments must in any event be approved by the Board of
Trustees in the manner described above with respect to the continuation of the
agreement. The provisions concerning the continuation, amendment and termination
of the distribution agreement are on a Fund by Fund basis and for each Fund on a
class by class basis.
B-24
<PAGE> 93
CLASS A SHARES. The following information concerns the underwriting commissions
paid in connection with the distribution of each Fund's Class A shares for the
fiscal years noted.
<TABLE>
<CAPTION>
COMMISSIONS
COMMISSIONS COMMISSIONS PAID TO
CLASS A SHARES FISCAL YEAR RETAINED BY KDI KDI PAID TO ALL FIRMS KDI AFFILIATED FIRMS
- ------------------------------------- ----------- --------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Adjustable Rate...................... 1996 $ 11,000 88,000 0
1995 $ 22,000 161,000 40,000
1994 $ 64,000 676,000 218,000
Cash Reserves........................ 1996 $ 0 0 0
1995+ $ 0 0 0
1994* $ 0 0 0
Diversified.......................... 1996 $ 129,000 737,000 69,000
1995 $ 75,000 462,000 68,000
1994 $ 115,000 694,000 125,000
Government........................... 1996 $ 330,000 2,024,000 91,000
1995 $ 380,000 2,427,000 325,000
1994 $ 820,000 5,602,000 693,000
High Yield........................... 1996 $ 857,000 6,035,000 226,000
1995 $ 476,000 3,430,000 435,000
1994 $ 665,000 4,420,000 679,000
Income and Capital................... 1996 $ 115,000 914,000 74,000
1995 $ 96,000 767,000 110,000
1994 $ 261,000 1,055,000 179,000
Mortgage............................. 1996 $ 38,000 226,000 11,000
1995+ $ 20,000 183,000 29,000
1994* $ 6,000 0 0
Short-Intermediate Government........ 1996 $ 9,000 70,000 1,000
1995+ $ 23,000 220,000 77,000
1994* $ 1,000 6,000 1,000
</TABLE>
- ---------------
+ Includes amounts paid during fiscal year ended July 31, 1995 and fiscal
period from August 1, 1995 to September 30, 1995.
* Class A shares of the Cash Reserves, Mortgage and Short-Intermediate
Government Funds were not available for purchase (except upon conversion of
Class B shares) prior to May 31, 1994.
CLASS B SHARES AND CLASS C SHARES. Class B and Class C shares of each Fund
(other than the Cash Reserves, Mortgage and Short-Intermediate Government Funds)
were not available for purchase prior to May 31, 1994.
Since the distribution agreement provides for fees charged to Class B and Class
C shares that are used by KDI to pay for distribution services (see the
prospectus under "Investment Manager and Underwriter"), the agreement (the
"Plan"), is approved and renewed separately for the Class B and Class C shares
in accordance with Rule 12b-1 under the Investment Company Act of 1940, which
regulates the manner in which an investment company may, directly or indirectly,
bear expenses of distributing its shares.
B-25
<PAGE> 94
Expenses of the Funds and of KDI in connection with the Rule 12b-1 plans for the
Class B and Class C shares are set forth below. A portion of the marketing,
sales and operating expenses shown below could be considered overhead expense.
<TABLE>
<CAPTION>
CONTINGENT OTHER DISTRIBUTION EXPENSES PAID BY
DEFERRED DISTRIBUTION KDI
DISTRIBUTION SALES TOTAL FEES PAID BY ------------------------------------
FEES PAID CHARGES DISTRIBUTION KDI TO KDI ADVERTISING MARKETING
FISCAL BY FUND PAID TO FEES PAID BY AFFILIATED AND PROSPECTUS AND SALES
CLASS B SHARES* YEAR TO KDI KDI KDI TO FIRMS FIRMS LITERATURE PRINTING EXPENSES
- --------------------- ------ ------------ ---------- ------------ ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable Rate...... 1996 $ 42,000 19,000 56,000 5,000 13,000 1,000 31,000
1995 $ 35,000 30,000 116,000 41,000 13,000 3,000 69,000
1994 $ 3,000 1,000 27,000 9,000 2,000 1,000 7,000
Cash Reserves........ 1996 $ 1,380,000 766,000 2,820,000 28,000 660,000 52,000 1,467,000
1995+ $ 2,125,000 1,629,000 2,810,000 86,000 249,000 63,000 1,607,000
1994 $ 1,790,000 1,336,000 3,015,000 81,000 148,000 8,000 1,158,000
Diversified.......... 1996 $ 1,909,000 446,000 1,739,000 54,000 409,000 33,000 871,000
1995 $ 1,925,000 688,000 1,155,000 133,000 115,000 16,000 586,000
1994 $ 922,000 322,000 479,000 73,000 35,000 15,000 250,000
Government........... 1996 $ 475,000 181,000 1,206,000 34,000 336,000 27,000 690,000
1995 $ 254,000 91,000 1,495,000 200,000 131,000 8,000 681,000
1994 $ 19,000 12,000 187,000 52,000 11,000 5,000 80,000
High Yield........... 1996 $ 7,450,000 1,324,000 7,288,000 91,000 1,549,000 119,000 3,416,000
1995 $ 7,344,000 1,785,000 3,986,000 574,000 335,000 45,000 2,075,000
1994 $ 2,493,000 657,000 1,343,000 254,000 85,000 33,000 692,000
Income and
Capital............ 1996 $ 572,000 146,000 1,393,000 89,000 390,000 31,000 804,000
1995 $ 289,000 86,000 876,000 113,000 70,000 7,000 354,000
1994 $ 31,000 12,000 164,000 35,000 14,000 5,000 79,000
Mortgage............. 1996 $ 9,328,000 2,147,000 982,000 22,000 325,000 23,000 656,000
1995+ $ 15,132,000 4,977,000 1,496,000 156,000 165,000 72,000 979,000
1994 $ 23,535,000 7,287,000 6,814,000 1,041,000 326,000 20,000 2,240,000
Short-Intermediate
Government......... 1996 $ 1,403,000 486,000 378,000 2,000 111,000 9,000 235,000
1995+ $ 1,979,000 1,011,000 699,000 64,000 78,000 21,000 416,000
1994 $ 2,044,000 810,000 1,946,000 263,000 97,000 4,000 644,000
<CAPTION>
OTHER DISTRIBUTION EXPENSES
PAID BY KDI
---------------------------
MISC.
OPERATING INTEREST
CLASS B SHARES* EXPENSES EXPENSE
- --------------------- --------- ---------
<S> <C> <C>
Adjustable Rate...... 12,000 26,000
22,000 18,000
2,000 1,000
Cash Reserves........ 235,000 789,000
285,000 775,000
81,000 311,000
Diversified.......... 165,000 468,000
97,000 452,000
41,000 168,000
Government........... 135,000 308,000
86,000 136,000
10,000 7,000
High Yield........... 638,000 567,000
281,000 461,000
108,000 115,000
Income and
Capital............ 132,000 295,000
59,000 104,000
12,000 10,000
Mortgage............. 119,000 514,000
147,000 1,911,000
128,000 2,696,000
Short-Intermediate
Government......... 44,000 -0-
73,000 14,000
37,000 105,000
</TABLE>
- ---------------
+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.
* Class B shares were first offered on May 31, 1994.
B-26
<PAGE> 95
<TABLE>
<CAPTION>
DISTRIBUTION OTHER DISTRIBUTION EXPENSES PAID BY
CONTINGENT FEES PAID KDI
DISTRIBUTION DEFERRED TOTAL BY KDI ------------------------------------
FEES PAID SALES DISTRIBUTION TO KDI ADVERTISING MARKETING
BY FUND CHARGES FEES PAID BY AFFILIATED AND PROSPECTUS AND SALES
CLASS C SHARES** FISCAL YEAR TO KDI TO KDI KDI TO FIRMS FIRMS LITERATURE PRINTING EXPENSES
- ---------------------- ----------- ------------ ---------- ------------ ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable Rate....... 1996 $ 9,000 0 9,000 0 9,000 1,000 20,000
1995 $ 8,000 11,000 4,000 6,000 2,000 32,000
1994 $ 1,000 0 0 3,000 1,000 9,000
Cash Reserves......... 1996 $ 48,000 1,000 162,000 0 112,000 9,000 143,000
1995+ $ 33,000 30,000 2,000 36,000 5,000 223,000
1994 $ 0 0 0 1,000 0 9,000
Diversified........... 1996 $ 33,000 0 52,000 0 34,000 3,000 54,000
1995 $ 14,000 14,000 1,000 8,000 1,000 42,000
1994 $ 1,000 1,000 1,000 1,000 1,000 11,000
Government............ 1996 $ 51,000 1,000 60,000 0 57,000 5,000 113,000
1995 $ 19,000 19,000 2,000 11,000 1,000 60,000
1994 $ 1,000 1,000 1,000 1,000 1,000 8,000
High Yield............ 1996 $245,000 3,000 370,000 0 316,000 23,000 559,000
1995 $ 68,000 67,000 8,000 41,000 4,000 250,000
1994 $ 3,000 3,000 3,000 6,000 3,000 51,000
Income and Capital.... 1996 $ 31,000 1,000 42,000 0 40,000 3,000 86,000
1995 $ 12,000 12,000 1,000 7,000 1,000 34,000
1994 $ 1,000 1,000 1,000 1,000 0 5,000
Mortgage.............. 1996 $ 12,000 0 15,000 0 8,000 1,000 17,000
1995+ $ 5,000 5,000 1,000 4,000 1,000 23,000
1994 $ 0 0 0 0 0 1,000
Short-Intermediate
Government.......... 1996 $ 25,000 1,000 29,000 0 36,000 3,000 76,000
1995+ $ 19,000 42,000 3,000 15,000 4,000 79,000
1994 $ 0 0 0 2,000 0 6,000
<CAPTION>
OTHER DISTRIBUTION
EXPENSES PAID BY KDI
--------------------
MISC.
OPERATING INTEREST
CLASS C SHARES** EXPENSES EXPENSES
- ---------------------- --------- --------
<S> <C> <C>
Adjustable Rate....... 8,000 8,000
14,000 4,000
3,000 0
Cash Reserves......... 39,000 43,000
42,000 18,000
2,000 0
Diversified........... 14,000 12,000
14,000 5,000
2,000 0
Government............ 8,000 19,000
14,000 4,000
2,000 0
High Yield............ 90,000 79,000
44,000 18,000
9,000 1,000
Income and Capital.... 2,000 12,000
11,000 2,000
1,000 0
Mortgage.............. 1,000 5,000
12,000 2,000
0 0
Short-Intermediate
Government.......... 12,000 17,000
21,000 8,000
1,000 0
</TABLE>
- ---------------
+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.
** Class C shares were first offered on May 31, 1994.
ADMINISTRATIVE SERVICES. Administrative services are provided to each Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all its expenses of providing services pursuant to the administrative
agreement between KDI and the Fund, including the payment of service fees. For
the services under the administrative agreement, each Fund pays KDI an
administrative services fee, payable monthly, at the annual rate of up to .25%
of average daily net assets of Class A, B and C shares of the Fund.
KDI has entered into related arrangements with various financial services firms,
such as broker-dealers or banks ("firms"), that provide services and facilities
for their customers or clients who are shareholders of the Fund. The firms
provide such office space and equipment, telephone facilities and personnel as
is necessary or beneficial for providing information and services to their
clients. Such services and assistance may include, but are not limited to,
establishing and maintaining shareholder accounts and records, processing
purchase and redemption transactions, answering routine inquiries regarding the
Fund, assistance to clients in changing dividend and investment options, account
designations and addresses and such other services as may be agreed upon from
time to time and permitted by applicable statute, rule or regulation. With
respect to Class A shares, KDI pays each firm a service fee, payable quarterly,
at an annual rate of (a) up to .15% (.25% for the Cash Reserves, Mortgage and
Short-Intermediate Government Funds) of the net assets in Fund accounts that it
maintains and services attributable to Class A shares acquired prior to October
1, 1993, and (b) up to .25% of net assets of those accounts that it maintains
and services attributable to Class A shares acquired on or after October 1,
1993, in each
B-27
<PAGE> 96
case commencing with the month after investment. With respect to Class B shares
and Class C shares, KDI currently advances to firms the first-year service fee
at a rate of up to .25% of the purchase price of such shares. For periods after
the first year, KDI currently intends to pay firms a service fee at an annual
rate of up to .25% (calculated monthly and paid quarterly) of the net assets
attributable to Class B and Class C shares maintained and serviced by the firm
and the fee continues until terminated by KDI or the Fund. Firms to which
service fees may be paid include broker-dealers affiliated with KDI.
The following information concerns the administrative services fee paid by each
Fund to KDI.
<TABLE>
<CAPTION>
ADMINISTRATIVE SERVICE FEES TOTAL SERVICE FEES PAID BY SERVICE FEES PAID BY KDI
PAID BY FUND KDI TO FIRMS TO KDI AFFILIATED FIRMS
-------------------------------- -------------------------- ------------------------
FUND FISCAL YEAR CLASS A CLASS B CLASS C
- ----------------------- ------------ ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate........ 1996 $ 213,000 14,000 3,000 231,000 5,000
1995 $ 299,000 11,000 2,000 320,000 76,000
1994* $ 377,000 1,000 1,000 378,000 78,000
Cash Reserves.......... 1996 $ 92,000 446,000 16,000 690,000 7,000
1995+ $ 113,000 664,000 10,000 854,000 59,000
1994** $ 83,000 491,000 0 778,000 45,000
Diversified............ 1996 $1,020,000 624,000 11,000 1,692,000 55,000
1995 $ 952,000 620,000 5,000 1,582,000 203,000
1994* $ 696,000 283,000 0 1,050,000 162,000
Government............. 1996 $7,542,000 159,000 15,000 7,728,000 329,000
1995 $7,831,000 84,000 6,000 7,965,000 1,161,000
1994* $8,756,000 6,000 0 8,767,000 1,514,000
High Yield............. 1996 $5,075,000 2,469,000 83,000 7,844,000 134,000
1995 $4,323,000 2,400,000 22,000 6,730,000 783,000
1994* $3,405,000 759,000 1,000 3,961,000 569,000
Income and Capital..... 1996 $ 950,000 185,000 10,000 1,167,000 39,000
1995 $ 856,000 95,000 4,000 980,000 108,000
1994* $ 810,000 11,000 0 833,000 106,000
Mortgage............... 1996 $4,751,000 2,978,000 4,000 7,729,000 301,000
1995+ $5,402,000 4,811,000 2,000 10,164,000 1,280,000
1994** $4,291,000 7,373,000 0 11,426,000 1,602,000
Short-Intermediate
Government........... 1996 $ 80,000 453,000 8,000 546,000 11,000
1995+ $ 69,000 640,000 6,000 698,000 60,000
1994** $ 26,000 671,000 0 670,000 67,000
</TABLE>
- ---------------
+ Includes amounts paid during fiscal year ended July 31, 1995 and the fiscal
period from August 1, 1995 to September 30, 1995.
* Class B and Class C shares were first offered on May 31, 1994.
** Class C shares were first offered on May 31, 1994.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for a Fund. Currently, however,
the administrative services fee payable to KDI is based only upon Fund assets in
accounts for which there is a firm listed on the Fund's records and it is
intended that KDI will pay all the administrative services fee that it receives
from a Fund to firms in the form of service fees. The effective administrative
services fee rate to be charged against all assets of a Fund while this
procedure is in effect will depend upon the proportion of Fund assets that is in
accounts for which there is a firm of record, as well as (except for the Cash
Reserves, Mortgage and Short-Intermediate Government Funds), with respect to
Class A shares, the date when shares representing
B-28
<PAGE> 97
such assets were purchased. The Board of Trustees of a Fund, in its discretion,
may approve basing the fee to KDI on all Fund assets in the future.
Certain trustees or officers of the Funds are also directors or officers of ZKI,
ZIML or KDI as indicated under "Officers and Trustees."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary
Trust Company ("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as
custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of each Fund maintained in the United States. The Chase Manhattan Bank, Chase
MetroTech Center, Brooklyn, New York 11245, as custodian, has custody of all
securities and cash of each Fund held outside of the United States. They attend
to the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by each Fund. IFTC is also each Fund's
transfer agent and dividend-paying agent. Pursuant to a services agreement with
IFTC, Kemper Service Company ("KSvC"), an affiliate of ZKI, serves as
"Shareholder Service Agent" of each Fund, and as such, performs all of IFTC's
duties as transfer agent and dividend paying agent. IFTC receives as transfer
agent, and pays to KSvC, annual account fees of $6 (a maximum of $8 for the Cash
Reserves Fund accounts) per account plus account set up, transaction and
maintenance charges, annual fees associated with the contingent deferred sales
charge (Class B only) and out-of-pocket expense reimbursement. IFTC's fee is
reduced by certain earnings credits in favor of the Fund. The following shows
for each Fund's 1996 fiscal year the shareholder service fees IFTC remitted to
KSvC.
<TABLE>
<CAPTION>
FUND FEES TO KSVC
- ---------------------------------------------------------------------------------- ------------
<S> <C>
Adjustable Rate................................................................... $ 302,000
Cash Reserves..................................................................... 1,122,000
Diversified....................................................................... 1,519,000
Government........................................................................ 4,139,000
High Yield........................................................................ 4,142,000
Income and Capital................................................................ 924,000
Mortgage.......................................................................... 4,709,000
Short-Intermediate Government+.................................................... 630,000
</TABLE>
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Funds' independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Funds' annual financial statements, review certain
regulatory reports and the Funds' federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Funds. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
PURCHASE AND REDEMPTION OF SHARES
As described in the Funds' prospectus, shares of a Fund are sold at their public
offering price, which is the net asset value per share of the Fund next
determined after an order is received in proper form plus, with respect to Class
A shares of each Fund other than the Cash Reserves Fund, an initial sales
charge. The applicable sales charge applies for exchanges from Class A shares of
Cash Reserves Fund to Class A shares of other Kemper Mutual Funds. The minimum
initial investment is $1,000 and the minimum subsequent investment is $100 but
such minimum amounts may be changed at any time. See the prospectus for certain
exceptions to these minimums. An order for the purchase of shares that is
accompanied by a check drawn on a foreign bank (other than a check drawn on a
Canadian bank in U.S. Dollars) will not be considered in proper form and will
not be processed unless and until the Fund determines that it has received
payment of the proceeds of the check. The time required for such a determination
will vary and cannot be determined in advance.
B-29
<PAGE> 98
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by the Fund at the applicable net asset value
per share of such Fund as described in the Funds' prospectus.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemption of Class B or Class C shares by certain classes of persons or through
certain types of transactions as described in the prospectus are provided
because of anticipated economies in sales and sales related efforts.
A Fund may suspend the right of redemption or delay payment more than seven days
(a) during any period when the New York Stock Exchange ("Exchange") is closed
other than customary weekend and holiday closings or during any period in which
trading on the Exchange is restricted, (b) during any period when an emergency
exists as a result of which (i) disposal of a Fund's investments is not
reasonably practicable, or (ii) it is not reasonably practicable for the Fund to
determine the value of its net assets, or (c) for such other periods as the
Securities and Exchange Commission may by order permit for the protection of a
Fund's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to each Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
DIVIDENDS AND TAXES
DIVIDENDS. Each Fund normally declares and distributes monthly dividends of net
investment income and distributes any net realized short-term and long-term
capital gains at least annually, except that the Cash Reserves Fund declares
daily dividends of its net investment income.
CASH RESERVES FUND. Dividends will be reinvested or paid in cash monthly. If a
shareholder redeems his or her entire account, all dividends accrued to the time
of redemption will be paid at that time. The Fund calculates its dividends based
on its daily net investment income. For this purpose, the net investment income
of the Cash Reserves Fund consists of (a) accrued interest income plus or minus
amortized discount or premium, (b) plus or minus all short-term realized gains
and losses on investments and (c) minus accrued expenses allocated to the Fund.
Expenses are accrued each day. While the Fund's investments are valued at
amortized cost (see "Net Asset Value" in the prospectus), there will be no
unrealized gains or losses on such investments. However, should the net asset
value 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.
ALL FUNDS. A Fund may at any time vary its foregoing dividend practices and,
therefore, reserves the right from time to time to either distribute or retain
for reinvestment such of its net investment income and its net short-term and
long-term capital gains as the Board of Trustees of the Fund determines
appropriate under the then current circumstances. In particular, and without
limiting the foregoing, a Fund may make additional distributions of net
investment income or capital gain net income in order to satisfy the minimum
distribution requirements contained in the Internal Revenue Code (the "Code").
Dividends will be reinvested in shares of the Fund paying such dividends unless
shareholders indicate in writing that they wish to receive them in cash or in
shares of other Kemper Funds as described in the prospectus.
B-30
<PAGE> 99
The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C shares than for Class A shares primarily
as a result of the distribution services fee applicable to Class B and Class C
shares. Distributions of capital gains, if any, will be paid in the same amount
for each class.
TAXES. Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code and, if so qualified, will not be liable
for federal income taxes to the extent its earnings are distributed. One of the
Subchapter M requirements to be satisfied is that less than 30% of a Fund's
gross income during its fiscal year must be derived from gains (not reduced by
losses) from the sale or other disposition of securities and certain other
investments held for less than three months. A Fund may be limited in its
options, futures and foreign currency transactions in order to prevent
recognition of such gains.
A Fund's options, futures and foreign currency transactions are subject to
special tax provisions that may accelerate or defer recognition of certain gains
or losses, change the character of certain gains or losses, or alter the holding
periods of certain of the Fund's securities.
The mark-to-market rules of the Code may require a Fund to recognize unrealized
gains and losses on certain options and futures held by the Fund at the end of
the fiscal year. Under these provisions, 60% of any capital gain or loss
recognized will generally be treated as long-term and 40% as short-term.
However, although certain forward contracts and futures contracts on foreign
currency are marked-to-market, the gain or loss is generally ordinary under
Section 988 of the Code. In addition, the straddle rules of the Code would
require deferral of certain losses realized on positions of a straddle to the
extent that the Fund had unrealized gains in offsetting positions at year end.
Gains and losses attributable to fluctuations in the value of foreign currencies
will be characterized generally as ordinary gain or loss under Section 988 of
the Code. For example, if a Fund sold a foreign bond and part of the gain or
loss on the sale was attributable to an increase or decrease in the value of a
foreign currency, then the currency gain or loss may be treated as ordinary
income or loss. If such transactions result in greater net ordinary income, the
dividends paid by the Fund will be increased; if the result of such transactions
is lower net ordinary income, a portion of dividends paid could be classified as
a return of capital.
At August 31, 1996 the Adjustable Rate Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $11,606,000, which
is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 1997 through 2005. The Fund does not intend
to distribute realized capital gains until the capital loss carryover is
exhausted.
At October 31, 1996 the Diversified Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $157,533,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 1997 through 2003. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At October 31, 1996, the Government Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $679,991,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 1998 through 2004. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At October 31, 1996, the Income and Capital Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $18,058,000, which
is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 2002 through 2003. The Fund does not intend
to distribute realized capital gains until the capital loss carryover is
exhausted.
At September 30, 1996, the High Yield Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $149,709,000,
which is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 1998 through 2004. The Fund does not intend
to distribute realized capital gains until the capital loss carryover is
exhausted.
B-31
<PAGE> 100
At September 30, 1996, the Mortgage Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $908,376,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 1998 through 2005. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At September 30, 1996, the Short-Intermediate Government Fund had an accumulated
net realized capital loss for federal income tax purposes of approximately
$17,243,000, which is available to offset future taxable capital gains. If not
applied, the carryover expires during the period 2002 through 2003. The Fund
does not intend to distribute realized capital gains until the capital loss
carryover is exhausted.
A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. The required
distribution is the sum of 98% of a Fund's net investment income for the
calendar year plus 98% of its capital gain net income for the one-year period
ending October 31, plus any undistributed net investment income from the prior
calendar year, plus any undistributed capital gain net income from the one year
period ended October 31 in the prior calendar year, minus any overdistribution
in the prior calendar year. For purposes of calculating the required
distribution, foreign currency gains or losses occurring after October 31 are
taken into account in the following calendar year. Each Fund intends to declare
or distribute dividends during the appropriate periods of an amount sufficient
to prevent imposition of the 4% excise tax.
A shareholder who redeems shares of a Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the adjusted cost basis of the shares. Any loss
recognized on the redemption of Fund shares held six months or less will be
treated as long-term capital loss to the extent that the shareholder has
received any long-term capital gain dividends on such shares. A shareholder who
has redeemed shares of a Fund (other than shares of the Cash Reserves Fund not
acquired by exchange from another Kemper Mutual Fund) or other Kemper Mutual
Fund listed in the prospectus under "Special Features--Class A Shares--Combined
Purchases" may reinvest the amount redeemed at net asset value at the time of
the reinvestment in shares of any Fund or in shares of a Kemper Mutual Fund
within six months of the redemption as described in the prospectus under
"Redemption or Repurchase of Shares--Reinvestment Privilege." If redeemed shares
were purchased after October 3, 1989 and were held less than 91 days, then the
lesser of (a) the sales charge waived on the reinvested shares, or (b) the sales
charge incurred on the redeemed shares, is included in the basis of the
reinvested shares and is not included in the basis of the redeemed shares. If a
shareholder realized a loss on the redemption or exchange of a Fund's shares and
reinvests in shares of the same Fund within 30 days before or after the
redemption or exchange, the transactions may be subject to the wash sale rules
resulting in a postponement of the recognition of such loss for federal income
tax purposes. An exchange of a Fund's shares for shares of another fund is
treated as a redemption and reinvestment for federal income tax purposes upon
which gain or loss may be recognized.
A Fund's investment income derived from foreign securities may be subject to
foreign income taxes withheld at the source. Because the amount of a Fund's
investments in various countries will change from time to time, it is not
possible to determine the effective rate of such taxes in advance.
Shareholders who are non-resident aliens are subject to U.S. withholding tax on
ordinary income dividends (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by any applicable tax treaty.
PERFORMANCE
As described in the prospectus, each Fund's historical performance or return for
a class of shares may be shown in the form of "yield" and, for each Fund except
the Cash Reserves Fund, "average annual total return" and "total return"
figures. The Cash Reserves Fund also may advertise its "effective yield." These
various measures of performance are described below. Performance information
will be computed separately for each class. ZKI agreed to waive its management
fee and to absorb certain operating expenses for the Adjustable Rate Fund and to
absorb certain operating expenses for the Cash Reserves Fund for the periods and
to the extent specified in this Statement of Additional Information. See
"Investment Manager and Underwriter." Because of this waiver and
B-32
<PAGE> 101
expense absorption, the performance results for the Adjustable Rate Fund and
Cash Reserves Fund may be shown with and without the effect of this waiver and
expense absorption. Performance results not giving effect to waivers and expense
absorptions will be lower.
Yield is a measure of the net investment income per share earned over a specific
one month or 30-day period expressed as a percentage of the maximum offering
price of a Fund's shares at the end of the period. Average annual total return
and total return measure both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of, the
underlying investments in the Fund's portfolio.
A Fund's yield is computed in accordance with a standardized method prescribed
by rules of the Securities and Exchange Commission. Each Fund's yield shown
below is based on the one month (7 days for Cash Reserves Fund) period ended as
noted.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
FUND (PERIOD ENDED) SHARES SHARES SHARES
- -------------------------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Adjustable Rate (8/31/96)................................................. 5.25% 4.67% 4.64%
Cash Reserves (9/30/96)................................................... 4.35 3.40 3.69
Diversified (10/31/96).................................................... 6.60 5.96 6.02
Government (10/31/96)..................................................... 6.18 5.50 5.52
High Yield (9/30/96)...................................................... 8.90 8.43 8.47
Income and Capital (10/31/96)............................................. 6.17 5.50 5.52
Mortgage (9/30/96)........................................................ 6.01 5.46 5.55
Short-Intermediate Government (9/30/96)................................... 5.08 4.45 4.57
</TABLE>
Each Fund's yield is computed by dividing the net investment income per share
earned during the specified one month or 30-day period by the maximum offering
price per share (which is net asset value for Class B and Class C shares) on the
last day of the period, according to the following formula:
<TABLE>
<S> <C> <C>
a - b
-----
YIELD = 2 [ ( cd +1 6(superior) - 1]
</TABLE>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period
(which is net asset value for Class B and Class C shares).
In computing the foregoing yield, each Fund follows certain standardized
accounting practices specified by Securities and Exchange Commission rules.
These practices are not necessarily consistent with those that each Fund uses to
prepare its annual and interim financial statements in conformity with generally
accepted accounting principles.
The Cash Reserve Fund's yield is also computed in accordance with a standardized
method prescribed by rules of the Securities and Exchange Commission. Under that
method, the current yield quotation is based on a seven-day period and is
computed as follows. The first calculation is net investment income per share;
which is accrued interest on portfolio securities, plus or minus amortized
discount or premium, less accrued expenses. This number is then divided by the
price per share (expected to remain constant at $1.00) at the beginning of the
period ("base period return"). The result is then divided by 7 and multiplied by
365 and the resulting yield figure is carried to the nearest one-hundredth of
one percent. Realized capital gains or losses and unrealized appreciation or
depreciation of investments are not included in the calculation.
The Cash Reserve Fund's effective yield is determined by taking the base period
return (computed as described above) and calculating the effect of assumed
compounding. The formula for the effective yield is: (base period
B-33
<PAGE> 102
return + 1) 365/7(superior) - 1. The Cash Reserve Fund's effective yield for its
Class A, Class B and Class C shares for the seven-day period ended September 30,
1996 was 4.45%, 3.46% and 3.76%, respectively.
Each Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the Fund's shares on the first day of the period, adjusting to deduct the
maximum sales charge (in the case of Class A shares), and computing the
"redeemable value" of that investment at the end of the period. The redeemable
value in the case of Class B shares or Class C shares includes the effect of the
applicable contingent deferred sales charge that may be imposed at the end of
the period. The redeemable value is then divided by the initial investment, and
this quotient is taken to the Nth root (N representing the number of years in
the period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value on the reinvestment
dates during the period. Average annual total return may also be calculated
without deducting the maximum sales charge.
Calculation of a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the Fund's "Financial Highlights" table
in the Fund's financial statements and prospectus. Total return performance for
a specific period is calculated by first taking a hypothetical investment
("initial investment") in a Fund's shares on the first day of the period, either
adjusting or not adjusting to deduct the maximum sales charge (in the case of
Class A shares), and computing the "ending value" of that investment at the end
of the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The ending value
in the case of Class B and Class C shares may or may not include the effect of
the applicable contingent deferred sales charge that may be imposed at the end
of the period. The calculation assumes that all income and capital gains
dividends paid by the Fund have been reinvested at net asset value on the
reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge would be
reduced if such charge were included.
A Fund's performance figures are based upon historical results and are not
representative of future performance. Each Fund's Class A shares are sold at net
asset value plus a maximum sales charge of 4.5% of the offering price (3.5% for
the Adjustable Rate and Short-Intermediate Government Funds). Class B and Class
C shares are sold at net asset value. Redemptions of Class B shares may be
subject to a contingent deferred sales charge that is 4% in the first year
following the purchase, declines by a specified percentage each year thereafter
and becomes zero after six years. Redemption of Class C shares may be subject to
a 1% contingent deferred sales charge in the first year following purchase.
Returns and net asset value will fluctuate. Factors affecting each Fund's
performance include general market conditions, operating expenses and investment
management. Any additional fees charged by a dealer or other financial services
firm would reduce the returns described in this section. Shares of each Fund are
redeemable at the then current net asset value, which may be more or less than
original cost.
The figures below show performance information for the Funds for various
periods. Comparative information with respect to certain indices is also
included. Please note the differences and similarities between the investments
which a Fund may purchase and the investments measured by the applicable
indices. The Consumer Price Index is generally considered to be a measure of
inflation. The Lehman Brothers Adjustable Rate Index generally represents the
performance of adjustable rate mortgages during various market conditions. The
Lehman Brothers Aggregate Bond Index generally represents the performance of
intermediate and long-term government bonds and investment grade corporate debt
securities and mortgage-backed securities during various market conditions. The
Lehman Brothers Government/Corporate Bond Index generally represents the
performance of intermediate and long-term government and investment grade
corporate debt securities during various market conditions. The Merrill Lynch
Market Weighted Index generally represents the performance of short- and
intermediate-term Treasury and GNMA securities during various market conditions.
The Salomon Brothers High Grade Corporate Bond Index generally represents the
performance of high grade long-term corporate bonds during various market
conditions. The Salomon Brothers Long-Term High Yield Index generally represents
the performance of high yield
B-34
<PAGE> 103
debt securities during various market conditions. The Salomon Brothers 30 Year
GNMA Index generally represents the performance of GNMA 30-year pass-through
mortgages. The foregoing bond indices are unmanaged. The market prices and
yields of corporate and government bonds will fluctuate. The net asset values
and returns of each class of shares of the Funds will also fluctuate. No
adjustment has been made for taxes payable on dividends. The period indicated
was one of fluctuating securities prices and interest rates.
ADJUSTABLE RATE FUND--AUGUST 31, 1996
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage
RETURN $10,000 Dividends Dividends Value Increase
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*)
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,811 9 8,352 17,172 71.7
Five Years 9,481 0 3,058 12,539 25.4
One Year 9,558 0 532 10,090 0.9
CLASS B SHARES
Life of Fund(++) 9,832 0 1,086 10,623 6.2
One Year 9,904 0 475 10,082 0.8
CLASS C SHARES
Life of Fund(++) 9,845 0 1,095 * *
One Year 9,904 0 478 * *
<CAPTION>
TOTAL Ending Percentage
RETURN Value Increase
TABLE (unadjusted)(*) (unadjusted)(*)
----------------- -----------------
<S> <C> <C>
CLASS A SHARES
Life of Fund(+) 17,801 78.0
Five Years 12,989 29.9
One Year 10,455 4.6
CLASS B SHARES
Life of Fund(++) 10,918 9.2
One Year 10,379 3.8
CLASS C SHARES
Life of Fund(++) 10,940 9.4
One Year 10,382 3.8
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
------------------------------------------------------
Consumer Salomon Lehman Lehman
TOTAL Price Bros. High Bros. Bros.
RETURN Index Grade Corp. Govt./Corp. Adj. Rate
TABLE (1) Index(2) Index(3) Index(4)
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Life of Fund(+) 37.5 141.0 115.8 DNA
Life of Fund(++) 6.6 1.1 17.7 16.7
Five Years 15.2 53.0 45.0 DNA
One Year 2.9 2.6 3.7 6.4
</TABLE>
<TABLE>
<CAPTION>
Salomon
Bros. Lehman
Fund Fund Fund High Lehman Bros.
AVERAGE ANNUAL Class Class Class Consumer Grade Bros. Adj.
TOTAL RETURN A B C Price Corp. Govt./Corp. Rate
TABLE Shares Shares Shares Index(1) Index(2) Index(3) Index(4)
---- ----- ----- --- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 6.2 * * 3.6 10.3 8.9 DNA
Life of Fund(++) * 2.7 4.1 2.9 4.5 7.5 7.1
Five Years 4.6 * * 2.9 8.9 7.7 DNA
One Year 0.9 0.8 3.8 2.9 2.6 3.7 6.4
</TABLE>
- ---------------
DNA--Data not available.
(+) Since September 1, 1987 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
B-35
<PAGE> 104
DIVERSIFIED FUND--OCTOBER 31, 1996
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending
RETURN $10,000 Dividends Dividends Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*)
- -------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 5,617 716 62,832 69,165
Fifteen Years 5,952 382 37,608 43,942
Ten Years 7,578 195 17,639 25,412
Since 2/1/89(+++) 9,328 0 13,340 22,668
Five Years 10,463 0 6,265 16,728
One Year 9,569 0 963 10,532
<CAPTION>
TOTAL Percentage Ending Percentage
RETURN Increase Value Increase
TABLE (adjusted)(*) (unadjusted)(***) (unadjusted)(***)
- -------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Life of Fund(+) 591.7 72,439 624.4
Fifteen Years 339.4 46,010 360.1
Ten Years 154.1 26,610 166.1
Since 2/1/89(+++) 126.7 23,737 137.4
Five Years 67.3 17,523 75.2
One Year 5.3 11,025 10.3
CLASS B SHARES
Life of Fund(++) 10,084 0 2,179 11,963
One Year 10,017 0 906 10,623
<CAPTION>
<S> <C> <C> <C>
Life of Fund(++) 19.6 12,263 22.6
One Year 6.2 10,923 9.2
CLASS C SHARES
Life of Fund(++) 10,101 0 2,206 *
One Year 9,984 0 583 *
<CAPTION>
<S> <C> <C> <C>
Life of Fund(++) * 12,307 23.1
One Year * 10,567 5.7
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------------------------------------------
Salomon
Salomon Lehman Bros.
TOTAL Consumer Bros. Bros. Long-Term
RETURN Price High Grade Govt./Corp. High Yield
TABLE Index(1) Corp. Index(2) Index(3) Index(5)
- -------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Life of Fund(+) 160.0 524.7 484.6 *
Life of Fund(++) 7.0 28.7 22.6 37.1
Fifteen Years 69.0 619.3 430.3 *
Ten Years 43.1 154.2 125.5 192.8
Since 2/1/89(+++) 30.3 118.0 99.1 135.2
Five Years 14.9 57.6 46.6 88.8
One Year 2.7 5.5 5.4 9.1
</TABLE>
<TABLE>
<CAPTION>
Salomon
AVERAGE ANNUAL Fund Fund Fund Consumer Bros. Lehman Bros.
TOTAL RETURN Class A Class B Class C Price High Grade Govt./Corp.
TABLE Shares Shares Shares Index(1) Corp. Index(2) Index(3)
- --------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 10.5 * * 5.1 9.9 9.6
Life of
Fund(++) * 7.7 9.0 2.8 11.0 8.8
Fifteen Years 10.4 * * 3.6 14.1 11.8
Ten Years 9.8 * * 3.7 9.8 8.5
Five Years 10.8 * * 2.8 9.5 8.0
One Year 5.3 6.2 5.7 2.7 5.5 5.4
<CAPTION>
Salomon
Bros.
AVERAGE ANNUAL Long-Term
TOTAL RETURN High Yield
TABLE Index(5)
- --------------- --------------
<S> <C>
Life of Fund(+) *
Life of
Fund(++) 13.9
Fifteen Years *
Ten Years 11.3
Five Years 13.6
One Year 9.1
</TABLE>
- ---------------
DNA--Data not available.
(+) Since June 23, 1977 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
(+++) The Fund's current objective became effective February 1, 1989.
B-36
<PAGE> 105
GOVERNMENT FUND--OCTOBER 31, 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*)
------------- ------------ -------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 7,838 0 35,918 43,756 337.6 45,810
Fifteen Years 10,581 0 36,079 46,660 366.6 48,848
Ten Years 8,436 0 11,843 20,279 102.8 21,242
Five Year 8,955 0 4,118 13,073 30.7 13,690
One Year 9,357 0 705 10,062 0.6 10,536
CLASS B SHARES
Life of Fund(++) 10,069 0 1,710 11,479 14.8 11,779
One Year 9,798 0 638 10,142 1.4 10,436
CLASS C SHARES
Life of Fund(++) 10,092 0 1,723 * * 11,815
One Year 9,798 0 642 * * 10,440
<CAPTION>
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(*)
-----------------
<S> <C>
Life of Fund(+) 358.1
Fifteen Years 388.5
Ten Years 112.4
Five Year 36.9
One Year 5.4
Life of Fund(++) 17.8
One Year 4.4
Life of Fund(++) 18.2
One Year 4.4
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------------
Consumer Salomon Lehman Salomon
TOTAL Price Bros. High Bros. Bros. 30 Yr.
RETURN Index Grade Corp. Govt./Corp. GNMA
TABLE (1) Index(2) Index(3) Index(6)
-------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Life of Fund(+) 111.5 499.5 443.6 DNA
Life of
Fund(++) 7.0 28.7 22.6 23.8
Fifteen Years 69.0 619.3 430.3 519.2
Ten Years 43.1 154.2 125.5 138.0
Five Year 14.9 57.6 46.6 43.1
One Year 2.7 5.5 5.4 7.2
</TABLE>
<TABLE>
<CAPTION>
Salomon Lehman Salomon
AVERAGE ANNUAL Fund Fund Fund Consumer Bros. High Bros. Bros. 30 Yr.
TOTAL RETURN Class A Class B Class C Price Grade Corp. Govt./Corp. GNMA
TABLE Shares Shares Shares Index(1) Index(2) Index(3) Index(6)
------- ------- ------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 9.0 * * 4.5 11.1 10.4 *
Life of Fund(++) * 5.9 7.1 2.8 11.0 8.8 9.2
Fifteen Years 10.8 * * 3.6 14.1 11.8 12.9
Ten Years 7.3 * * 3.7 9.8 8.5 9.1
Five Year 5.5 * * 2.8 9.5 8.0 7.4
One Year 0.6 1.4 4.4 2.7 5.5 5.4 7.2
</TABLE>
- ---------------
DNA--Data not available.
(+) Since October 1, 1979 for Class A Shares (when ZKI assumed investment
advisory responsibilities for the Fund; prior to that date, the Fund was managed
by another investment adviser that was not affiliated with ZKI)
(++) Since May 31, 1994 for Class B and Class C Shares.
B-37
<PAGE> 106
HIGH YIELD FUND--SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*)
- ------------------ ------------- ------------ -------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,159 1,127 70,089 79,375 693.8 83,084
Fifteen Years 12,535 1,119 65,184 78,838 688.4 82,543
Ten Years 8,556 399 19,177 28,132 181.3 29,460
Five Years 10,762 0 6,847 17,609 76.1 18,438
One Year 9,809 0 979 10,788 7.9 11,300
CLASS B SHARES
Life of Fund(++) 10,326 0 2,343 12,369 23.7 12,669
One Year 10,275 0 927 10,902 9.0 11,202
CLASS C SHARES
Life of Fund(++) 10,351 0 2,360 * * 12,711
One Year 10,274 0 932 * * 11,206
<CAPTION>
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)
- ------------------ -----------------
<S> <C>
CLASS A SHARES
Life of Fund(+) 730.8
Fifteen Years 725.4
Ten Years 194.6
Five Years 84.4
One Year 13.0
CLASS B SHARES
Life of Fund(++) 26.7
One Year 12.0
CLASS C SHARES
Life of Fund(++) 27.1
One Year 12.1
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-----------------------------------------------------
Salomon
Salomon Bros.
Consumer Bros. Lehman Long-Term
TOTAL Price High Grade Bros. High
RETURN Index Corp. Govt./Corp. Yield
TABLE (1) Index(2) Index(3) Index(5)
- ----------------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Life of Fund(+) 151.7 506.8 467.9 *
Life of Fund(++) 6.6 24.2 19.8 34.7
Fifteen Years 68.8 630.4 446.4 *
Ten Years 42.7 150.0 123.6 193.0
Five Years 14.7 52.8 44.6 91.8
One Year 2.7 3.7 4.5 8.4
</TABLE>
<TABLE>
<CAPTION>
Salomon
Salomon Bros.
Bros. Long-Term
AVERAGE ANNUAL Fund Fund Fund Consumer High Grade Lehman Bros. High
TOTAL RETURN Class A Class B Class C Price Corp. Govt./Corp. Yield
TABLE Shares Shares Shares Index(1) Index(2) Index(3) Index(5)
- --------------- ------- ------- ------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 11.7 * * 5.1 10.1 9.7 *
Life of Fund
(++) * 9.5 10.8 2.8 9.7 8.0 13.6
Fifteen Years 14.8 * * 3.6 14.2 12.0 *
Ten Years 10.9 * * 3.6 9.6 8.4 11.4
Five Years 12.0 * * 2.8 8.8 7.7 13.9
One Year 7.9 9.0 12.1 2.7 3.7 4.5 8.4
</TABLE>
- ---------------
DNA--Data not available.
(+) Since January 26, 1978 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
B-38
<PAGE> 107
INCOME AND CAPITAL FUND--OCTOBER 31, 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*)
------------- ------------ -------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,126 461 65,865 74,452 644.5 77,952
Fifteen Years 11,735 244 40,687 52,666 426.7 55,177
Ten Years 8,909 99 12,415 21,423 114.2 22,433
Five Years 9,881 66 4,285 14,232 42.3 14,907
One Year 9,421 0 618 10,039 0.4 10,517
CLASS B SHARES
Life of Fund(++) 10,382 0 1,664 11,746 17.5 12,046
One Year 9,862 0 558 10,124 1.2 10,420
CLASS C SHARES
Life of Fund(++) 10,406 0 1,678 * * 12,084
One Year 9,863 0 560 * * 10,423
<CAPTION>
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(*)
-----------------
<S> <C>
Life of Fund(+) 679.5
Fifteen Years 451.8
Ten Years 124.3
Five Years 49.1
One Year 5.2
Life of Fund(++) 20.5
One Year 4.2
Life of Fund(++) 20.8
One Year 4.2
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-----------------------------------------------------
Salomon Lehman
Bros. Bros. Lehman
TOTAL Consumer High Grade Aggregate Bros.
RETURN Price Corp. Bond Bond Govt./Corp.
TABLE Index(1) Index(2) Index(7) Index(3)
-------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Life of Fund(+) 230.1 766.0 * 691.0
Life of Fund(++) 7.0 28.7 22.8 22.6
Fifteen Years 69.0 619.3 444.4 430.3
Ten Years 43.1 154.2 127.7 125.5
Five Years 14.9 57.6 44.9 46.6
One Year 2.7 5.5 5.9 5.4
</TABLE>
<TABLE>
<CAPTION>
Lehman
Salomon Bros.
Bros. Aggregate Lehman
AVERAGE ANNUAL Fund Fund Fund Consumer High Grade Bond Bros.
TOTAL RETURN Class A Class B Class C Price Corp. Bond Index Govt./Corp.
TABLE Shares Shares Shares Index(1) Index(2) (7) Index(3)
- --------------- ------- ------- ------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 9.3 * * 5.4 10.1 * 9.6
Life of
Fund(++) * 6.9 8.1 2.8 11.0 8.9 8.8
Fifteen Years 11.7 * * 3.6 14.1 12.0 11.8
Ten Years 7.9 * * 3.7 9.8 8.6 8.5
Five Years 7.3 * * 2.8 9.5 7.7 8.0
One Year 0.4 1.2 4.2 2.7 5.5 5.9 5.4
</TABLE>
- ---------------
DNA--Data not available.
(+) Since April 15, 1974 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
B-39
<PAGE> 108
MORTGAGE FUND--SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(***) (adjusted)(*) (unadjusted)(*)
- ------------------ ------------- ------------ -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,447 0 3,722 12,169 21.7 12,746
One Year 9,251 0 703 9,954 (0.5) 10,428
CLASS B SHARES
Life of Fund(++) 8,129 0 14,331 * * 22,460
Ten Years 8,158 0 10,546 * * 18,704
Five Years 9,201 0 3,838 12,947 29.5 13,039
One Year 9,705 0 649 10,063 0.6 10,354
CLASS C SHARES
Life of Fund(+++) 9,871 0 1,661 * * 11,532
One Year 9,691 0 656 * * 10,347
<CAPTION>
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(*)
- ------------------ ---------------
<S> <C>
Life of Fund(+) 27.5
One Year 4.3
Life of Fund(++) 124.6
Ten Years 87.0
Five Years 30.4
One Year 3.5
Life of Fund(+++) 15.3
One Year 3.5
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------
Salomon Merrill
Bros. Lehman Lynch
TOTAL Consumer 30 Yr. Brothers Market
RETURN Price GNMA Govt./Corp. Weighted
TABLE Index(1) Index(6) Index(3) Index(8)
- ----------------- -------- ------- ----------- --------
<S> <C> <C> <C> <C>
Life of Fund(+) 14.1 35.9 37.2 *
Life of Fund(++) 49.4 252.8 213.9 *
Life of Fund(+++) 6.6 21.4 19.8 17.5
Ten Years 42.7 136.3 123.6 113.6
Five Years 14.7 42.4 44.6 37.7
One Year 2.7 6.0 4.5 5.5
</TABLE>
<TABLE>
<CAPTION>
Salomon
AVERAGE Bros. Lehman Merrill Lynch
ANNUAL Fund Fund Fund Consumer 30 Yr. Brothers Market
TOTAL RETURN Class A Class B Class C Price GNMA Govt./Corp. Weighted
TABLE Shares Shares Shares Index(1) Index(6) Index(3) Index(8)
-------- -------- -------- -------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 4.2 * * 2.8 6.7 6.9 *
Life of Fund(++) * 7.0 * 3.4 11.8 10.1 *
Life of Fund(+++) * * 6.3 2.8 8.7 8.0 7.1
Ten Years * 6.5 * 3.6 9.0 8.4 7.9
Five Years * 5.3 * 2.8 7.3 7.7 6.6
One Year (0.5) 0.6 3.5 2.7 6.0 4.5 5.5
</TABLE>
- ---------------
DNA*Data not available.
(+) Since January 10, 1992 for Class A Shares.
(++) Since October 26, 1984 for Class B Shares.
(+++) Since May 31, 1994 for Class C Shares.
B-40
<PAGE> 109
SHORT-INTERMEDIATE GOVERNMENT FUND--SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Distributions Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*)
- ------------------ ------------- ------------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,866 71 3,153 12,090 20.9 12,526
One Year 9,426 0 637 10,063 0.6 10,425
CLASS B SHARES
Life of Fund(++) 9,235 93 6,056 * * 15,384
Five Years 9,333 16 3,084 12,400 24.0 12,493
One Year 9,752 0 576 10,035 0.4 10,328
CLASS C SHARES
Life of Fund(+++) 9,716 0 1,408 * * 11,124
One Year 9,752 0 584 * * 10,336
<CAPTION>
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(*)
- ------------------ ---------------
<S> <C>
Life of Fund(+) 25.3
One Year 4.3
Life of Fund(++) 53.8
Five Years 24.9
One Year 3.3
Life of Fund(+++) 11.2
One Year 3.4
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-----------------------------------------------------------------------------------------------
Salomon
Consumer Bros. Lehman Merrill Lynch
TOTAL Price 30 Yr. Bros. Market
RETURN Index GNMA Govt./Corp. Weighted
TABLE (1) Index(6) Index(3) Index(8)
- --------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Life of Fund(+) 14.1 35.9 37.2 *
Life of Fund(++) 29.9 98.5 94.5 *
Life of Fund(+++) 6.6 21.4 19.8 17.5
Five Years 14.7 42.4 44.6 37.7
One Year 2.7 6.0 4.5 5.5
</TABLE>
<TABLE>
<CAPTION>
Salomon
Bros. Lehman
AVERAGE ANNUAL Fund Fund Fund Consumer 30 Yr. Bros.
TOTAL RETURN Class A Class B Class C Price GNMA Govt./Corp.
TABLE Shares Shares Shares Index(1) Index(6) Index(3)
- ----------------- -------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 4.1 * * 2.8 6.7 6.9
Life of Fund(++) * * * 3.5 9.4 9.1
Life of Fund(+++) * * 4.7 2.8 8.7 8.0
Five Years * 4.4 * 2.8 7.3 7.7
One Year 0.6 0.4 3.4 2.7 6.0 4.5
<CAPTION>
Merrill Lynch
AVERAGE ANNUAL Market
TOTAL RETURN Weighted
TABLE Index(8)
- ----------------- --------------
<S> <C>
Life of Fund(+) *
Life of Fund(++) *
Life of Fund(+++) 7.1
Five Years 6.6
One Year 5.5
</TABLE>
- ---------------
(+) Since January 10, 1992 for Class A Shares.
(++) Since February 1, 1989 for Class B Shares.
(+++) Since May 31, 1994 for Class C Shares.
FOOTNOTES FOR ALL FUNDS
* The Initial Investment and adjusted amounts for Class A shares were adjusted
for the maximum initial sales charge at the beginning of the period, which is
4.5% for the Diversified Fund, Government Fund, High Yield Fund, Income and
Capital Fund and Mortgage Fund and 3.5% for the Adjustable Rate Fund and
Short-Intermediate Government Fund. The Initial Investment for Class B and Class
C shares was not adjusted. Amounts were adjusted for Class B shares for the
contingent deferred sales charge that may be imposed at the end of the period
based upon the schedule for shares sold currently, see "Redemption or Repurchase
of Shares" in the prospectus. No adjustments were made to Class C shares.
** Includes short-term capital gain dividends.
(1) The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. Source is Towers Data Systems.
(2) Salomon Brothers High Grade Corporate Bond Index is on a total return basis
with all dividends reinvested and is comprised of high grade long-term
industrial and utility bonds rated in the top two rating categories. This index
is unmanaged. Source is Towers Data Systems.
(3) The Lehman Brothers Government/Corporate Bond Index is on a total return
basis and is comprised of all publicly issued, non-convertible, domestic debt of
the U.S. Government or any agency thereof, quasi-federal corporation, or
corporate debt guaranteed by the U.S. Government and all publicly issued,
fixed-rate, non-convertible, domestic debt of the three major corporate
classifications: industrial, utility, and financial. Only notes and bonds with a
minimum outstanding principal amount of $1,000,000 and a minimum of one year to
maturity are included. Bonds included must have a rating of at least Baa by
Moody's Investors Service, Inc., BBB by Standard & Poor's Corporation or in the
case of bank bonds not rated by either Moody's or S&P, BBB by Fitch Investors
Service. This index is unmanaged. Source is Towers Data Systems.
(4) The Lehman Brothers Adjustable Rate Index is a broad market capitalization
index of the U.S. Government agency adjustable rate mortgage market. All
securities in the index have coupons that periodically adjust based on a spread
over a published index, and all are guaranteed by an agency of the U.S.
Government. This index is unmanaged. Source is Lehman Brothers Inc.
(5) The Salomon Brothers Long-Term High Yield Bond Index is on a total return
basis with all dividends reinvested and is comprised of high yield bonds with a
par value of $50 million or higher and a remaining maturity of 10 years or
longer rated BB+ or lower by Standard & Poor's Corporation or Ba1 or lower by
Moody's Investors Service, Inc. This index is unmanaged. Source is Salomon
Brothers Inc.
(6) The Salomon Brothers 30 Year GNMA Index is on a total return basis with all
dividends reinvested and is comprised of GNMA 30-year pass throughs of single
family and graduated payment mortgages. In order for a GNMA coupon to be
included in the index, it must have at least $200 million of outstanding coupon
product. This index is unmanaged. Source is Salomon Brothers Inc.
(7) The Lehman Brothers Aggregate Bond Index is on a total return basis and is
comprised of intermediate and long-term government bonds, investment grade
corporate debt securities and mortgage-backed securities. This index is
unmanaged. Source is Lipper Analytical Services, Inc.
(8) The Merrill Lynch Market Weighted Index is an unmanaged index comprised of
the universe of 1-5 year Treasuries plus the Merrill Lynch GNMA Index. The two
components are market value weighted, currently 76% in 1-5 year Treasuries and
24% in GNMAs. Source is Merrill Lynch.
B-41
<PAGE> 110
Investors may want to compare the performance of a Fund to that of certificates
of deposit issued by banks and other depository institutions. Certificates of
deposit represent an alternative income producing product. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution. The
shares of a Fund are not insured and net asset value as well as yield will
fluctuate, except that the Cash Reserves Fund seeks to maintain a stable net
asset value of $1.00. Shares of a Fund are redeemable at net asset value which
may be more or less than original cost. The bonds in which the Funds (other than
the Cash Reserves Fund) invest are generally of longer term than most
certificates of deposit and may reflect longer term market interest rate
fluctuations.
Investors also may want to compare the performance of a Fund to that of U.S.
Treasury bills, notes or bonds because such instruments represent alternative
income producing products. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. As noted in the prospectus, the government guarantee of the bonds in
the Adjustable Rate, Government, Mortgage and Short-Intermediate Government
Funds does not guarantee the market value of their respective shares. The net
asset value of a Fund other than the Cash Reserves Fund will fluctuate. Shares
of a Fund are redeemable at net asset value which may be more or less than
original cost (except that the Cash Reserves Fund seeks to maintain a net asset
value of $1.00 per share). Each Fund's yield will also fluctuate.
From time to time, the Adjustable Rate Fund may compare its yield or price
volatility to various securities, such as U.S. Government Securities, or to
certain indices including, but not limited to, the J.P. Morgan one-, three-, and
five-year constant maturity Treasury yield indices, which are based on estimated
Treasury security yields adjusted to constant maturity and the Federal Home Loan
Bank Board 11th District Cost of Funds Index (COFI), which represents the
weighted average cost of funds for savings institutions in Arizona, California
and Nevada and is based on the one month annualized yield of savings deposits,
Federal Home Loan Advances and other borrowings, such as repurchase agreements.
The following tables illustrate an assumed $10,000 investment in Class A shares
of each Fund other than the Cash Reserves, Mortgage and Short-Intermediate
Government Funds, which includes the current maximum sales charge of 4.5% (3.5%
for the Adjustable Rate Fund), with income and capital gain dividends reinvested
in additional shares. The tables for the Mortgage and Short-Intermediate
Government Funds illustrate an assumed $10,000 investment in Class B shares of
these Funds, with income and capital gain dividends reinvested in additional
shares, and do not include the effect of the contingent deferred sales charge.
Each table covers the period from commencement of operations of the Fund to
December 31, 1995.
ADJUSTABLE RATE FUND (9/1/87)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1987 $ 96 $ 0 $9,722 $ 96 $ 0 $ 9,818
1988 1,098 0 9,132 1,159 0 10,291
1989 1,122 10 9,185 2,294 10 11,489
1990 1,137 0 8,918 3,388 9 12,315
1991 1,222 0 9,207 4,756 10 13,973
1992 824 0 9,217 5,592 10 14,819
1993 767 0 9,196 6,341 10 15,547
1994 747 0 8,724 6,745 9 15,478
1995 948 0 8,929 7,857 9 16,795
----------------------------------------------------------------------------------
</TABLE>
B-42
<PAGE> 111
- --------------------------------------------------------------------------------
DIVERSIFIED FUND (6/23/77)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1977 $ 427 $ 0 $9,141 $ 427 $ 0 $ 9,567
1978 1,006 132 8,591 1,367 132 10,090
1979 1,350 18 8,898 2,787 154 11,839
1980 1,672 30 9,774 4,830 201 14,805
1981 2,052 0 8,738 6,297 179 15,214
1982 2,420 27 8,592 8,771 204 17,567
1983 2,941 0 8,577 11,697 204 20,478
1984 3,449 0 7,667 13,803 182 21,652
1985 3,604 66 7,534 17,181 248 24,963
1986 3,163 307 6,748 18,381 522 25,651
1987 3,379 367 5,412 17,484 690 23,586
1988 3,847 0 5,475 21,566 698 27,739
1989 4,603 0 5,064 24,238 646 29,948
1990 4,215 0 3,819 21,868 487 26,174
1991 4,665 0 5,050 34,010 644 39,704
1992 4,604 0 5,363 40,723 684 46,770
1993 5,096 0 5,879 49,906 749 56,534
1994 4,438 0 5,217 48,486 665 54,368
1995 5,061 0 5,734 58,572 731 65,037
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOVERNMENT FUND (10/1/79)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1979 $ 203 $ 0 $9,192 $ 207 $ 0 $ 9,399
1980 1,009 0 8,164 1,145 0 9,309
1981 1,197 0 7,180 2,181 0 9,361
1982 1,314 0 8,119 3,912 0 12,031
1983 1,442 0 7,878 5,225 0 13,103
1984 1,686 0 7,806 6,903 0 14,709
1985 1,925 0 8,468 9,523 0 17,991
1986 2,076 0 8,853 12,061 0 20,913
1987 2,228 0 8,173 13,301 0 21,473
1988 2,265 0 7,851 14,985 0 22,836
1989 2,454 0 8,092 17,941 0 26,033
1990 2,526 0 8,066 20,486 0 28,552
1991 2,762 0 8,629 24,849 0 33,478
1992 2,781 0 8,341 26,780 0 35,125
1993 2,662 0 8,242 29,094 0 37,336
1994 2,684 0 7,422 28,770 0 36,192
1995 2,942 0 8,155 34,684 0 42,839
</TABLE>
- --------------------------------------------------------------------------------
B-43
<PAGE> 112
- --------------------------------------------------------------------------------
HIGH YIELD FUND (1/26/78)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1978 $ 826 $ 0 $8,950 $ 786 $ 0 $ 9,736
1979 1,098 0 8,227 1,744 0 9,971
1980 1,306 0 7,140 2,737 0 9,877
1981 1,515 0 6,678 4,057 0 10,735
1982 1,793 0 8,041 6,935 0 14,976
1983 2,048 0 8,365 9,254 0 17,620
1984 2,359 0 8,090 11,327 0 19,417
1985 2,684 0 8,787 15,108 0 23,895
1986 2,929 0 9,290 18,968 0 28,258
1987 3,375 1,196 8,690 20,917 1,200 30,807
1988 4,142 0 8,787 25,246 1,215 35,248
1989 4,632 0 7,635 26,155 1,055 34,845
1990 5,116 0 5,688 23,849 786 30,322
1991 5,417 0 7,262 36,262 1,003 44,527
1992 5,075 0 7,678 43,409 1,061 52,148
1993 5,492 0 8,393 53,178 1,159 62,730
1994 5,892 0 7,493 53,104 1,035 61,632
1995 6,500 0 7,994 63,314 1,104 72,412
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCOME AND CAPITAL FUND (4/15/74)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1974 $ 425 $ 0 $ 9,819 $ 436 $ 0 $10,255
1975 939 0 10,077 1,421 0 11,498
1976 955 69 10,535 2,481 72 13,088
1977 1,052 75 10,077 3,415 144 13,636
1978 1,133 0 9,580 4,365 137 14,082
1979 1,397 0 8,873 5,393 127 13,393
1980 1,701 0 7,632 6,229 109 13,970
1981 1,861 0 6,858 7,438 98 14,394
1982 2,183 0 7,994 11,122 115 19,231
1983 2,478 0 7,889 13,422 113 21,424
1984 2,892 0 7,775 16,175 111 24,061
1985 3,191 0 8,396 20,803 120 29,319
1986 3,273 0 8,673 24,793 124 33,590
1987 3,590 0 8,042 26,474 115 34,631
1988 3,933 0 7,975 30,152 114 38,241
1989 4,207 0 7,794 33,607 112 41,513
1990 4,209 0 7,507 36,590 108 44,205
1991 4,313 0 8,080 43,926 116 52,122
1992 4,168 0 8,061 48,039 115 56,215
1993 4,029 355 8,376 53,946 476 62,798
1994 4,578 0 7,507 52,743 426 60,676
1995 4,939 0 8,462 64,690 480 73,632
</TABLE>
- --------------------------------------------------------------------------------
B-44
<PAGE> 113
- --------------------------------------------------------------------------------
MORTGAGE FUND (10/26/84)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1984 $ 0 $ 0 $10,024 $ 0 $ 0 $10,024
1985 1,028 0 10,035 1,051 0 11,086
1986 1,286 0 10,036 2,344 0 12,380
1987 1,270 0 9,212 3,389 0 12,600
1988 1,315 0 8,694 4,474 0 13,168
1989 1,326 0 8,800 5,867 0 14,667
1990 1,325 0 8,612 7,098 0 15,710
1991 1,442 0 9,235 9,149 0 18,384
1992 1,457 0 8,917 10,285 0 19,202
1993 1,381 0 8,718 11,410 0 20,128
1994 1,259 0 7,835 11,461 0 19,296
1995 1,387 0 8,576 13,988 0 22,564
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHORT-INTERMEDIATE GOVERNMENT FUND (2/1/89)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1989 $ 741 $ 0 $10,024 $ 737 $ 0 $10,761
1990 946 0 9,847 1,679 0 11,526
1991 934 0 10,118 2,690 0 12,808
1992 795 0 10,024 3,461 0 13,485
1993 769 100 9,859 4,157 99 14,115
1994 697 0 9,197 4,555 93 13,845
1995 853 0 9,577 5,609 96 15,282
</TABLE>
- --------------------------------------------------------------------------------
* Includes short-term capital gain dividends
The following tables compare the performance of the Class A shares of the Funds
(other than the Mortgage and Short-Intermediate Government Funds, for which the
performance is of the Class B shares) over various periods with that of other
mutual funds within the categories described below according to data reported by
Lipper Analytical Services, Inc. ("Lipper"), New York, New York, which is a
mutual fund reporting service. Lipper performance figures are based on changes
in net asset value, with all income and capital gain dividends reinvested. Such
calculations do not include the effect of any sales charges. Future performance
cannot be guaranteed. Lipper publishes performance analyses on a regular basis.
Each category includes funds with a variety of objectives, policies and market
and credit risks that should be considered in reviewing these rankings.
B-45
<PAGE> 114
ADJUSTABLE RATE FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
----------------
Adjustable Rate
Mortgage Funds
----------------
<S> <C>
One Year (Period ended 9/30/96)................................................. 37 of 53
Five Years (Period ended 9/30/96)............................................... 4 of 18
</TABLE>
The Lipper Adjustable Rate Mortgage Funds category includes funds that invest at
least 65% of assets in adjustable rate mortgage securities or other securities
collateralized by or representing an interest in mortgages.
DIVERSIFIED FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
------------
General Bond
Funds
------------
<S> <C>
One Year (Period ended 9/30/96)..................................................... 6 of 43
Five Years (Period ended 9/30/96)................................................... 1 of 11
Ten Years (Period ended 9/30/96).................................................... 1 of 5
</TABLE>
The Lipper General Bond Funds Category includes funds that intend to keep the
bulk of their assets in corporate and government debt issues.
GOVERNMENT FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
Certificate
Edition
------------
GNMA Funds
------------
<S> <C>
One Year (Period ended 9/30/96).................................................... 23 of 52
Five Years (Period ended 9/30/96).................................................. 20 of 29
Ten Years (Period ended 9/30/96)................................................... 9 of 19
</TABLE>
The Lipper GNMA Funds category includes funds that invest a minimum of 65% of
their portfolio in Government National Mortgage Association securities.
B-46
<PAGE> 115
HIGH YIELD FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
------------
High Current
Yield Funds
------------
<S> <C>
One Year (Period ended 9/30/96).................................................... 58 of 143
Five Years (Period ended 9/30/96).................................................. 21 of 63
Ten Years (Period ended 9/30/96)................................................... 2 of 43
</TABLE>
The Lipper High Current Yield Funds category includes funds which are managed
with an emphasis on high current (relative) yield. There are no quality or
maturity restrictions. The Fund was ranked number 139 out of 1,688, 23 out of
565 and 2 out of 43 funds in the Fixed Income category for the one, five and ten
year periods ended September 30, 1996 according to data reported by Lipper in
the Lipper Mutual Fund Performance Analysis. The Lipper Fixed Income category
reported in the Lipper Mutual Fund Performance Analysis includes funds which
normally have more than 75% of their assets in fixed income issues.
INCOME AND CAPITAL FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
------------
Corporate
Bond Funds:
"A" Rated
------------
<S> <C>
One Year (Period ended 9/30/96)..................................................... 49 of 113
Five Years (Period ended 9/30/96)................................................... 12 of 48
Ten Years (Period ended 9/30/96).................................................... 13 of 26
</TABLE>
The Lipper Corporate Bond Funds "A" Rated category includes funds which invest
65% of their corporate holdings in the top three grades.
MORTGAGE FUND
<TABLE>
<CAPTION>
Lipper
Performance
Analysis
------------
U.S.
Mortgage
B SHARES Funds
------------
<S> <C>
One Year (Period ended 9/30/96)..................................................... 49 of 60
Five Years (Period ended 9/30/96)................................................... 18 of 23
Ten Years (Period ended 9/30/96).................................................... 13 of 15
</TABLE>
The Lipper U.S. Mortgage Funds category includes funds that invest at least 65%
of their assets in U.S. Mortgages/Securities issued or guaranteed as to
principal and interest by the U.S. government and certain federal agencies.
SHORT-INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
Lipper
Performance
Analysis
------------
Short U.S.
B SHARES Gov't Funds
------------
<S> <C>
One Year (Period ended 9/30/96)..................................................... 77 of 86
Five Years (Period ended 9/30/96)................................................... 30 of 30
</TABLE>
The Lipper Short (1-5 year) U.S. Government Funds category includes funds that
invest at least 65% of their assets in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities with average maturities of
five years or less.
B-47
<PAGE> 116
OFFICERS AND TRUSTEES
The officers and trustees of the Funds, their birthdates, their principal
occupations and their affiliations, if any, with ZKI, the investment manager,
ZIML, the sub-adviser of certain Funds, and KDI, the principal underwriter, are
as follows (the number following each person's title is the number of investment
companies managed by ZKI and its affiliates, for which he or she holds similar
positions):
ALL FUNDS:
DAVID W. BELIN (6/20/28), Trustee (24), 2000 Financial Center, 7th and Walnut,
Des Moines, Iowa; Member, Belin Harris Lamson McCormick, P.C. (attorneys).
LEWIS A. BURNHAM (1/8/33), Trustee (24), 16410 Avila Boulevard, Tampa, Florida;
Director, Management Consulting Services, McNulty & Company; formerly Executive
Vice President, Anchor Glass Container Corporation.
DONALD L. DUNAWAY (3/8/37), Trustee (24), 7515 Pelican Bay Blvd., Naples,
Florida; Retired; formerly, Executive Vice President, A. O. Smith Corporation
(diversified manufacturer).
ROBERT B. HOFFMAN (12/11/36), Trustee (24), 800 N. Lindbergh Boulevard, St.
Louis, Missouri; Senior Vice President and Chief Financial Officer, Monsanto
Company (chemical products); prior thereto, Vice President, FMC Corporation
(manufacturer of machinery and chemicals); prior thereto, Director, Executive
Vice President and Chief Financial Officer, Staley Continental, Inc. (food
products).
DONALD R. JONES (1/17/30), Trustee (24), 1776 Beaver Pond Road, Inverness,
Illinois; Retired; Director, Motorola, Inc. (manufacturer of electronic
equipment and components); formerly, Executive Vice President and Chief
Financial Officer, Motorola, Inc.
DOMINIQUE P. MORAX (10/2/48), Trustee* (37), 222 South Riverside Plaza, Chicago,
Illinois; Member, Extended Corporate Executive Board, Zurich Insurance Company;
Director, ZKI.
SHIRLEY D. PETERSON (9/3/41), Trustee (24), 401 Rosemont Avenue, Frederick,
Maryland; President, Hood College, Maryland; prior thereto, Partner, Steptoe &
Johnson (attorneys); prior thereto, Commissioner, Internal Revenue Service;
prior thereto, Assistant Attorney General, U.S. Department of Justice.
WILLIAM P. SOMMERS (7/22/33), Trustee (24), 333 Ravenswood Avenue, Menlo Park,
California; President and Chief Executive Officer, SRI International (research
and development); prior thereto, Executive Vice President, Iameter (medical
information and educational service provider); prior thereto, Senior Vice
President and Director, Booz, Allen & Hamilton, Inc. (management consulting
firm) (retired), Director, Rohr, Inc., Therapeutic Discovery Corp. and Litton
Industries.
STEPHEN B. TIMBERS (8/8/44), President and Trustee* (37), 222 South Riverside
Plaza, Chicago, Illinois; President, Chief Executive Officer, Chief Investment
Officer and Director, ZKI; Director, KDI, Dreman Value Advisors, Inc. and LTV
Corporation.
J. PATRICK BEIMFORD, JR. (5/25/50), Vice President* (24), 222 South Riverside
Plaza, Chicago, Illinois; Executive Vice President/Chief Investment
Officer--Fixed Income Investments, ZKI.
CHARLES R. MANZONI, JR. (1/23/47), Vice President* (37), 222 South Riverside
Plaza, Chicago, Illinois; Executive Vice President, Secretary and General
Counsel of ZKI; Secretary, ZKI Holding Corp.; Secretary, ZKI Agency, Inc.;
formerly, Partner, Gardner, Carton & Douglas (attorneys).
JEROME L. DUFFY (6/29/36), Treasurer* (37), 222 South Riverside Plaza, Chicago,
Illinois; Senior Vice President, ZKI.
B-48
<PAGE> 117
PHILIP J. COLLORA (11/15/45), Vice President and Secretary* (37), 222 South
Riverside Plaza, Chicago, Illinois; Attorney, Senior Vice President and
Assistant Secretary, ZKI.
ELIZABETH C. WERTH (10/1/47), Assistant Secretary* (30), 222 South Riverside
Plaza, Chicago, Illinois; Vice President, ZKI; Vice President and Director of
State Registrations, KDI.
ADJUSTABLE RATE FUND:
ELIZABETH A. BYRNES (2/8/57), Vice President* (2), 222 South Riverside Plaza,
Chicago, Illinois; First Vice President, ZKI.
RICHARD L. VANDENBERG (11/16/49), Vice President* (4), 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President, ZKI; formerly, Senior Vice
President and Portfolio Manager with an unaffiliated investment management firm.
DIVERSIFIED FUND:
ROBERT S. CESSINE (1/5/50), Vice President* (3), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, ZKI; formerly, Vice President,
Wellington Management Company.
MICHAEL A. McNAMARA (12/28/44), Vice President* (6), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, ZKI.
HARRY E. RESIS, JR. (11/24/45), Vice President* (6), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, ZKI; formerly, First Vice President,
PaineWebber Incorporated.
JONATHAN W. TRUTTER (11/29/57), Vice President* (3), 222 South Riverside Plaza,
Chicago, Illinois; First Vice President, ZKI.
GOVERNMENT FUND:
RICHARD L. VANDENBERG, see above.*
HIGH YIELD FUND:
MICHAEL A. McNAMARA, see above.*
HARRY E. RESIS, JR., see above.*
INCOME AND CAPITAL FUND:
ROBERT S. CESSINE, see above.
CASH RESERVES, MORTGAGE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS (KEMPER
PORTFOLIOS):
FRANK J. RACHWALSKI, JR. (3/26/45),Vice President* (9), 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President, ZKI.
RICHARD L. VANDENBERG, see above.*
* Interested persons of the Fund as defined in the Investment Company Act of
1940.
B-49
<PAGE> 118
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 1996 fiscal year except that the information in the last column is for
calendar year 1995.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION FROM
----------------------------------------------------------------------------
INCOME & TOTAL COMPENSATION
ADJUSTABLE DIVERSIFIED GOVERNMENT HIGH YIELD CAPITAL KEMPER KEMPER FUNDS
NAME OF TRUSTEE RATE FUND FUND FUND FUND FUND PORTFOLIOS+ PAID TO TRUSTEES**
- ------------------------------- ---------- ----------- ---------- ---------- --------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
David W. Belin*................ $2,800 6,100 11,600 9,800 4,900 15,600 149,700
Lewis A. Burnham............... 2,100 3,600 6,700 6,200 3,100 11,100 111,000
Donald L. Dunaway*............. 3,100 5,700 11,400 10,000 4,800 16,400 151,000
Robert B. Hoffman.............. 2,200 3,700 7,000 6,600 3,200 11,800 105,500
Donald R. Jones................ 2,200 3,700 7,000 6,600 3,200 11,800 110,700
Shirley D. Peterson***......... 2,100 3,600 6,800 6,300 3,100 11,200 44,500
William P. Sommers............. 2,100 3,500 6,600 6,100 3,000 11,000 100,700
</TABLE>
- ---------------
+ Includes Cash Reserves Fund, Mortgage Fund and Short-Intermediate Government
Fund.
* Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with Kemper Funds. Deferred amounts accrue interest
monthly at a rate equal to the yield of Kemper Money Funds--Kemper Money
Market Fund. Total deferred amounts and interest accrued through each Fund's
fiscal year are $14,400, $49,200, $94,000, $67,700, $35,200 and $80,800 for
Mr. Belin and $15,900, $36,500, $83,200, $60,700, $30,100 and $15,400 for
Mr. Dunaway for the Adjustable Rate Fund, Diversified Fund, Government Fund,
High Yield Fund, Income and Capital Fund and Kemper Portfolios+,
respectively.
** Includes compensation for service on the boards of 22 Kemper funds with 40
fund portfolios. Each trustee currently serves as a trustee of 24 Kemper
Funds with 41 fund portfolios.
*** Appointed a trustee of certain Kemper Fund boards on June 15, 1995.
As of December 2, 1996, the officers and trustees of the Funds, as a group,
owned less than 1% of the then outstanding shares of each Fund and no person
owned of record 5% or more of the outstanding shares of any class of any Fund,
except that the following owned of record shares of the following Funds.
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- ------------------------------- ------------------------------------------------------------ ------ ----------
<S> <C> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C> <C>
Adjustable Rate Prudential Securities FBO A 6.20%
Standard Savings Bank
228 W. Garvey Ave.
Monterey Park, CA 91754
Builders Prime Window & Supply B 7.17
Russell Lyons/Donald O'Connor PS
401K FBO Forfeiture Account
2nd & Merion
Bridgeport, PA 19405
Wexford Clearing Service Corp FBO B 5.32
Principal Financial Svcs C/F Dean A. Raber
15514 Crocus Lane
Eden Prairie, MN 55347
Junior Junction Inc. C 5.65
1400 Noyes York
Utica, NY 13502
Fenna Construction Inc. C 18.46
13631 Balsam Ln.
Dayton, MN 55327
Thelma O. Linderman Trust C 6.84
1057 E. Knollcrest Drive
Covina, CA 91724
</TABLE>
B-50
<PAGE> 119
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- ------------------------------- ------------------------------------------------------------ ------ ----------
<S> <C> <C> <C>
Estate of Arthur A. Ulrich C 9.11
870 84th LN NW
Minneapolis, MN 55433
Income & Capital BHC Securities, Inc. B 6.60
Attn: Mutual Funds
One Commerce Square
Philadelphia, PA 19103
Paul K. Christoff TTEE C 9.93
Lindsay Concrete Prod Inc. PSP
DTD 10-1-89
Paul K. Christoff, Attorney
137 S. Main St., Suite 301
Akron, OH 44308-1136
NFSC FEBO C 6.89
Mary M. Villagomez
218 Tubing Rd.
Broussard, LA 70518
MLPF&S C 12.24
4800 Deer Lake Dr. East
Jacksonville, FL 32246
ZKI Inc. I 5.45
Retirement Plan EE
811 Main Street
Kansas City, MO 64105
ZKI Inc. I 11.91
Retirement Plan PS
811 Main
Kansas City, MO 64105
High Yield Donald Lufkin Jenrette C 5.38
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303
MLPF&S C 6.12
4800 Deer Lake Dr. East
Jacksonville, FL 32246
Patterson & Co. I 28.30
PNB Personal Trust Acctg
P.O. Box 7829
Philadelphia, PA 19101-7829
National Financial B 5.30
200 Liberty St.
New York, NY 10281
Diversified NFSC FEBO C 6.87
Mary M. Villagomez
218 Tubing Rd.
Broussard, LA 70518
MLPF&S C 21.12
4800 Deer Lake Dr. East
Jacksonville, FL 32246
Invest Financial Corp. EE I 83.19
FBO Robert A. Mcosker
1546 Sims Ct.
Tucker, GA 30084
</TABLE>
B-51
<PAGE> 120
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- ------------------------------- ------------------------------------------------------------ ------ ----------
<S> <C> <C> <C>
Invest Financial Corp. EE I 5.03
FBO Sandra L. Tressler
RR 6 Box 373
Danville, PA 17821
Government NFSC FEBO B 5.73
Home Savings of America
815 E. 6th St.
Ontario, CA 91764
BHC Securities Inc. B 5.20
Attn: Mutual Funds Dept.
One Commerce Square
Philadelphia, PA 19103
RA Giaquinta DDS P/S C 5.19
57 Whippany Rd.
Whippany, NJ 07981
MLPF&S C 7.14
4800 Deer Lake Dr. East
Jacksonville, FL 32246
ZKI Inc. I 12.17
Retirement Plan
811 Main
Kansas City, MO 64105
Mortgage PaineWebber C 47.24
P.O. Box 3321
Weehawken, NJ 07087-6727
MLPF&S C 9.80
Attn. Fund Administration
4800 Deer Lake Dr. East
Jacksonville, FL 32246
Richard A. McTyre & Judith C 5.36
C S McTyre JTWROS
480 South Johnston Street
Dallas, GA 30132
PaineWebber for the Benefit of C 5.45
John J. Kain &
Marguerrite R. Kain
Ten. In Common
432 Beverly Garden Dr.
Metairie, LA 70001-2108
Cash Reserves Smith Family Limited Partnership C 8.77
P.O. Box 1960
Metairie, LA 70004
Short-Intermediate Government National Financial Service Corp. B 8.29
One World Financial Center
200 Liberty Street, 4th Floor
New York, NY 10281-1003
PaineWebber C 20.43
1000 Harbor Blvd. # 6FLR
Weehawken, NJ 07087-6727
NFSC FEBO C 9.01
Betty Stanford
2305 Cleary
Metairie, LA 70001
</TABLE>
B-52
<PAGE> 121
SHAREHOLDER RIGHTS
The Funds generally are not required to hold meetings of their shareholders.
Under the Agreement and Declaration of Trust of each Fund ("Declaration of
Trust"), however, shareholder meetings will be held in connection with the
following matters: (a) the election or removal of trustees if a meeting is
called for such purpose; (b) the adoption of any contract for which shareholder
approval is required by the Investment Company Act of 1940 ("1940 Act"); (c) any
termination of the Fund or a class to the extent and as provided in the
Declaration of Trust; (d) any amendment of the Declaration of Trust (other than
amendments changing the name of the Fund, supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision thereof); (e) (with respect to the Cash Reserves, Mortgage and Short-
Intermediate Government Funds only) as to whether a court action, proceeding or
claim should or should not be brought or maintained derivatively or as a class
on behalf of the Fund or the shareholders, to the same extent as the
stockholders of a Massachusetts business corporation; and (f) such additional
matters as may be required by law, the Declaration of Trust, the By- laws of the
Fund, or any registration of the Fund with the Securities and Exchange
Commission or any state, or as the trustees may consider necessary or desirable.
The shareholders also would vote upon changes in fundamental investment
objectives, policies or restrictions.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) each Fund will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares at a meeting called for that purpose, which meeting shall
be held upon the written request of the holders of not less than 10% of the
outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of a Fund stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, each
Fund has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
Each Fund's Declaration of Trust provides that the presence at a shareholder
meeting in person or by proxy of at least 30% of the shares entitled to vote on
a matter shall constitute a quorum. Thus, a meeting of shareholders of a Fund
could take place even if less than a majority of the shareholders were
represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
auditors. Some matters requiring a larger vote under the Declaration of Trust,
such as termination or reorganization of a Fund and certain amendments of the
Declaration of Trust, would not be affected by this provision; nor would matters
which under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act.
Each Fund's Declaration of Trust specifically authorizes the Board of Trustees
to terminate the Fund or any Portfolio or class by notice to the shareholders
without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of a
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of each Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by a
Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of a Fund and each Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by ZKI remote and not
material, since it is limited to circumstances in which a disclaimer is
inoperative and such Fund itself is unable to meet its obligations.
B-53
<PAGE> 122
RATINGS OF INVESTMENTS
COMMERCIAL PAPER RATINGS
Commercial paper rated by Standard & Poor's Corporation ("S&P") has the
following characteristics: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated "A" or better. The issuer has
access to at least two additional channels of borrowing. Basic earnings and cash
flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1 or A-2.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service, Inc. ("Moody's"). Among the factors
considered by it in assigning ratings are the following: (1) evaluation of the
management of the issuer; (2) economic evaluation of the issuer's industry or
industries and an appraisal of speculative-type risks which may be inherent in
certain areas; (3) evaluation of the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the issuer;
and (8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations. Relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated Prime-1 or 2.
CORPORATE BONDS
STANDARD & POOR'S CORPORATION BOND RATINGS
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
B-54
<PAGE> 123
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
B-55
<PAGE> 124
PORTFOLIO OF INVESTMENTS
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
Portfolio of Investments at August 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
COUPON PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY Notes 8.875% 1997 $ 4,000 $ 4,126
SECURITIES - 23.2% 9.00-9.25 1998 17,000 17,820
(Cost: $22,181)
==================================================================================
21,946
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Adjustable rate 7.972 2019 7,978 8,292
MORTGAGE CORPORATION - mortgages (a) 7.875 2020 2,144 2,204
68.9% 7.132-7.875 2022 18,867 19,288
(Cost: $64,984) 7.365-7.689 2023 12,358 12,604
7.51 2024 6,568 6,740
7.346 2025 10,059 10,298
7.00 2026 5,000 5,098
Fixed rate 11.25 2010 425 467
collateralized 11.00 2014 98 106
mortgage obligations
==================================================================================
65,097
- ---------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Adjustable rate 6.999 2019 3,963 4,068
MORTGAGE ASSOCIATION - mortgages (a) 7.652-7.767 2021 4,237 4,373
13.1% 5.90 2025 3,846 3,936
(Cost: $12,342)
==================================================================================
12,377
- ---------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL Pass-through 11.00 2018 434 480
MORTGAGE ASSOCIATION - certificates
.5%
(Cost: $487)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--105.7%
(Cost: $99,994) 99,900
==================================================================================
LIABILITIES, LESS CASH AND OTHER ASSETS--(5.7)% (5,423)
==================================================================================
NET ASSETS--100% $94,477
==================================================================================
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Adjustable rate securities. The coupon rates on these securities vary with a
selected index at specified intervals and the rates shown above are the
effective rates on August 31, 1996. The dates shown represent the final maturity
of the obligations.
Based on the cost of investments of $99,994,000 for federal income tax purposes
at August 31, 1996, the gross unrealized appreciation was $262,000, the gross
unrealized depreciation was $356,000 and the net unrealized depreciation of
securities was $94,000.
See accompanying Notes to Financial Statements.
9
<PAGE> 125
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Adjustable Rate U.S.
Government Fund as of August 31, 1996, the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
fiscal periods since 1992. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
August 31, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Adjustable Rate U.S. Government Fund at August 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the fiscal periods since 1992, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1996
10
<PAGE> 126
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------
Investments, at value
(Cost: $99,994) $ 99,900
- -------------------------------------------------------------------------------------------------------
Cash 1,028
- -------------------------------------------------------------------------------------------------------
Receivable for:
Fund shares sold 11
- -------------------------------------------------------------------------------------------------------
Investments sold 7,797
- -------------------------------------------------------------------------------------------------------
Interest 1,220
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS 109,956
=======================================================================================================
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------------------------------------
Payable for:
Dividends 126
- -------------------------------------------------------------------------------------------------------
Fund shares redeemed 55
- -------------------------------------------------------------------------------------------------------
Investments purchased 15,168
- -------------------------------------------------------------------------------------------------------
Management fee 43
- -------------------------------------------------------------------------------------------------------
Administrative services fee 16
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 37
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 34
- -------------------------------------------------------------------------------------------------------
Total liabilities 15,479
- -------------------------------------------------------------------------------------------------------
NET ASSETS $ 94,477
=======================================================================================================
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------------------------------------
Paid-in capital $105,477
- -------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (11,624)
- -------------------------------------------------------------------------------------------------------
Net unrealized depreciation on investments (94)
- -------------------------------------------------------------------------------------------------------
Undistributed net investment income 718
- -------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 94,477
=======================================================================================================
THE PRICING OF SHARES
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($86,993,000 / 10,578,000 shares outstanding) $8.22
- -------------------------------------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 3.63% of
net asset value or 3.50% of offering price) $8.52
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($6,298,000 / 765,000 shares outstanding) $8.23
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($1,186,000 / 144,000 shares outstanding) $8.24
=======================================================================================================
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 127
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Interest income $7,561
- -------------------------------------------------------------------------------------------------------
Expenses:
Management fee 627
- -------------------------------------------------------------------------------------------------------
Distribution services fee 51
- -------------------------------------------------------------------------------------------------------
Administrative services fee 230
- -------------------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 378
- -------------------------------------------------------------------------------------------------------
Professional fees 37
- -------------------------------------------------------------------------------------------------------
Reports to shareholders 23
- -------------------------------------------------------------------------------------------------------
Trustees' fees and other 18
- -------------------------------------------------------------------------------------------------------
Total expenses 1,364
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 6,197
=======================================================================================================
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Net realized gain on sales of investments (including options purchased) 80
- -------------------------------------------------------------------------------------------------------
Net realized loss from futures transactions (100)
- -------------------------------------------------------------------------------------------------------
Net realized loss (20)
- -------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments (928)
- -------------------------------------------------------------------------------------------------------
Net loss on investments (948)
- -------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,249
=======================================================================================================
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995
<S> <C> <C>
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
Net investment income $ 6,197 9,245
- ---------------------------------------------------------------------------------------------------------
Net realized loss (20) (3,301)
- ---------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (928) 2,153
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 5,249 8,097
- ---------------------------------------------------------------------------------------------------------
Net equalization charges (272) (591)
- ---------------------------------------------------------------------------------------------------------
Distribution from net investment income (6,117) (9,118)
- ---------------------------------------------------------------------------------------------------------
Net decrease from capital share transactions (34,140) (71,446)
- ---------------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (35,280) (73,058)
=========================================================================================================
NET ASSETS
- ---------------------------------------------------------------------------------------------------------
Beginning of year 129,757 202,815
- ---------------------------------------------------------------------------------------------------------
END OF YEAR (including undistributed net investment income
of $718,000 and $904,000, respectively) $ 94,477 129,757
=========================================================================================================
</TABLE>
12
<PAGE> 128
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Adjustable Rate U.S. Government Fund is an
open-end management investment company organized as
a business trust under the laws of Massachusetts.
The Fund offers four classes of shares. Class A
shares are sold to investors subject to an initial
sales charge. Class B shares are sold without an
initial sales charge but are subject to higher
ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions. Class B shares automatically
convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares and, for shares sold on or
after April 1, 1996, a contingent deferred sales
charge payable upon certain redemptions within one
year of purchase. Class C Shares do not convert
into another class. Class I shares (none sold
through August 31, 1996) are offered to a limited
group of investors, are not subject to initial or
contingent deferred sales charges and have lower
ongoing expenses than other classes. Differences in
class expenses will result in the payment of
different per share income dividends by class. Each
share represents an identical interest in the
investments of the Fund and has the same rights.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at
value. Fixed income securities are valued by using
market quotations, or independent pricing services
that use prices provided by market makers or
estimates of market values obtained from yield data
relating to instruments or securities with similar
characteristics. Exchange traded fixed income
options are valued at the last sale price unless
there is no sale price, in which event prices
provided by market makers are used.
Over-the-counter traded fixed income options are
valued based upon prices provided by market makers.
Financial futures and options thereon are valued at
the settlement price established each day by the
board of trade or exchange on which they are
traded. Other securities and assets are valued at
fair value as determined in good faith by the Board
of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Interest income is recorded on the
accrual basis and includes discount amortization on
all fixed income securities and premium
amortization on mortgage-backed securities.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
13
<PAGE> 129
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Fund may purchase securities with delivery or
payment to occur at a later date. At the time the
Fund enters into a commitment to purchase a
security, the transaction is recorded and the value
of the security is reflected in the net asset
value. The value of the security may vary with
market fluctuations. No interest accrues to the
Fund until payment takes place. At the time the
Fund enters into this type of transaction it is
required to segregate cash or other liquid assets
equal to the value of the securities purchased. At
August 31, 1996 the Fund had $5,132,000 in purchase
commitments outstanding (5% of net assets), with a
corresponding amount of assets segregated.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the earlier of 3:00 p.m. Chicago
time or the close of the Exchange. The net asset
value per share is determined separately for each
class by dividing the Fund's net assets
attributable to that class by the number of shares
of the class outstanding.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies and therefore no
federal income tax provision is required. The
accumulated net realized loss on sales of
investments for federal income tax purposes at
August 31, 1996, amounting to approximately
$11,606,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 1997 through 2005.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
than generally accepted accounting principles.
EQUALIZATION ACCOUNTING. A portion of proceeds from
sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment
income so that income per share available for
distribution is not affected by sales or
redemptions of shares.
14
<PAGE> 130
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management
agreement with Zurich Kemper Investments, Inc.
(ZKI), and pays a management fee at an annual rate
of .55% of the first $250 million of average daily
net assets declining to .40% of average daily net
assets in excess of $12.5 billion. The Fund
incurred a management fee of $627,000 for the year
ended August 31, 1996.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI). Underwriting commissions paid in connection
with the distribution of Class A shares are as
follows:
<TABLE>
<CAPTION>
COMMISSIONS
ALLOWED BY KDI
COMMISSIONS ----------------------------
RETAINED BY KDI TO ALL FIRMS TO AFFILIATES
--------------- ------------ -------------
<S> <C> <C> <C>
Year ended August 31, 1996 $11,000 88,000 --
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, KDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B and Class C shares and the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES
DISTRIBUTION FEES PAID BY KDI
AND CDSC RECEIVED ------------------------------
BY KDI TO ALL FIRMS TO AFFILIATES
----------------- ------------- --------------
<S> <C> <C> <C>
Year ended August 31, 1996 $70,000 65,000 5,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with KDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays KDI a fee at an annual rate of up to .25%
of average daily net assets of each class. KDI in
turn has various agreements with financial services
firms that provide these services and pays these
firms based on assets of Fund accounts the firms
service. Administrative services fees (ASF) paid
are as follows:
<TABLE>
<CAPTION>
ASF PAID BY KDI
ASF PAID BY -----------------------------
THE FUND TO KDI TO ALL FIRMS TO AFFILIATES
---------------- ------------- -------------
<S> <C> <C> <C>
Year ended August 31, 1996 $230,000 231,000 5,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Kemper Service Company (KSvC) is the shareholder
service agent of the Fund. Under the agreement,
KSvC received shareholder services fees of $302,000
for the year ended August 31, 1996.
15
<PAGE> 131
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
For the year ended August 31, 1996, the Fund made
no payments to its officers and incurred trustees'
fees of $15,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended August 31, 1996, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $337,779
Proceeds from sales 370,173
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------
SHARES 1996 AMOUNT SHARES 1995 AMOUNT
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------
SHARES SOLD
----------------------------------------------------------------------------
Class A 3,196 $26,308 4,898 $ 39,971
----------------------------------------------------------------------------
Class B 352 2,925 605 4,993
----------------------------------------------------------------------------
Class C 126 1,046 169 1,399
----------------------------------------------------------------------------
SHARES ISSUED IN
REINVESTMENT OF
DIVIDENDS
----------------------------------------------------------------------------
Class A 500 4,138 737 6,072
----------------------------------------------------------------------------
Class B 27 224 24 195
----------------------------------------------------------------------------
Class C 6 51 6 49
----------------------------------------------------------------------------
SHARES REDEEMED
----------------------------------------------------------------------------
Class A (8,043) (66,310) (14,546) (119,011)
----------------------------------------------------------------------------
Class B (182) (1,513) (478) (3,932)
----------------------------------------------------------------------------
Class C (122) (1,009) (142) (1,182)
----------------------------------------------------------------------------
CONVERSION OF SHARES
----------------------------------------------------------------------------
Class A 14 113 31 262
----------------------------------------------------------------------------
Class B (14) (113) (31) (262)
----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE
TRANSACTIONS $(34,140) $ (71,446)
----------------------------------------------------------------------------
</TABLE>
16
<PAGE> 132
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts to take advantage of anticipated
market conditions and bears the risk that arises
from entering into these contracts.
At the time the Fund enters into a futures
contract, it is required to segregate liquid assets
with its custodian. Subsequently, gain or loss is
recognized and payments are made on a daily basis
between the Fund and its broker as the market value
of the futures contract changes. At August 31,
1996, the market value of assets segregated by the
Fund was $6,517,000 for the following financial
futures contracts owned by the Fund.
<TABLE>
<CAPTION>
FACE EXPIRATION LOSS AT
TYPE AMOUNT POSITION MONTH 8/31/96
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury
Note $5,988,000 Long Sept. '96 $(15,000)
</TABLE>
17
<PAGE> 133
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------
CLASS A
-----------------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of year $8.30 8.33 8.68 8.63 8.37
- ---------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .48 .34 .47 .63
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.09) (.04) (.29) .02 .22
- ---------------------------------------------------------------------------------------------------
Total from investment operations .37 .44 .05 .49 .85
- ---------------------------------------------------------------------------------------------------
Less distribution from net investment income .45 .47 .40 .44 .59
- ---------------------------------------------------------------------------------------------------
Net asset value, end of year $8.22 8.30 8.33 8.68 8.63
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN 4.55% 5.52 .59 5.87 10.56
- ---------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------------------
Expenses 1.15% 1.10 .93 .21 .28
- ---------------------------------------------------------------------------------------------------
Net investment income 5.49 5.76 3.96 5.44 7.02
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------- -----------------------------------------
CLASS B CLASS C
------------------------------------- -----------------------------------------
MAY 31, MAY 31,
YEAR ENDED AUGUST 31, 1994 TO YEAR ENDED AUGUST 31, 1994 TO
--------------------- AUGUST 31, --------------------- AUGUST 31,
1996 1995 1994 1996 1995 1994
------- ----- ---------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------ -----------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------ -----------------------------------------
Net asset value, beginning of period $8.31 8.32 8.37 8.32 8.33 8.37
- ------------------------------------------------------------------------------ -----------------------------------------
Income from investment operations:
Net investment income .40 .43 .07 .40 .43 .08
- ------------------------------------------------------------------------------ -----------------------------------------
Net realized and unrealized loss (.09) (.04) (.04) (.09) (.04) (.04)
- ------------------------------------------------------------------------------ -----------------------------------------
Total from investment operations .31 .39 .03 .31 .39 .04
- ------------------------------------------------------------------------------ -----------------------------------------
Less distribution from net investment
income .39 .40 .08 .39 .40 .08
- ------------------------------------------------------------------------------ -----------------------------------------
Net asset value, end of period $8.23 8.31 8.32 8.24 8.32 8.33
============================================================================== =========================================
TOTAL RETURN (NOT ANNUALIZED) 3.79% 4.84 .34 3.82 4.89 .47
- ------------------------------------------------------------------------------ -----------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------ -----------------------------------------
Expenses 1.89% 1.85 1.96 1.89 1.79 1.88
- ------------------------------------------------------------------------------ -----------------------------------------
Net investment income 4.75 5.01 3.36 4.75 5.07 3.52
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $94,477 129,757 202,815 212,694 174,967
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate 272% 308 533 138 309
- -----------------------------------------------------------------------------------------------------
</TABLE>
NOTES: ZKI agreed to waive its management fee and absorb certain operating
expenses during a portion of the fiscal year ended August 31, 1992. Thereafter,
these expenses were gradually reinstated from December 31, 1992 through January
31, 1994. Without this agreement, the ratios of expenses and net investment
income to average net assets for Class A shares would have been .99% and 3.90%
for the year ended August 31, 1994, .95% and 4.70% for the year ended August 31,
1993, and .90% and 6.40% for the year ended August 31, 1992.
Total return does not reflect the effect of any sales charges.
18
<PAGE> 134
NOTES
19
<PAGE> 135
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
PART C.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(i) Financial statements included in Part A of the Registration
Statement:
Financial Highlights.
(ii) Financial Statements included in Part B of the Registration
Statement:
Statement of assets and liabilities--August 31, 1996.
Statement of operations for the year ended August 31, 1996.
Statement of changes in net assets for each of the two years in the
period ended August 31, 1996.
Portfolio of investments--August 31, 1996.
Notes to financial statements.
Schedules II, III, IV and V are omitted as the required information is
not present.
Schedule I has been omitted as the required information is presented in
the portfolio of investments at August 31, 1996.
(b) Exhibits
<TABLE>
<S> <C>
99.B1 Amended and Restated Agreement and Declaration of Trust*
99.B2 By-Laws*
99.B3 Inapplicable
99.B4(a) Text of Share Certificate*
99.B4(b) Amended and Restated Written Instrument Establishing and Designating
Separate Classes of Shares
99.B5(a) Investment Management Agreement
99.B6(a) Underwriting and Distribution Services Agreement
99.B6(b) Selling Group Agreement*
99.B6(c) Addendum to Selling Group Agreement
99.B7 Inapplicable
99.B8 Custody Agreement*
99.B9(a) Agency Agreement*
99.B9(b) Supplement to Agency Agreement
99.B9(c) Administrative Services Agreement*
99.B9(d) Amendment to Administrative Services Agreement*
99.B9(e) Assignment and Assumption*
99.B9(f) Amended Appendix I for Administrative Services Agreement*
99.B10 Legal Opinion and Consent
99.B11 Report and Consent of Independent Auditors
99.B12 Inapplicable
99.B13 Inapplicable
99.B14(a) Kemper Retirement Plan Prototype*
99.B14(b) Model Individual Retirement Account*
99.B15 See 6(a) above (Class B and Class C Shares)
99.B16 Performance Calculations**
99.B18 Multi-Distribution System Plan
99.B24 Powers of Attorney
99.B485(b) Representation of Counsel (Rule 485(b))
27A Financial Data Schedule
27B Financial Data Schedule
27C Financial Data Schedule
</TABLE>
- ---------------
* Incorporated herein by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A filed on November 30, 1995.
** Incorporated herein by reference to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A filed on October 26, 1988.
C-1
<PAGE> 136
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Inapplicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of December 2, 1996, there were holders of record of the sole series of
shares of Registrant as follows: 7,784 Class A, 1,002 Class B and 317 Class C.
ITEM 27. INDEMNIFICATION
Article VIII of the Registrant's Agreement and Declaration of Trust
(Exhibit 1 hereto, which is incorporated herein by reference) provides in effect
that the Registrant will indemnify its officers and trustees under certain
circumstances. However, in accordance with Section 17(h) and 17(i) of the
Investment Company Act of 1940 and its own terms, said Article of the Agreement
and Declaration of Trust does not protect any person against any liability to
the Registrant or its shareholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question as to whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
C-2
<PAGE> 137
ITEM 28(a) BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information pertaining to business and other connections of the
Registrant's investment advisers is hereby incorporated by reference to the
section of the Prospectus captioned "Investment Manager and Underwriter"
and to the section of the Statement of Additional Information
captioned "Investment Manager and Underwriter."
Zurich Kemper Investments, Inc., investment adviser of the Registrant, is
investment adviser of:
Kemper Mutual Funds:
Kemper Technology Fund
Kemper Total Return Fund
Kemper Growth Fund
Kemper Small Capitalization Equity Fund
Kemper Income and Capital Preservation Fund
Kemper Money Funds
Kemper National Tax-Free Income Series
Kemper Diversified Income Fund
Kemper High Yield Fund
Cash Equivalent Fund
Kemper U.S. Government Securities Fund
Kemper International Fund
Kemper Portfolios
Kemper State Tax-Free Income Series
Tax-Exempt California Money Market Fund
Kemper Adjustable Rate U.S. Government Fund
Kemper Blue Chip Fund
Kemper Global Income Fund
Kemper Target Equity Fund
Cash Account Trust
Investors Cash Trust
Tax-Exempt New York Money Market Fund
Kemper Value Plus Growth Fund
Kemper Quantitative Equity Fund
Kemper Horizon Fund
Kemper Europe Fund
Kemper Asian Growth Fund
Kemper Closed-End Funds:
Kemper High Income Trust
Kemper Intermediate Government Trust
Kemper Municipal Income Trust
Kemper Multi-Market Income Trust
Kemper Strategic Municipal Income Trust
The Growth Fund of Spain, Inc.
Kemper Strategic Income Fund
Zurich Kemper Investments, Inc. also furnishes investment advice to and
manages investment portfolios for other clients including Kemper Investors Fund
and Kemper International Bond Fund.
C-3
<PAGE> 138
Item 28(b)(i) Business and Other Connections of Officers
and Directors of Zurich Kemper Investments, Inc.,
the Investment Adviser
TIMBERS, STEPHEN B.
Director, President, Chief Executive Officer and Chief Investment
Officer, Zurich Kemper Investments, Inc.
Director, Kemper Distributors, Inc.
Director, Zurich Investment Management, Inc.
Director, Chairman, Kemper Service Company
Director, Dreman Value Advisors, Inc.
Director, ZKI Agency, Inc.
Director, President, Kemper International Management, Inc.
Trustee and President, Kemper Funds
Director, The LTV Corporation
Governor, Investment Company Institute
NEAL, JOHN E.
Director, Zurich Kemper Investments, Inc.
President, Kemper Funds Group, a unit of Zurich Kemper
Investments, Inc.
Director, President, Kemper Service Company
Director, Kemper Distributors, Inc.
Director, Zurich Investment Management, Inc.
Director, Dreman Value Advisors, Inc.
Director, ZKI Agency, Inc.
Director, Community Investment Corporation
Director, Continental Community Development Corporation
Director, K-P Greenway, Inc.
Director, K-P Plaza Dallas, Inc.
Director, Kemper/Prime Acquisition Fund, Inc.
Director, RespiteCare
Director, Urban Shopping Centers, Inc.
Vice President, Kemper Funds
CHENG, LAURENCE W.
Director, Zurich Kemper Investments, Inc.
President and Chief Executive Officer, Zurich Investment
Management Group
C-4
<PAGE> 139
MORAX, DOMINQUE P.
Director, Zurich Kemper Investments, Inc.
Senior Vice President, Member Extended Corporate Executive Board,
Zurich Insurance Company
Trustee, Kemper Funds
CHAPMAN, II, WILLIAM E.
President, Kemper Retirement Plans Group, a unit of Zurich Kemper
Investments, Inc.
Director, Executive Vice President, Kemper Distributors, Inc.
VOGEL, VICTOR E.
Senior Executive Vice President, Zurich Kemper Investments, Inc.
Trustee, Zurich Kemper Investments, Inc. Profit Sharing Plan & Money
Purchase Pension Plan
BEIMFORD, JR., JOSEPH P.
Executive Vice President, Chief Investment Officer - Fixed
Income, Zurich Kemper Investments, Inc.
Vice President, Cash Account Trust
Vice President, Cash Equivalent Fund
Vice President, Galaxy Offshore, Inc.
Vice President, Investors Cash Trust
Vice President, Kemper Adjustable Rate U.S. Government Fund
Vice President, Kemper Diversified Income Fund
Vice President, Kemper Global Income Fund
Vice President, Kemper High Income Trust
Vice President, Kemper High Yield Fund
Vice President, Kemper Income and Capital Preservation Fund
Vice President, Kemper Intermediate Government Trust
Vice President, Kemper International Bond Fund
Vice President, Kemper Investors Fund
Vice President, Kemper Money Funds
Vice President, Kemper Multi-Market Income Trust
Vice President, Kemper Municipal Income Trust
Vice President, Kemper National Tax-Free Income Series
Vice President, Kemper Portfolios
Vice President, Kemper State Tax-Free Income Series
Vice President, Kemper Strategic Income Fund
Vice President, Kemper Strategic Municipal Income Trust
Vice President, Kemper U.S. Government Securities Fund
Vice President, Tax-Exempt California Money Market Fund
Vice President, Tax-Exempt New York Money Market Fund
COXON, JAMES H.
Executive Vice President, Zurich Kemper Investments, Inc.
Director, Vice President, Galaxy Offshore, Inc.
C-5
<PAGE> 140
Executive Vice President, Zurich Investment Management, Inc.
FERRO, DENNIS H.
Executive Vice President, Zurich Kemper Investments, Inc.
Director, Managing Director-Equities, Zurich Investment
Management Limited
Vice President, Kemper International Fund
Vice President, Kemper Investors Fund
Vice President, Kemper Target Equity Fund
Vice President, The Growth Fund of Spain, Inc.
Vice President, Kemper Europe Fund
GREENAWALT, JAMES L.
Executive Vice President, Zurich Kemper Investments, Inc.
Director, President, Kemper Distributors, Inc.
Director, President, ZKI Agency, Inc.
JOHNS, GORDON K.
Executive Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Global Income Fund
Vice President, Kemper Diversified Income Fund
Vice President, Kemper International Bond Fund
Vice President, Kemper International Management, Inc.
Managing Director, Zurich Investment Management Limited
Vice President, Kemper Multi-Market Income Trust
Director, Thames Heritage Parade Limited
LANGBAUM, GARY A.
Executive Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Total Return Fund
Vice President, Kemper Investors Fund
MANZONI, JR., CHARLES R.
Executive Vice President, Secretary & General Counsel, Zurich Kemper
Investments, Inc.
Vice President, Kemper Funds
Secretary, ZKI Agency, Inc.
Secretary, Kemper Service Company
Secretary, Kemper Distributors, Inc.
Secretary, ZKI Holding Corporation
MURRIHY, MAURA J.
Executive Vice President, Zurich Kemper Investments, Inc.
REYNOLDS, STEVEN H.
Executive Vice President, Chief Investment Officer - Equities, Zurich
Kemper Investments, Inc.
Vice President, Kemper Technology Fund
Vice President, Kemper Total Return Fund
Vice President, Kemper Growth Fund
Vice President, Kemper Small Capitalization Equity Fund
Vice President, Kemper International Fund
Vice President, Kemper Blue Chip Fund
Vice President, Kemper Value Plus Growth Fund
Vice President, Kemper Quantitative Equity Fund
Vice President, Kemper Target Equity Fund
Vice President, Kemper Horizon Fund
Vice President, Kemper Investors Fund
Vice President, The Growth Fund of Spain, Inc.
Vice President, Kemper Europe Fund
C-6
<PAGE> 141
ROBERTS, SCOTT A.
Executive Vice President, Zurich Kemper Investments, Inc.
Director, Executive Vice President, Zurich Investment Management, Inc.
SILIGMUELLER, DALE S.
Executive Vice President, Zurich Kemper Investments, Inc.
Director, Executive Vice President, Kemper Service Company
WEISS, ROBERT D.
Executive Vice President, Zurich Kemper Investments, Inc.
Executive Vice President, Zurich Investment Management, Inc.
BUKOWSKI, DANIEL J.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Quantitative Equity Fund
Vice President, Kemper Value Plus Growth Fund
Vice President, Kemper Investors Fund
BUTLER, DAVID H.
Senior Vice President, Zurich Kemper Investments, Inc.
CERVONE, DAVID M.
Senior Vice President, Zurich Kemper Investments, Inc.
CESSINE, ROBERT S.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Income and Capital Preservation Fund
Vice President, Kemper Diversified Income Fund
Vice President, Kemper Multi-Market Income Trust
Vice President, Kemper Investors Fund
CHESTER, TRACY McCORMICK
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Blue Chip Fund
Vice President, Kemper Target Equity Fund
CHIEN, CHRISTINE
Senior Vice President, Zurich Kemper Investments, Inc.
CIARLELLI, ROBERT W.
Senior Vice President, Zurich Kemper Investments, Inc.
Executive Vice President, Kemper Service Company
COLLORA, PHILIP J.
Senior Vice President and Assistant Secretary, Zurich Kemper
Investments, Inc.
Vice President and Secretary, Kemper Funds
C-7
<PAGE> 142
Assistant Secretary, Kemper International Management, Inc.
Assistant Secretary, Zurich Investment Management, Inc.
Assistant Secretary, Dreman Value Advisors, Inc.
Assistant Secretary, ZKI Agency, Inc.
DUDASIK, PATRICK H.
Senior Vice President, Zurich Kemper Investments, Inc.
Executive Vice President, Chief Financial Officer and Treasurer,
Dreman Value Advisors, Inc.
Vice President and Treasurer, Zurich Investment Management, Inc.
Treasurer and Chief Financial Officer, Kemper Distributors, Inc.
Treasurer and Chief Financial Officer, Kemper Service Company
Director and Treasurer, Zurich Investment Management Limited
Treasurer, ZKI Agency, Inc.
DUFFY, JEROME L.
Senior Vice President, Zurich Kemper Investments, Inc.
Treasurer, Kemper Funds
FENGER, JAMES E.
Senior Vice President, Zurich Kemper Investments, Inc.
FINK, THOMAS M.
Senior Vice President, Zurich Kemper Investments, Inc.
Senior Vice President, Zurich Investment Management, Inc.
GALLAGHER, MICHAEL L.
Senior Vice President, Zurich Kemper Investments, Inc.
Senior Vice President, Kemper Service Company
GOERS, RICHARD A.
Senior Vice President, Zurich Kemper Investments, Inc.
GREENWALD, MARSHALL L.
Senior Vice President, Zurich Kemper Investments, Inc.
Senior Vice President, Zurich Investment Management, Inc.
HARRINGTON, MICHAEL E.
Senior Vice President, Zurich Kemper Investments, Inc.
KLEIN, GEORGE
Senior Vice President, Zurich Kemper Investments, Inc.
Director, Executive Vice President, Zurich Investment Management, Inc.
KLEIN, MARTY
Senior Vice President, Zurich Kemper Investments, Inc.
KORTH, FRANK D.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Technology Fund
McNAMARA, MICHAEL A.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Diversified Income Fund
Vice President, Kemper High Income Trust
Vice President, Kemper High Yield Fund
C-8
<PAGE> 143
Vice President, Kemper Investors Fund
Vice President, Kemper Multi-Market Income Trust
Vice President, Kemper Strategic Income Fund
MOELLER, JAMES V.
Senior Vice President, Zurich Kemper Investments, Inc.
MOORE, C. PERRY
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, ZKI Agency, Inc.
MIER, CHRISTOPHER J.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper National Tax-Free Income Series
Vice President, Kemper Municipal Income Trust
Vice President, Kemper State Tax-Free Income Series
Vice President, Kemper Strategic Municipal Income Trust
RABIEGA, CRAIG F.
Senior Vice President, Zurich Kemper Investments, Inc.
First Vice President, Kemper Service Company
RACHWALSKI, JR. FRANK J.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Cash Account Trust
Vice President, Cash Equivalent Fund
Vice President, Investors Cash Trust
Vice President, Kemper Investors Fund
Vice President, Kemper Money Funds
Vice President, Kemper Portfolios
Vice President, Tax-Exempt California Money Market Fund
Vice President, Tax-Exempt New York Money Market Fund
REGNER, THOMAS M.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Horizon Fund
Vice President, Kemper Investors Fund
RESIS, JR., HARRY E.
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Diversified Income Fund
Vice President, Kemper High Income Trust
Vice President, Kemper High Yield Fund
Vice President, Kemper Investors Fund
Vice President, Kemper Multi-Market Income Trust
Vice President, Kemper Strategic Income Fund
SCHUMACHER, ROBERT T.
Senior Vice President, Zurich Kemper Investments, Inc.
SILVIA, JOHN E.
Senior Vice President, Zurich Kemper Investments, Inc.
SMITH, JR., EDWARD BYRON
Senior Vice President, Zurich Kemper Investments, Inc.
SWANSON, DAVID
Senior Vice President, Zurich Kemper Investments, Inc.
C-9
<PAGE> 144
THOUIN-LEERKAMP, EDITH A.
Senior Vice President, Zurich Kemper Investments, Inc.
Director-European Equities, Zurich Investment Management Limited
Vice President, Kemper Europe Fund
VANDENBERG, RICHARD
Senior Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Diversified Income Fund
Vice President, Kemper U.S. Government Securities Fund
Vice President, Kemper Portfolios
Vice President, Kemper Adjustable Rate U.S. Government Fund
VINCENT, CHRISTOPHER T.
Senior Vice President, Zurich Kemper Investments, Inc.
First Vice President, Zurich Investment Management, Inc.
WONNACOTT, LARRY R.
Senior Vice President, Zurich Kemper Investments, Inc.
Senior Vice President, Zurich Investment Management, Inc.
BAZAN, KENNETH M.
First Vice President, Zurich Kemper Investments, Inc.
Director, K-P Greenway, Inc.
Director, K-P Plaza Dallas, Inc.
Director, Kemper/Prime Acquisition Fund, Inc.
BOEHM, JONATHAN J.
First Vice President, Zurich Kemper Investments, Inc.
Senior Vice President, Kemper Service Company
BURROW, DALE R.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Strategic Municipal Income Trust
BYRNES, ELIZABETH A.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Adjustable Rate U.S. Government Fund
Vice President, Kemper Intermediate Government Trust
CHIEN, CHRISTINE
First Vice President, Zurich Kemper Investments, Inc.
CHRISTIANSEN, HERBERT A.
First Vice President, Zurich Kemper Investments, Inc.
First Vice President, Kemper Service Company
COHEN, JERRI I.
First Vice President, Zurich Kemper Investments, Inc.
DeMAIO, CHRIS C.
First Vice President, Zurich Kemper Investments, Inc.
Vice President and Chief Accounting Officer, Kemper Service
Company
C-10
<PAGE> 145
DEXTER, STEPHEN P.
First Vice President, Zurich Kemper Investments, Inc.
DOYLE, DANIEL J.
First Vice President, Zurich Kemper Investments, Inc.
HALE, DAVID D.
First Vice President, Zurich Kemper Investments, Inc.
HAUSKEN, PHILIP D.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Distributors, Inc.
HORTON, ROBERT J.
First Vice President, Zurich Kemper Investments, Inc.
INNES, BRUCE D.
First Vice President, Zurich Kemper Investments, Inc.
Co-President, International Association of Corporate and
Professional Recruiters
JACOBS, PETER M.
First Vice President, Zurich Kemper Investments, Inc.
KEELEY, MICHELLE M.
First Vice President, Zurich Kemper Investments, Inc.
KIEL, CAROL L.
First Vice President, Zurich Kemper Investments, Inc.
KNAPP, WILLIAM M.
First Vice President, Zurich Kemper Investments, Inc.
LAUGHLIN, ANN M.
First Vice President, Zurich Kemper Investments, Inc.
LENTZ, MAUREEN P.
First Vice President, Zurich Kemper Investments, Inc.
McCRINDLE-PETRARCA, SUSAN
First Vice President, Zurich Kemper Investments, Inc.
MINER, EDWARD
First Vice President, Zurich Kemper Investments, Inc.
MURRAY, SCOTT S.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Service Company
NORRIS, JOHNSTON A.
First Vice President, Zurich Kemper Investments, Inc.
C-11
<PAGE> 146
PANOZZO, ROBERTA L.
First Vice President, Zurich Kemper Investments, Inc.
PONTECORE, SUSAN E.
First Vice President, Zurich Kemper Investments, Inc.
RADIS, STEVE A.
First Vice President, Zurich Kemper Investments, Inc.
RATEKIN, DIANE E.
First Vice President, Assistant General Counsel and Assistant
Secretary, Zurich Kemper Investments, Inc.
Assistant Secretary, Kemper Distributors, Inc.
SMITH, ROBERT G.
First Vice President, Zurich Kemper Investments, Inc.
STUEBE, JOHN W.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Cash Account Trust
Vice President, Cash Equivalent Fund
TEPPER, SHARYN A.
First Vice President, Zurich Kemper Investments, Inc.
TRUTTER, JONATHAN W.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Diversified Income Fund
Vice President, Kemper Multi-Market Income Trust
Vice President, Kemper Strategic Income Fund
WETHERALD, ROBERT F.
First Vice President, Zurich Kemper Investments, Inc.
WILLSON, STEPHEN R.
First Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Strategic Municipal Income Trust
WITTNEBEL, MARK E.
First Vice President, Zurich Kemper Investments, Inc.
ADAMS, DONALD
Vice President, Zurich Kemper Investments, Inc.
ALLEN, PATRICIA L.
Vice President, Zurich Kemper Investments, Inc.
ANDREASEN, AMY
Vice President, Zurich Kemper Investments, Inc.
ANTONAK, GEORGE A.
Vice President, Zurich Kemper Investments, Inc.
BALASUBRAMANIAM, KALAMADI
Vice President, Zurich Kemper Investments, Inc.
BARRY, JOANN M.
Vice President, Zurich Kemper Investments, Inc.
C-12
<PAGE> 147
BIEBERLY, CHRISTINE A.
Vice President, Zurich Kemper Investments, Inc.
BODEM, RICHARD A.
Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Service Company
BRENNAN, ELEANOR R.
Vice President, Zurich Kemper Investments, Inc.
BUCHANAN, PAMELA S.
Vice President, Zurich Kemper Investments, Inc.
BURKE, MARY PAT
Vice President, Zurich Kemper Investments, Inc.
BURSHTAN, DAVID H.
Vice President, Zurich Kemper Investments, Inc.
CARNEY, ANNE T.
Vice President, Zurich Kemper Investments, Inc.
CACCIOLA, RONALD
Vice President, Zurich Kemper Investments, Inc.
Senior Vice President, Zurich Investment Management, Inc.
CARTER, PAUL J.
Vice President and Compliance Manager, Zurich Kemper Investments, Inc.
COHEN, JERRI I.
Vice President, Zurich Kemper Investments, Inc.
COULTER, STEVAN F.
Vice President, Zurich Kemper Investments, Inc.
ESOLA, CHARLES J.
Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Service Company
FRIHART, THORA A.
Vice President, Zurich Kemper Investments, Inc.
GERACI, AUGUST L.
Vice President, Zurich Kemper Investments, Inc.
GOLAN, JAMES S.
Vice President, Zurich Kemper Investments, Inc.
GOODWIN, JUDITH C.
Vice President, Zurich Kemper Investments, Inc.
GRAY, PATRICK
Vice President, Zurich Kemper Investments, Inc.
GROOTENDORST, TONYA
Vice President, Zurich Kemper Investments, Inc.
HECHT, MARC L.
Vice President, Zurich Kemper Investments, Inc.
Assistant Secretary, Kemper Distributors, Inc.
Assistant Secretary, ZKI Holding Corporation
Assistant Secretary, ZKI Agency, Inc.
C-13
<PAGE> 148
HUOT, LISA L.
Vice President, Zurich Kemper Investments, Inc.
JASINSKI, R. ANTHONY
Vice President, Zurich Kemper Investments, Inc.
KARWOWSKI, KENNETH F.
Vice President, Zurich Kemper Investments, Inc.
KENNEDY, PATRICK J.
Vice President, Zurich Kemper Investments, Inc.
KOBS, MICHAEL G.
Vice President, Zurich Kemper Investments, Inc.
KOCH, DEBORAH L.
Vice President, Zurich Kemper Investments, Inc.
KOURY, KATHRYN E.
Vice President, Zurich Kemper Investments, Inc.
KOWALCZYK, MARK A.
Vice President, Zurich Kemper Investments, Inc.
Vice President, ZKI Agency, Inc.
KRANZ, KATHY J.
Vice President, Zurich Kemper Investments, Inc.
KRUEGER, PAMELA D.
Vice President, Zurich Kemper Investments, Inc.
KYCE, JOYCE
Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Service Company
LASKA, ROBERTA E.
Vice President, Zurich Kemper Investments, Inc.
LAUTZ, STEPHEN
Vice President, Zurich Kemper Investments, Inc.
LeFEBVRE, THOMAS J.
Vice President, Zurich Kemper Investments, Inc.
McGINN, MARTHA R.
Vice President, Zurich Kemper Investments, Inc.
McGOVERN, KAREN B.
Vice President, Zurich Kemper Investments, Inc.
MILLER, GARY L.
Vice President, Zurich Kemper Investments, Inc.
MILLIGAN, BRIAN J.
Vice President, Zurich Kemper Investments, Inc.
C-14
<PAGE> 149
MULLEN, TERRENCE
Vice President, Zurich Kemper Investments, Inc.
MURPHY, THOMAS M.
Vice President, Zurich Kemper Investments, Inc.
NEVILLE, BRIAN P.
Vice President, Zurich Kemper Investments, Inc.
NORMAN, JR., DONALD L.
Vice President, Zurich Kemper Investments, Inc.
NOWAK, GREGORY J.
Vice President, Zurich Kemper Investments, Inc.
PANOZZO, ALBERT R.
Vice President, Zurich Kemper Investments, Inc.
PAXTON, THOMAS
Vice President, Zurich Kemper Investments, Inc.
QUADRINI, LISA L.
Vice President, Zurich Kemper Investments, Inc.
RANDALL, JR., WALTER R.
Vice President, Zurich Kemper Investments, Inc.
ROBINSON, DEBRA A.
Vice President, Zurich Kemper Investments, Inc.
RODGERS, JOHN B.
Vice President, Zurich Kemper Investments, Inc.
ROKOSZ, PAUL A.
Vice President, Zurich Kemper Investments, Inc.
ROSE, KATIE M.
Vice President, Zurich Kemper Investments, Inc.
RUDIN, MICHELLE I.
Vice President, Zurich Kemper Investments, Inc.
SAENGER, MARYELLEN
Vice President, Zurich Kemper Investments, Inc.
SHULTZ, KAREN D.
Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Service Company
SOPHER, EDWARD O.
Vice President, Zurich Kemper Investments, Inc.
C-15
<PAGE> 150
SPILLER, KATHLEEN A.
Vice President, Zurich Kemper Investments, Inc.
SPURLING, CHRIS
Vice President, Zurich Kemper Investments, Inc.
STROMM, LAWRENCE D.
Vice President, Zurich Kemper Investments, Inc.
THOMAS, JILL
Vice President, Zurich Kemper Investments, Inc.
VANDEMERKT, RICHARD J.
Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Service Company
WALKER, ANGELA
Vice President, Zurich Kemper Investments, Inc.
WATKINS, JAMES K.
Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Service Company
WERTH, ELIZABETH C.
Vice President, Zurich Kemper Investments, Inc.
Vice President, Kemper Distributors, Inc.
Assistant Secretary, Kemper Open-End Mutual Funds
WILNER, MITCHELL
Vice President, Zurich Kemper Investments, Inc.
WIZER, BARBARA K.
Vice President, Zurich Kemper Investments, Inc.
ZURAWSKI, CATHERINE N.
Vice President, Zurich Kemper Investments, Inc.
C-16
<PAGE> 151
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Kemper Distributors, Inc. acts as principal underwriter of the
Registrant's shares and acts as principal underwriter of the Kemper Mutual
Funds, Kemper Investors Fund, Kemper International Bond Fund and Kemper-Dreman
Fund, Inc.
(b) Information on the officers and directors of Kemper Distributors,
Inc., principal underwriter for the Registrant is set forth below. The
principal business address is 222 South Riverside Plaza, Chicago, Illinois
60606.
<TABLE>
<CAPTION>
POSITIONS AND
POSITIONS AND OFFICES OFFICES WITH
NAME WITH UNDERWRITER REGISTRANT
---- ---------------- ----------
<S> <C> <C>
James L. Greenawalt Director, President None
William E. Chapman, II Director, Executive Vice President None
John E. Neal Director Vice President
Stephen B. Timbers Director President/Trustee
Patrick H. Dudasik Financial Principal, Treasurer
and Chief Financial Officer None
Linda A. Bercher Senior Vice President None
Thomas V. Bruns Senior Vice President None
Terry Cunningham Senior Vice President None
John H. Robison, Jr. Senior Vice President None
Henry J. Schulthesz Senior Vice President None
Philip D. Hausken Vice President None
Carlene D. Merold Vice President None
Elizabeth C. Werth Vice President Assistant Secretary
Charles R. Manzoni, Jr. Secretary Vice President
Marc L. Hecht Assistant Secretary None
Diane E. Ratekin Assistant Secretary None
</TABLE>
(c) Not applicable.
C-17
<PAGE> 152
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All such accounts, books and other documents are maintained at the offices
of the Registrant, the offices of Registrant's investment adviser, Zurich Kemper
Investments, Inc. and Registrant's principal underwriter, Kemper Distributors,
Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, at the offices of the
custodian and transfer agent, Investors Fiduciary Trust Company, 21 West 10th
Street, Kansas City, Missouri 64141 or at the offices of the Shareholder Service
Agent, Kemper Service Company, 811 Main Street, Kansas City, Missouri 64105.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Not applicable.
C-18
<PAGE> 153
S I G N A T U R E S
Pursuant to the requirements of the Securities Act of
1933 and the Investment Company Act of 1940, the Registrant
certifies that it meets all of the requirements for
effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of
Chicago and State of Illinois, on the 17th day of December,
1996.
KEMPER ADJUSTABLE RATE U.S.
GOVERNMENT FUND
By /s/ Stephen B. Timbers
------------------------------
Stephen B. Timbers, President
Pursuant to the requirements of the Securities Act of
1933, this Registration Statement has been signed below on
December 17, 1996 on behalf of the following persons in the
capacities indicated.
Signature Title
--------- -----
/s/ Stephen B. Timbers President
---------------------------------- (Principal
Stephen B. Timbers Executive Officer)
and Trustee
/s/David W. Belin* Trustee
--------------------------------------
/s/Lewis A. Burnham* Trustee
--------------------------------------
/s/Donald L. Dunaway* Trustee
--------------------------------------
/s/Robert B. Hoffman* Trustee
--------------------------------------
/s/Donald R. Jones* Trustee
--------------------------------------
/s/Dominique P. Morax* Trustee
--------------------------------------
/s/Shirley D. Peterson* Trustee
--------------------------------------
/s/William P. Sommers* Trustee
--------------------------------------
/s/ Jerome L. Duffy
-------------------------------------- Treasurer
Jerome L. Duffy (Principal
Financial and
Accounting Officer)
*Philip J. Collora signs this document pursuant to powers of
attorney filed herewith.
/s/ Philip J. Collora
--------------------------------
Philip J. Collora
<PAGE> 154
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
INDEX TO EXHIBITS
Exhibits
<TABLE>
<S> <C>
99.B1 Amended and Restated Agreement and Declaration of Trust*
99.B2 By-Laws*
99.B3 Inapplicable
99.B4(a) Text of Share Certificate*
99.B4(b) Amended and Restated Written Instrument Establishing and Designating
Separate Classes of Shares
99.B5(a) Investment Management Agreement
99.B6(a) Underwriting and Distribution Services Agreement
99.B6(b) Selling Group Agreement*
99.B6(c) Addendum to Selling Group Agreement
99.B7 Inapplicable
99.B8 Custody Agreement*
99.B9(a) Agency Agreement*
99.B9(b) Supplement to Agency Agreement
99.B9(c) Administrative Services Agreement*
99.B9(d) Amendment to Administrative Services Agreement*
99.B9(e) Assignment and Assumption*
99.B9(f) Amended Appendix I for Administrative Services Agreement*
99.B10 Legal Opinion and Consent
99.B11 Report and Consent of Independent Auditors
99.B12 Inapplicable
99.B13 Inapplicable
99.B14(a) Kemper Retirement Plan Prototype*
99.B14(b) Model Individual Retirement Account*
99.B15 See 6(a) above (Class B and Class C Shares)
99.B16 Performance Calculations**
99.B18 Multi-Distribution System Plan
99.B24 Powers of Attorney
99.B485(b) Representation of Counsel (Rule 485(b))
27A Financial Data Schedule
27B Financial Data Schedule
27C Financial Data Schedule
</TABLE>
- ---------------
* Incorporated herein by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A filed on November 30, 1995.
** Incorporated herein by reference to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A filed on October 26, 1988.
<PAGE> 1
EXHIBIT 99.B4(b)
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
AMENDED AND RESTATED
WRITTEN INSTRUMENT ESTABLISHING
AND DESIGNATING SEPARATE CLASSES OF SHARES
March 9, 1996
The undersigned constitute all the Trustees of Kemper Adjustable Rate U.S.
Government Fund (the "Fund"), a Massachusetts business trust governed by an
Amended and Restated Agreement and Declaration of Trust dated May 27, 1994 (the
"Amended Declaration of Trust"). This amended and restated instrument is
executed pursuant to Section 1 of Article III of the Amended Declaration of
Trust in order to establish and designate separate classes of shares of any
series of the Fund, is based in part upon resolutions of the Board of Trustees
of the Fund adopted at meetings held on January 14, 1994 and March 8-9, 1996
and amends and restates a prior written instrument related to the subject
matter hereof.
WHEREAS, Under the Amended Declaration of Trust the Board of Trustees has
the authority, in its discretion and without shareholder approval, to divide
the shares of any series of the Fund into separate classes of shares;
WHEREAS, This Board of Trustees has previously approved, subject to
various conditions, the division of the shares of each series of the Fund into
four classes of shares, to be named "Class A Shares," "Class B Shares," "Class
C Shares" and "Class I Shares" and has on this date approved amendments to the
terms of such division of shares;
WHEREAS, This Board of Trustees deems it desirable and in the best
interests of the Fund to amend and restate the terms and conditions governing
the division of the shares of each series of the Fund, whether now existing or
hereafter created (the "series"), into four separate classes of shares to be
named, as previously indicated, "Class A Shares," "Class B Shares," "Class C
Shares" and "Class I Shares" and the provision to investors of a conversion
feature from Class B Shares to the Class A Shares, which conversion feature
would thereby eliminate any distribution services fee then in effect under any
plan adopted pursuant to Rule 12b-1 of the Investment Company Act of 1940
("1940 Act") for such Class B Shares; and
<PAGE> 2
WHEREAS, This Board of Trustees believes that the creation of four
separate classes of shares on the terms and conditions as amended and restated
as provided herein will be in the best interests of and will have no negative
effects upon the current shareholders of the Fund;
NOW, THEREFORE, the establishment and designation of separate classes of
shares of any series of the Fund is approved in accordance with the following
amended and restated provisions:
1. Subject to the conditions hereinafter set forth, the shares of any
series shall be divided into four classes to be known respectively as the
"Class A Shares," the "Class B Shares," the "Class C Shares" and the "Class I
Shares," which classes shall have such preferences and special or relative
rights and privileges as may be determined from time to time by this Board of
Trustees subject always to the Amended Declaration of Trust and the 1940 Act
and the rules and regulations thereunder.
2. Subject to the terms of the Amended Declaration of Trust, the Class A
Shares, Class B Shares, Class C Shares and Class I Shares will have the same
rights and privileges except that:
(A) the Class A Shares
(1) shall be sold subject to an initial sales charge as described in
the prospectus for the Fund as from time to time in effect or shall be
issued to shareholders in connection with the conversion feature as
hereinafter described;
(2) shall have an administrative service fee;
(3) shall not have a plan of distribution adopted under Rule 12b-1 of
the 1940 Act ("Rule 12b-1 plan") and no fees payable under the Rule 12b-1
plans for the Class B Shares or Class C Shares shall be allocated or
charged to the Class A Shares; and
(4) shall have such dividend reinvestment, exchange and redemption
rights and privileges as may be described in the prospectus for the Fund
as from time to time in effect; and
(B) the Class B Shares
(1) shall be sold without an initial sales charge but subject to a
contingent deferred sales charge imposed upon the redemption of the Class
B shares as described in the prospectus of the Fund as from time to time
in effect;
2
<PAGE> 3
(2) shall have an administrative service fee;
(3) shall have a Rule 12b-1 plan and any fees payable from time to
time under such plan shall be allocated and charged to, and any voting
rights with respect to such plan shall be exercisable by, the Class B
Shares only;
(4) shall convert to Class A Shares within a specified number of
years as hereinafter described; and
(5) shall have such purchase, dividend reinvestment, exchange and
redemption rights and privileges associated therewith as may be described
in the prospectus for the Fund as from time to time in effect; and
(C) the Class C Shares
(1) shall be sold without any initial sales charge or any contingent
deferred sales charge except that, Class C Shares sold on or after April
1, 1996 shall be subject to a contingent deferred sales charge as
described in the prospectus for the Fund as from time to time in effect;
(2) shall have an administrative service fee;
(3) shall have a Rule 12b-1 plan and any fees payable from time to
time under such plan shall be allocated and charged to, and any voting
rights with respect to such plan shall be exercisable by, the Class C
Shares only; and
(4) shall have such purchase, dividend reinvestment, exchange and
redemption rights and privileges associated therewith as may be described
in the prospectus for the Fund as from time to time in effect; and
(D) the Class I Shares
(1) shall be sold without any initial sales charge or any contingent
deferred sales charge;
(2) shall not have an administrative service fee;
(3) shall not have a Rule 12b-1 plan and no fees payable under the
plans for the Class B Shares or Class C Shares shall be allocated or
charged to the Class I Shares; and
(4) shall have such dividend reinvestment, exchange and redemption
rights and privileges as may be described in the prospectus for the Fund
as from time to time in effect.
3
<PAGE> 4
3. Any shares of the Fund that were issued and outstanding at the time
when shares of the Fund were originally divided into separate classes of shares
as set forth above shall be classified as Class A Shares.
4. Class A Shares of a series shall be issued to holders of Class B
Shares of the same series pursuant to the following described conversion
feature:
(A) Class B Shares will convert to Class A Shares six years after
issuance of such Class B Shares; provided, however, that any Class B
Shares issued in exchange for shares originally classified as Initial
Shares of Kemper Portfolios, formerly known as Kemper Investment
Portfolios (KP), whether in connection with a reorganization with a series
of KP or otherwise, shall convert to Class A Shares seven years after
issuance of such Initial Shares if such Initial Shares were issued prior
to February 1, 1991;
(B) Class B Shares issued upon reinvestment of income and capital
gain dividends and other distributions will convert to Class A Shares on a
pro rata basis with other Class B Shares; and
(C) Conversion to Class A Shares shall be based upon the relative net
asset values of the Class A Shares and the Class B Shares at the time of
conversion.
IN WITNESS WHEREOF, the undersigned have this 9th day of March, 1996
signed these presents.
/s/ Stephen B. Timbers
-----------------------------------
Stephen B. Timbers
210 South Green Bay Road
Lake Forest, IL 60045
(signatures continue)
4
<PAGE> 5
/s/ David W. Belin
-----------------------------------
David W. Belin, Trustee
1705 Plaza Circle
Des Moines, Iowa 50322
/s/ Lewis A. Burnham
-----------------------------------
Lewis A. Burnham, Trustee
16410 Avila Boulevard
Tampa, Florida 33613
/s/ Donald L. Dunaway
-----------------------------------
Donald L. Dunaway, Trustee
7515 Pelican Bay Boulevard, #903
Naples, Florida 33963
/s/ Robert B. Hoffman
-----------------------------------
Robert B. Hoffman, Trustee
10045 Litzsinger Road
St. Louis, MO 63124-1131
/s/ Donald R. Jones
-----------------------------------
Donald R. Jones, Trustee
1776 Beaver Pond Road
Inverness, Illinois 60067
/s/ Dominique P. Morax
-----------------------------------
Dominique P. Morax, Trustee
Vordere Dorfstrasse 13
8803 Ruschlikon
Switzerland
/s/ Shirley D. Peterson
-----------------------------------
Shirley D. Peterson, Trustee
401 Rosemont Avenue
Frederick, MD 21701-8575
/s/ William P. Sommers
-----------------------------------
William P. Sommers, Trustee
2181 Parkside Avenue
Hillsborough, California 94010
-----------------------------------
Stephen B. Timbers, Trustee
210 South Green Bay Road
Lake Forest, Illinois 60045
<PAGE> 1
EXHIBIT 99.B5(a)
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT made this 4th day of January, 1996, by and between KEMPER
ADJUSTABLE RATE U.S. GOVERNMENT FUND, a Massachusetts business trust (the
"Fund"), and KEMPER FINANCIAL SERVICES, INC., a Delaware corporation (the
"Adviser").
WHEREAS, the Fund is an open-end management investment company registered
under the Investment Company Act of 1940, the shares of beneficial interest
("Shares") of which are registered under the Securities Act of 1933;
WHEREAS, the Fund is authorized to issue Shares in separate series or
portfolios with each representing the interests in a separate portfolio of
securities and other assets;
WHEREAS, the Fund currently offers or intends to offer Shares in one
portfolio, the Initial Portfolio, together with any other Fund portfolios which
may be established later and served by the Adviser hereunder, being herein
referred to collectively as the "Portfolios" and individually referred to as a
"Portfolio"; and
WHEREAS, the Fund desires at this time to retain the Adviser to render
investment advisory and management services to the Initial Portfolio, and the
Adviser is willing to render such services;
NOW THEREFORE, in consideration of the mutual covenants hereinafter
contained, it is hereby agreed by and between the parties hereto as follows:
1. The Fund hereby employs the Adviser to act as the investment adviser for
the Initial Portfolio and other Portfolios hereunder and to manage the
investment and reinvestment of the assets of each such Portfolio in accordance
with the applicable investment objectives and policies and limitations, and to
administer the affairs of each such Portfolio to the extent requested by and
subject to the supervision of the Board of Trustees of the Fund for the period
and upon the terms herein set forth, and to place orders for the purchase or
sale of portfolio securities for the Fund's account with brokers or dealers
selected by it; and, in connection therewith, the Adviser is authorized as the
agent of the Fund to give instructions to the Custodian of the Fund as to the
deliveries of securities and payments
<PAGE> 2
of cash for the account of the Fund. In connection with the selection of such
brokers or dealers and the placing of such orders, the Adviser is directed to
seek for the Fund best execution of orders. Subject to such policies as the
Board of Trustees of the Fund determines, the Adviser shall not be deemed to
have acted unlawfully or to have breached any duty, created by this Agreement
or otherwise, solely by reason of its having caused the Fund to pay a broker or
dealer an amount of commission for effecting a securities transaction in excess
of the amount of commission another broker or dealer would have charged for
effecting that transaction, if the Adviser determined in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker or dealer viewed in terms of
either that particular transaction or the Adviser's overall responsibilities
with respect to the clients of the Adviser as to which the Adviser exercises
investment discretion. The Fund recognizes that all research services and
research that the Adviser receives or generates are available for all clients,
and that the Fund and other clients may benefit thereby. The investment of
funds shall be subject to all applicable restrictions of the Agreement and
Declaration of Trust and By-Laws of the Fund as may from time to time be in
force.
The Adviser accepts such employment and agrees during such period to render
such services, to furnish office facilities and equipment and clerical,
bookkeeping and administrative services for the Fund, to permit any of its
officers or employees to serve without compensation as trustees or officers of
the Fund if elected to such positions and to assume the obligations herein set
forth for the compensation herein provided. The Adviser shall for all purposes
herein provided be deemed to be an independent contractor and, unless otherwise
expressly provided or authorized, shall have no authority to act for or
represent the Fund in any way or otherwise be deemed an agent of the Fund. It
is understood and agreed that the Adviser, by separate agreements with the
Fund, may also serve the Fund in other capacities.
2. In the event that the Fund establishes one or more portfolios other than
the Initial Portfolio with respect to which it desires to retain the Adviser to
render investment advisory and management services hereunder, it shall notify
the Adviser in writing. If the Adviser is willing to render such services, it
shall notify the Fund in writing whereupon such portfolio or portfolios shall
become a Portfolio or Portfolios hereunder.
2
<PAGE> 3
3. For the services and facilities described in Section 1, the Fund will pay
to the Adviser at the end of each calendar month, an investment management fee
for each Portfolio computed by applying the following annual rates to the
applicable average daily net assets of the Portfolio:
<TABLE>
<CAPTION>
Applicable Average
Daily Net Assets
(Thousands) Annual Rate
----------------- -----------
<S> <C>
$0 - $ 250,000 .55 of 1%
$ 250,000 - $ 1,000,000 .52 of 1%
$ 1,000,000 - $ 2,500,000 .50 of 1%
$ 2,500,000 - $ 5,000,000 .48 of 1%
$ 5,000,000 - $ 7,500,000 .45 of 1%
$ 7,500,000 - $10,000,000 .43 of 1%
$10,000,000 - $12,500,000 .41 of 1%
Over $12,500,000 .40 of 1%
</TABLE>
The fee as computed above shall be computed separately for, and charged as
an expense of, each Portfolio based upon the average daily net assets of such
Portfolio. For the month and year in which this Agreement becomes effective or
terminates, there shall be an appropriate proration on the basis of the number
of days that the Agreement is in effect during the month and year,
respectively.
4. The services of the Adviser to the Fund under this Agreement are not to be
deemed exclusive, and the Adviser shall be free to render similar services or
other services to others so long as its services hereunder are not impaired
thereby.
5. In addition to the fee of the Adviser, the Fund shall assume and pay any
expenses for services rendered by a custodian for the safekeeping of the Fund's
securities or other property, for keeping its books of account, for any other
charges of the custodian, and for calculating the net asset value of the Fund
as provided in the prospectus of the Fund. The Adviser shall not be required
to pay and the Fund shall assume and pay the charges and expenses of its
operations, including compensation of the trustees (other than those affiliated
with the Adviser), charges and expenses of independent auditors, of legal
counsel, of any transfer or dividend disbursing agent, and of any registrar of
the Fund, costs of acquiring and disposing of portfolio securities, interest,
if any, on obligations incurred by the Fund, costs of share certificates and of
reports, membership dues in the
3
<PAGE> 4
Investment Company Institute or any similar organization, costs of reports and
notices to shareholders, other like miscellaneous expenses and all taxes and
fees payable to federal, state or other governmental agencies on account of the
registration of securities issued by the Fund, filing of trust documents or
otherwise. The Fund shall not pay or incur any obligation for any expenses for
which the Fund intends to seek reimbursement from the Adviser as herein
provided without first obtaining the written approval of the Adviser. The
Adviser shall arrange, if desired by the Fund, for officers or employees of the
Adviser to serve, without compensation from the Fund, as trustees, officers or
agents of the Fund if duly elected or appointed to such positions and subject
to their individual consent and to any limitations imposed by law.
If expenses borne by the Fund for those Portfolios which the Adviser
manages in any fiscal year (including the Adviser's fee, but excluding
interest, taxes, fees incurred in acquiring and disposing of portfolio
securities, distribution services fees, extraordinary expenses and any other
expenses excludable under state securities law limitations) exceed any
applicable limitation arising under state securities laws, the Adviser will
reduce its fee or reimburse the Fund for any excess to the extent required by
such state securities laws. If for any month the expenses of the Fund properly
chargeable to the income account shall exceed 1/12 of the percentage of average
net assets allowable as expenses, the payment to the Adviser for that month
shall be reduced and if necessary the Adviser shall make a refund payment to
the Fund so that the total net expense will not exceed such percentage. As of
the end of the Fund's fiscal year, however, the foregoing computations and
payments shall be readjusted so that the aggregate compensation payable to the
Adviser for the year is equal to the percentage calculated in accordance with
Section 3 hereof of the average net asset value as determined as described
herein throughout the fiscal year, diminished to the extent necessary so that
the total of the aforementioned expense items of the Fund shall not exceed the
expense limitation. The aggregate of repayments, if any, by the Adviser to the
Fund for the year shall be the amount necessary to limit the said net expense
to said percentage in accordance with the foregoing.
The net asset value for each Portfolio shall be calculated in accordance
with the provisions of the Fund's prospectus or as the trustees may determine
in accordance with the provisions of the Investment Company Act of 1940. On
each day when net asset value is not calculated, the net asset value of a
Portfolio shall be deemed to be the net asset value of such Portfolio as of the
close of business on
4
<PAGE> 5
the last day on which such calculation was made for the purpose of the
foregoing computations.
6. Subject to applicable statutes and regulations, it is understood that
trustees, officers or agents of the Fund are or may be interested in the
Adviser as officers, directors, agents, shareholders or otherwise, and that the
officers, directors, shareholders and agents of the Adviser may be interested
in the Fund otherwise than as a trustee, officer or agent.
7. The Adviser shall not be liable for any error of judgment or of law or for
any loss suffered by the Fund in connection with the matters to which this
Agreement relates, except loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Adviser in the performance of its
obligations and duties or by reason of its reckless disregard of its
obligations and duties under this Agreement.
8. This Agreement shall become effective with respect to the Initial
Portfolio on the date hereof and shall remain in full force until March 1,
1996, unless sooner terminated as hereinafter provided. This Agreement shall
continue in force from year to year thereafter with respect to each Portfolio,
but only as long as such continuance is specifically approved for each
Portfolio at least annually in the manner required by the Investment Company
Act of 1940 and the rules and regulations thereunder; provided, however, that
if the continuation of this Agreement is not approved for a Portfolio, the
Adviser may continue to serve in such capacity for such Portfolio in the manner
and to the extent permitted by the Investment Company Act of 1940 and the rules
and regulations thereunder.
This Agreement shall automatically terminate in the event of its
assignment and may be terminated at any time without the payment of any penalty
by the Fund or by the Adviser on sixty (60) days written notice to the other
party. The Fund may effect termination with respect to any Portfolio by action
of the Board of Trustees or by vote of a majority of the outstanding voting
securities of such Portfolio.
This Agreement may be terminated with respect to any Portfolio at any time
without the payment of any penalty by the Board of Trustees or by vote of a
majority of the outstanding voting securities of such Portfolio in the event
that it shall have been established by a court of competent jurisdiction that
the Adviser or any officer or director of the Adviser has taken any action
which results in a breach of the covenants of the Adviser set forth herein.
5
<PAGE> 6
The terms "assignment" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the Investment Company Act of
1940 and the rules and regulations thereunder.
Termination of this Agreement shall not affect the right of the Adviser to
receive payments on any unpaid balance of the compensation described in Section
3 earned prior to such termination.
9. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder shall not be thereby
affected.
10. Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as
such other party may designate for the receipt of such notice.
11. All parties hereto are expressly put on notice of the Fund's Agreement and
Declaration of Trust and all amendments thereto, all of which are on file with
the Secretary of The Commonwealth of Massachusetts, and the limitation of
shareholder and trustee liability contained therein. This Agreement has been
executed by and on behalf of the Fund by its representatives as such
representatives and not individually, and the obligations of the Fund hereunder
are not binding upon any of the trustees, officers, or shareholders of the Fund
individually but are binding upon only the assets and property of the Fund.
With respect to any claim by the Adviser for recovery of that portion of the
investment management fee (or any other liability of the Fund arising
hereunder) allocated to a particular Portfolio, whether in accordance with the
express terms hereof or otherwise, the Adviser shall have recourse solely
against the assets of that Portfolio to satisfy such claim and shall have no
recourse against the assets of any other Portfolio for such purpose.
12. This Agreement shall be construed in accordance with applicable federal
law and (except as to Section 11 hereof which shall be construed in accordance
with the laws of The Commonwealth of Massachusetts) the laws of the State of
Illinois.
6
<PAGE> 7
13. This Agreement is the entire contract between the parties relating to the
subject matter hereof and supersedes all prior agreements between the parties
relating to the subject matter hereof.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed as of the day and year first above written.
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
By: /s/ John E. Peters
----------------------------------------
Title: Vice President
ATTEST:
/s/ Philip J. Collora
- ----------------------------
Title: Secretary
KEMPER FINANCIAL SERVICES, INC.
By: /s/ Patrick Dudasik
----------------------------------------
Title: Senior Vice President
ATTEST:
/s/ David F. Dierenfeldt
- ----------------------------
Title: Assistant Secretary
7
<PAGE> 1
EXHIBIT 99.B6(a)
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT
AGREEMENT made this 4th day of January, 1996, between KEMPER ADJUSTABLE
RATE U.S. GOVERNMENT 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 agent for the distribution of
shares of beneficial interest (hereinafter called "shares") of the Fund in
jurisdictions wherein shares of the Fund may legally be offered for sale;
provided, however, that the Fund in its absolute discretion may (a) issue or
sell shares directly to holders of shares of the Fund upon such terms and
conditions and for such consideration, if any, as it may determine, whether in
connection with the distribution of subscription or purchase rights, the
payment or reinvestment of dividends or distributions, or otherwise; or (b)
issue or sell shares at net asset value to the shareholders of any other
investment company, for which KDI shall act as exclusive distributor, who wish
to exchange all or a portion of their investment in shares of such other
investment company for shares of the Fund. KDI shall appoint various financial
service firms ("Firms") to provide distribution services to investors. The
Firms shall provide such office space and equipment, telephone facilities,
personnel, literature distribution, advertising and promotion as is necessary
or beneficial for providing information and distribution services to existing
and potential clients of the Firms. KDI may also provide some of the above
services for the Fund.
KDI accepts such appointment as distributor and principal underwriter and
agrees to render such services and to assume the obligations herein set forth
for the compensation herein provided. KDI shall for all purposes herein
provided be deemed to be an independent contractor and, unless expressly
provided herein or otherwise authorized, shall have no authority to act for or
represent the Fund in any way. KDI, by separate agreement with the Fund, may
also serve the Fund in other capacities. The services of KDI to the Fund under
this Agreement are not to be deemed exclusive, and KDI shall be free to render
similar services or other services to others so long as its services hereunder
are not impaired thereby.
<PAGE> 2
In carrying out its duties and responsibilities hereunder, KDI will,
pursuant to separate written contracts, appoint various Firms to provide
advertising, promotion and other distribution services contemplated hereunder
directly to or for the benefit of existing and potential shareholders who may
be clients of such Firms. Such Firms shall at all times be deemed to be
independent contractors retained by KDI and not the Fund.
KDI shall use its best efforts with reasonable promptness to sell such
part of the authorized shares of the Fund remaining unissued as from time to
time shall be effectively registered under the Securities Act of 1933
("Securities Act"), at prices determined as hereinafter provided and on terms
hereinafter set forth, all subject to applicable federal and state laws and
regulations and to the Agreement and Declaration of Trust of the Fund.
2. KDI shall sell shares of the Fund to or through qualified Firms in such
manner, not inconsistent with the provisions hereof and the then effective
registration statement (and related prospectus) of the Fund under the
Securities Act, as KDI may determine from time to time, provided that no Firm
or other person shall be appointed or authorized to act as agent of the Fund
without the prior consent of the Fund. In addition to sales made by it as
agent of the Fund, KDI may, in its discretion, also sell shares of the Fund as
principal to persons with whom it does not have selling group agreements.
Shares of any class of any series of the Fund offered for sale or sold by
KDI shall be so offered or sold at a price per share determined in accordance
with the then current prospectus. The price the Fund shall receive for all
shares purchased from it shall be the net asset value used in determining the
public offering price applicable to the sale of such shares. Any excess of the
sales price over the net asset value of the shares of the Fund sold by KDI as
agent shall be retained by KDI as a commission for its services hereunder. KDI
may compensate Firms for sales of shares at the commission levels provided in
the Fund's prospectus from time to time. KDI may pay other commissions, fees
or concessions to Firms, and may pay them to others in its discretion, in such
amounts as KDI shall determine from time to time. KDI shall be entitled to
receive and retain any applicable contingent deferred sales charge as described
in the Fund's prospectus. KDI shall also receive any distribution services fee
payable by the Fund as provided in Section 8 hereof.
KDI will require each Firm to conform to the provisions hereof and the
Registration Statement (and related prospectus) at the time in effect under the
Securities Act with respect to the public offering price or net asset value, as
applicable, of the Fund's shares, and neither KDI nor any such Firms shall
withhold the placing of purchase orders so as to make a profit thereby.
2
<PAGE> 3
3. The Fund will use its best efforts to keep effectively registered under
the Securities Act for sale as herein contemplated such shares as KDI shall
reasonably request and as the Securities and Exchange Commission shall permit
to be so registered. Notwithstanding any other provision hereof, the Fund may
terminate, suspend or withdraw the offering of shares whenever, in its sole
discretion, it deems such action to be desirable.
4. The Fund will execute any and all documents and furnish any and all
information that may be reasonably necessary in connection with the
qualification of its shares for sale (including the qualification of the Fund
as a dealer where necessary or advisable) in such states as KDI may reasonably
request (it being understood that the Fund shall not be required without its
consent to comply with any requirement which in its opinion is unduly
burdensome). The Fund will furnish to KDI from time to time such information
with respect to the Fund and its shares as KDI may reasonably request for use
in connection with the sale of shares of the Fund.
5. KDI shall issue and deliver or shall arrange for various Firms to issue
and deliver on behalf of the Fund such confirmations of sales made by it
pursuant to this agreement as may be required. At or prior to the time of
issuance of shares, KDI will pay or cause to be paid to the Fund the amount due
the Fund for the sale of such shares. Certificates shall be issued or shares
registered on the transfer books of the Fund in such names and denominations as
KDI may specify.
6. KDI shall order shares of the Fund from the Fund only to the extent that
it shall have received purchase orders therefor. KDI will not make, or
authorize Firms or others to make (a) any short sales of shares of the Fund; or
(b) any sales of such shares to any trustee or officer of the Fund or to any
officer or director of KDI or of any corporation or association furnishing
investment advisory, managerial or supervisory services to the Fund, or to any
corporation or association, unless such sales are made in accordance with the
then current prospectus relating to the sale of such shares. KDI, as agent of
and for the account of the Fund, may repurchase the shares of the Fund at such
prices and upon such terms and conditions as shall be specified in the current
prospectus of the Fund. In selling or reacquiring shares of the Fund for the
account of the Fund, KDI will in all respects conform to the requirements of
all state and federal laws and the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., relating to such sale or
reacquisition, as the case may be, and will indemnify and save harmless the
Fund from any damage or expense on account of any wrongful act by KDI or any
employee, representative or agent of KDI. KDI will observe and be bound by all
the provisions of the Agreement and Declaration of Trust of the Fund (and of
any fundamental policies
3
<PAGE> 4
adopted by the Fund pursuant to the Investment Company Act of 1940, notice of
which shall have been given to KDI) which at the time in any way require,
limit, restrict, prohibit or otherwise regulate any action of the part of KDI
hereunder.
7. The Fund shall assume and pay all charges and expenses of its operations
not specifically assumed or otherwise to be provided by KDI under this
Agreement. The Fund will pay or cause to be paid expenses (including the fees
and disbursements of its own counsel) of any registration of the Fund and its
shares under the United States securities laws and expenses incident to the
issuance of shares of beneficial interest, such as the cost of share
certificates, issue taxes, and fees of the transfer agent. KDI will pay all
expenses (other than expenses which one or more Firms may bear pursuant to any
agreement with KDI) incident to the sale and distribution of the shares issued
or sold hereunder, including, without limiting the generality of the foregoing,
all (a) expenses of printing and distributing any prospectus and of preparing,
printing and distributing or disseminating any other literature, advertising
and selling aids in connection with the offering of the shares for sale (except
that such expenses need not include expenses incurred by the Fund in connection
with the preparation, typesetting, printing and distribution of any
registration statement or prospectus, report or other communication to
shareholders in their capacity as such), (b) expenses of advertising in
connection with such offering and (c) expenses (other than the Fund's auditing
expenses) of qualifying or continuing the qualification of the shares for sale
and, in connection therewith, of qualifying or continuing the qualification of
the Fund as a dealer or broker under the laws of such states as may be
designated by KDI under the conditions herein specified. No transfer taxes, if
any, which may be payable in connection with the issue or delivery of shares
sold as herein contemplated or of the certificates for such shares shall be
borne by the Fund, and KDI will indemnify and hold harmless the Fund against
liability for all such transfer taxes.
8. For the services and facilities described herein in connection with Class
B shares and Class C shares of each series of the Fund, the Fund will pay to
KDI at the end of each calendar month a distribution services fee computed at
the annual rate of .75% of average daily net assets attributable to the Class B
shares and Class C shares of each such series. For the month and year in which
this Agreement becomes effective or terminates, there shall be an appropriate
proration on the basis of the number of days that the Agreement is in effect
during the month and year, respectively. The foregoing fee shall be in
addition to and shall not be reduced or offset by the amount of any contingent
deferred sales charge received by KDI under Section 2 hereof.
4
<PAGE> 5
The net asset value shall be calculated in accordance with the provisions
of the Fund's current prospectus. On each day when net asset value is not
calculated, the net asset value of a share of any class of any series of the
Fund shall be deemed to be the net asset value of such a share as of the close
of business on the last previous day on which such calculation was made. The
distribution services fee for any class of a series of the Fund shall be based
upon average daily net assets of the series attributable to the class and such
fee shall be charged only to such class.
9. KDI shall prepare reports for the Board of Trustees of the Fund on a
quarterly basis in connection with the Fund's distribution plan for Class B
shares and Class C shares showing amounts paid to the various Firms and such
other information as from time to time shall be reasonably requested by the
Board of Trustees.
10. To the extent applicable, this Agreement constitutes the plan for the
Class B shares and Class C shares of each series of the Fund pursuant to Rule
12b-1 under the Investment Company Act of 1940; and this Agreement and plan
shall be approved and renewed in accordance with Rule 12b-1 for such Class B
shares and Class C shares separately.
This Agreement shall become effective on the date hereof and shall
continue until March 1, 1996; and shall continue from year to year thereafter
only so long as such continuance is approved in the manner required by the
Investment Company Act of 1940.
This Agreement shall automatically terminate in the event of its
assignment and may be terminated at any time without the payment of any penalty
by the Fund or by KDI on sixty (60) days written notice to the other party.
The Fund may effect termination with respect to any class of any series of the
Fund by a vote of (i) a majority of the Board of Trustees, (ii) a majority of
the trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in this Agreement or in any agreement related to
this Agreement, or (iii) a majority of the outstanding voting securities of the
class. Without prejudice to any other remedies of the Fund, the Fund may
terminate this Agreement at any time immediately upon KDI's failure to fulfill
any of its obligations hereunder.
This Agreement may not be amended to increase the amount to be paid to KDI
by the Fund for services hereunder with respect to a class of any series of the
Fund without the vote of a majority of the outstanding voting securities of
such class. All material amendments to this Agreement must in any event be
approved by a vote of the Board of Trustees of the Fund including the trustees
who are not interested persons of the Fund and who have no direct or indirect
financial interest in this Agreement or in any
5
<PAGE> 6
agreement related to this Agreement, cast in person at a meeting called for
such purpose.
The terms "assignment", "interested" and "vote of a majority of the
outstanding voting securities" shall have the meanings set forth in the
Investment Company Act of 1940 and the rules and regulations thereunder.
Termination of this Agreement shall not affect the right of KDI to receive
payments on any unpaid balance of the compensation described in Section 8
earned prior to such termination.
11. KDI will not use or distribute, or authorize the use, distribution or
dissemination by Firms or others in connection with the sale of Fund shares any
statements other than those contained in the Fund's current prospectus, except
such supplemental literature or advertising as shall be lawful under federal
and state securities laws and regulations. KDI will furnish the Fund with
copies of all such material.
12. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder shall not be thereby
affected.
13. Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as
such other party may designate for the receipt of such notice.
14. All parties hereto are expressly put on notice of the Fund's Agreement and
Declaration of Trust, and all amendments thereto, all of which are on file with
the Secretary of The Commonwealth of Massachusetts, and the limitation of
shareholder and trustee liability contained therein. This Agreement has been
executed by and on behalf of the Fund by its representatives as such
representatives and not individually, and the obligations of the Fund hereunder
are not binding upon any of the Trustees, officers or shareholders of the Fund
individually but are binding upon only the assets and property of the Fund.
With respect to any claim by KDI for recovery of any liability of the Fund
arising hereunder allocated to a particular series or class, whether in
accordance with the express terms hereof or otherwise, KDI shall have recourse
solely against the assets of that series or class to satisfy such claim and
shall have no recourse against the assets of any other series or class for such
purpose.
15. This Agreement shall be construed in accordance with applicable federal
law and (except as to Section 14 hereof which shall be construed in accordance
with the laws of The Commonwealth of Massachusetts) the laws of the State of
Illinois.
6
<PAGE> 7
16. This Agreement is the entire contract between the parties relating to the
subject matter hereof and supersedes all prior agreements between the parties
relating to the subject matter hereof.
IN WITNESS WHEREOF, the Fund and KDI have caused this Agreement to be
executed as of the day and year first above written.
KEMPER ADJUSTABLE RATE U.S.
GOVERNMENT FUND
By: /s/ John E. Peters
----------------------------
Title: Vice President
-------------------------
ATTEST:
/s/ Philip J. Collora
- ------------------------------
Title: Secretary
------------------------
KEMPER DISTRIBUTORS, INC.
By: /s/ Patrick Dudasik
----------------------------
Title: Chief Financial Officer
-------------------------
and Treasurer
ATTEST:
/s/ David F. Dierenfeldt
- -------------------------------
Title: Secretary
-------------------------
7
<PAGE> 1
EXHIBIT 99.B6(c)
ADDENDUM TO
KEMPER DISTRIBUTORS, INC.
SELLING GROUP AGREEMENT
Your Selling Group Agreement, including any subsequent amendments thereto
("Agreement"), with Kemper Distributors, Inc. ("KDI") for the distribution of
shares of the Kemper Funds (the "Funds") is hereby amended as follows:
(1) Section 3 is revised by the inclusion of the following condition after the
last sentence of said Section. "Our liability to you with respect to the
payment of any service fee is limited to the proceeds received by us from
the Funds for your services, and you waive any right you may have to
payment of any service fee until we are in receipt of the proceeds from
the Funds that are attributable to your services."
(2) The third sentence of Section 17 is revised to read as follows: "Class C
Shares are offered at net asset value without an initial sales charge but
are subject to a contingent deferred sales charge and a Rule 12b-1 fee,
and have no conversion feature.
KEMPER DISTRIBUTORS, INC.
Date: October 18, 1996
<PAGE> 1
EXHIBIT 99.B9(b)
SUPPLEMENT TO AGENCY AGREEMENT
Supplement to Agency Agreement ("Supplement") made as of April 1, 1995 and
between the registered investment company executing this document (the "Fund")
and Investors Fiduciary Trust Company ("Agent").
WHEREAS, the Fund and Agent are parties to an Agency Agreement ("Agency
Agreement"), as supplemented from time to time;
WHEREAS, Section 5.A. of the Agency Agreement provides that the fees
payable by the Fund to Agent thereunder shall be as set forth in a separate
schedule to be agreed to by the Fund and Agent; and
WHEREAS, the parties desire to reflect in this Supplement the revised fee
schedule for the Agency Agreement as in effect as of the date hereof;
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein provided, the parties agree as follows:
1. The revised fee schedule for services provided by Agent to the Fund
under the Agency Agreement as in effect as of the date hereof is set forth in
Exhibit A attached hereto.
2. This Supplement shall become a part of the Agency Agreement and
subject to its terms and shall supersede all previous fee schedules under such
agreement as of the date hereof.
IN WITNESS WHEREOF, the Fund and Agent have duly executed this Supplement
as of the day and year first set forth above.
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
By: /s/ John E. Peters
---------------------------------------
Title: Vice President
------------------------------------
INVESTORS FIDUCIARY TRUST COMPANY
By: /s/ Stephen R. Hilliard
---------------------------------------
Title: Executive Vice President
------------------------------------
<PAGE> 2
EXHIBIT A
FEE SCHEDULE (MULTIPLE CLASSES OF SHARES)
<TABLE>
<CAPTION>
TRANSFER AGENCY FUNCTION FEE PAYABLE BY FUND
CLASS A, C AND I CLASS B
<S> <C> <C>
1. Annual open shareholder
account fee (per year per
account).
a. Non-daily dividend series. $6.00 $6.00
b. Daily dividend series. $8.00 $8.00
2. Annual closed shareholder account
fee (per year per account). $6.00 $6.00
3. Contingent deferred sales charge Not
account fee (per year per open Applicable $2.25
account).
4. Establishment of new shareholder
account (per new account). $4.00 $4.00
5. Payment of dividend (per dividend
per account). $ .40 $ .40
6. Automated transaction (per
transaction).** $ .50 $ .50
7. Non-monetary transactions fee (per
year per open account). $2.00 $2.00
8. All other shareholder inquiry,
correspondence and research trans-
actions (per transaction). $1.25 $1.25
</TABLE>
The out-of-pocket expenses of IFTC will be reimbursed by Fund in accordance
with the provisions of Section 5 of the Agency Agreement. All fees will be
subject to offset by earnings allowances under the Custody Agreement between
Fund and IFTC. The attached Transfer Agency Fee Schedule Supplement is a part
of this Exhibit A.
- -----------------
* The new shareholder account fee is not applicable to
Class A Share accounts established in connection with a conversion
from Class B Shares.
** Automated transaction includes, without limitation, money market series
purchases and redemptions, ACH purchases, systematic exchanges and
conversions from Class B Shares to Class A Shares.
<PAGE> 3
TRANSFER AGENCY FEE SCHEDULE SUPPLEMENT
For purposes of the following limitation, "Class Expenses" are expenses
identified as attributable to a particular class of the Fund and charged
directly to the class. Class Expenses are limited to the following:
registration fees, directors' or trustees' fees, expenses of periodic meetings
of directors, trustees or shareholders, transfer agency fees, legal and
accounting fees (other than fees for income tax return preparation or income
tax advice), and costs of shareholder communications required by law (e.g., the
preparation and mailing of prospectuses and proxy statements). Class Expenses
specifically do not include Rule 12b-1 fees and administrative service fees.
Transfer agency fees and expenses will be limited for any class of the Fund to
the extent necessary to ensure that the Class Expenses allocated to each share
of a class of the Fund for a fiscal year will differ from the Class Expenses
allocated to each share of any other class of the Fund by less than 50 basis
points (.50%) of the average daily net asset value per share of the class of
shares with the smallest average net asset value (adjusted as necessary for
classes in effect for a partial year). For a Fund with multiple series, the
foregoing shall be applied to each series separately.
In addition, transfer agency fees and expenses (as a percentage of average
daily net assets) for any fiscal year will be limited as follows:
<TABLE>
<S> <C> <C>
SERIES NAME CLASS B SHARES CLASS C SHARES
Initial Portfolio .26% .23%
</TABLE>
<PAGE> 1
December 19, 1996
Kemper Adjustable Rate U.S. Government Fund
222 South Riverside Plaza
Chicago, Illinois 60606
Ladies and Gentlemen:
Reference is made to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A under the Securities Act of 1933 being
filed by Kemper Adjustable Rate U.S. Government Fund (the "Fund") in connection
with its proposed registration of units of beneficial interest, no par value
("Shares"), in one authorized series (the "Portfolio").
We are counsel to the Fund and in such capacity are familiar with the
Fund's organization and have counseled the Fund regarding various legal
matters. We have examined such Fund records and other documents and
certificates as we have considered necessary or appropriate for the purpose of
this opinion. As to various questions of fact material to our opinion, we have
relied upon statements and certificates of officers and representatives of the
Fund. In our examination of such materials, we have assumed the genuineness of
all signatures and the conformity to original documents of all copies submitted
to us.
Based upon the foregoing and upon the opinion dated June 3, 1987 by
Ropes & Gray of Boston, Massachusetts, we advise you and opine that (a) the
Fund is a duly authorized and validly existing voluntary association with
transferrable shares under the laws of the Commonwealth of Massachusetts and is
authorized to issue an unlimited number of Shares in the Portfolio; and (b)
upon the issuance of the Shares in accordance with the Fund's Agreement and
Declaration of Trust and the receipt by the Fund of a purchase price not less
than the net asset value per Share, the Shares will be legally issued and
outstanding, fully paid and non-assessable (although shareholders of the Fund
may be subject to liability under certain circumstances as described in the
opinion from Ropes & Gray).
<PAGE> 2
This opinion is solely for the benefit of the Fund, the Fund's Board
of Trustees and the Fund's officers and may not be relied upon by any other
person without our prior written consent. We hereby consent to the use of this
opinion in connection with said Post-Effective Amendment.
Very truly yours,
/s/ Vedder, Price, Kaufman & Kammholz
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
COK/dd
<PAGE> 1
EXHIBIT 99.B11
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Kemper Adjustable Rate U.S. Government Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Kemper Adjustable Rate U.S. Government Fund as
of August 31, 1996, the related statements of operations for the year then
ended and of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the fiscal periods since
1988. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of August 31, 1996, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Kemper Adjustable Rate U.S. Government Fund at August 31, 1996, and the results
of its operations, the changes in its net assets, and the financial highlights
for the periods referred to above, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1996
<PAGE> 2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors and Reports to Shareholders" and to the
use of our report dated October 16, 1996 in the Registration Statement (Form
N-1A) of Kemper Adjustable Rate U.S. Government Fund, and its incorporation by
reference in the related prospectus and statement of additional information of
Kemper Fixed Income Funds, filed with the Securities and Exchange Commission in
this Post-Effective Amendment No. 14 to the Registration Statement under the
Securities Act of 1933 (File No. 33-14832) and in this Amendment No. 15 to the
Registration Statement under the Investment Company Act of 1940 (File No.
811-5195).
ERNST & YOUNG LLP
Chicago, Illinois
December 18, 1996
<PAGE> 1
EXHIBIT 99.B18
KEMPER MUTUAL FUNDS
MULTI-DISTRIBUTION SYSTEM PLAN
WHEREAS, each investment company adopting this Multi- Distribution System
Plan (each a "Fund" and collectively the "Funds") is an open-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act");
WHEREAS, Zurich Kemper Investments, Inc. and/or Dreman Value Advisors,
Inc. serves as investment adviser and Kemper Distributors, Inc. serves as
principal underwriter for each Fund;
WHEREAS, each Fund has a non-Rule 12b-1 administrative services agreement
providing for a service fee at an annual rate of up to .25% of average daily
net assets;
WHEREAS, each Fund has established a Multi-Distribution System enabling
each Fund, as more fully reflected in its prospectus, to offer investors the
option of purchasing shares (a) with a front-end sales load (which may vary
among Funds) and a service fee ("Class A shares"); (b) without a front-end
sales load, but subject to a Contingent Deferred Sales Charge ("CDSC") (which
may vary among Funds), a Rule 12b-1 plan providing for a distribution fee, and
a service fee ("Class B shares"); (c) without a front-end sales load, but
subject to a CDSC (applicable to shares purchased on or after April 1, 1996 and
which may vary among Funds), a Rule 12b-1 Plan providing for a distribution
fee, and a service fee ("Class C shares"); and (d) for certain Funds, without a
front-end load, a CDSC, a distribution fee or a service fee ("Class I shares");
and
WHEREAS, Rule 18f-3 under the 1940 Act permits open-end management
investment companies to issue multiple classes of voting stock representing
interests in the same portfolio notwithstanding Sections 18(f)(1) and 18(i)
under the 1940 Act if, among other things, such investment companies adopt a
written plan setting forth the separate arrangement and expense allocation of
each class and any related conversion features or exchange privileges;
NOW, THEREFORE, each Fund, wishing to be governed by Rule 18f-3 under the
1940 Act, hereby adopts this Multi-Distribution System Plan as follows:
1. Each class of shares will represent interests in the same portfolio
of investments of the Fund (or series), and be identical in all respects to
each other class, except as set forth below. The only differences among the
various classes of shares of the Fund (or series) will relate solely to:
<PAGE> 2
(a) different distribution fee payments associated with any Rule 12b-1 Plan for
a particular class of shares and any other costs relating to implementing or
amending such Rule 12b-1 Plan (including obtaining shareholder approval of such
Rule 12b-1 Plan or any amendment thereto), which will be borne solely by
shareholders of such classes; (b) different service fees; (c) different
shareholder servicing fees; (d) different class expenses, which will be limited
to the following expenses determined by the Fund board to be attributable to a
specific class of shares: (i) printing and postage expenses related to
preparing and distributing materials such as shareholder reports, prospectuses,
and proxy statements to current shareholders of a specific class; (ii)
Securities and Exchange Commission registration fees incurred by a specific
class; (iii) litigation or other legal expenses relating to a specific class;
(iv) board member fees or expenses incurred as a result of issues relating to a
specific class; and (v) accounting expenses relating to a specific class; (e)
the voting rights related to any Rule 12b-1 Plan affecting a specific class of
shares; (f) conversion features; (g) exchange privileges; and (h) class names
or designations. Any additional incremental expenses not specifically
identified above that are subsequently identified and determined to be properly
applied to one class of shares of the Fund (or a series) shall be so applied
upon approval by a majority of the members of the Fund's board, including a
majority of the board members who are not interested persons of the Fund.
2. Under the Multi-Distribution System, certain expenses may be
attributable to the Fund, but not to a particular series or class thereof. All
such expenses will be borne by each class on the basis of the relative
aggregate net assets of the classes, except that, if the Fund has series,
expenses will first be allocated among series, based upon their relative
aggregate net assets. Expenses that are attributable to a particular series,
but not to a particular class thereof, will be borne by each class of that
series on the basis of the relative aggregate net assets of the classes.
Notwithstanding the foregoing, the underwriter, the investment manager or other
provider of services to the Fund may waive or reimburse the expenses of a
specific class or classes to the extent permitted under Rule 18f-3 under the
1940 Act.
A class of shares may be permitted to bear expenses that are directly
attributable to that class including: (a) any distribution fees associated with
any Rule 12b-1 Plan for a particular class and any other costs relating to
implementing or amending such Rule 12b-1 Plan (including obtaining shareholder
approval of such Rule 12b-1 Plan or any amendment thereto); (b) any service
fees attributable to such class; (c) any shareholder servicing fees
attributable to such class; and (d) any class expenses determined by the Fund
board to be attributable to such class.
2
<PAGE> 3
3. After a shareholder's Class B shares have been outstanding for six
years, they will automatically convert to Class A shares of the Fund (or
series) at the relative net asset values of the two classes and will thereafter
not be subject to a Rule 12b-1 Plan; provided, however, that any Class B Shares
issued in exchange for shares originally classified as Initial Shares of Kemper
Portfolios, formerly known as Kemper Investment Portfolios (KP), whether in
connection with a reorganization with a series of KP or otherwise, shall
convert to Class A shares seven years after issuance of such Initial Shares if
such Initial Shares were issued prior to February 1, 1991. Class B shares
issued upon reinvestment of income and capital gain dividends and other
distributions will be converted to Class A shares on a pro rata basis with the
Class B shares.
4. Any conversion of shares of one class to shares of another class is
subject to the continuing availability of a ruling of the Internal Revenue
Service or an opinion of counsel to the effect that the conversion of shares
does not constitute a taxable event under federal income tax law. Any such
conversion may be suspended if such a ruling or opinion is no longer available.
5. To the extent exchanges are permitted, shares of any class of the
Fund will be exchangeable with shares of the same class of another Fund, or
with money market fund shares as described in the applicable prospectus.
Exchanges will comply with all applicable provisions of Rule 11a-3 under the
1940 Act. For purposes of calculating the time period remaining on the
conversion of Class B shares to Class A shares, Class B shares received on
exchange retain their original purchase date.
6. Dividends paid by the Fund (or series) as to each class of its
shares, to the extent any dividends are paid, will be calculated in the same
manner, at the same time, on the same day, and will be in the same amount;
except that any distribution fees, service fees, shareholder servicing fees and
class expenses allocated to a class will be borne exclusively by that class.
7. Any distribution arrangement of the Fund, including distribution
fees, front-end sales loads and CDSCs, will comply with Article III, Section
26, of the Rules of Fair Practice of the National Association of Securities
Dealers, Inc.
8. All material amendments to this Plan must be approved by a majority
of the members of the Fund's board, including a majority of the board members
who are not interested persons of the Fund.
3
<PAGE> 4
Any open-end investment company may establish a Multi-Distribution System
and adopt this Multi-Distribution System Plan by approval of a majority of the
members of any such company's governing board, including a majority of the
board members who are not interested persons of such company.
For use on or after: April 1, 1996
4
<PAGE> 1
EXHIBIT 99.B24
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen B.
Timbers, Charles R. Manzoni, Jr., and Philip J. Collora and each of them, any
of whom may act without the joinder of the others, as such person's
attorney-in-fact to sign and file on such person's behalf individually and in
the capacity stated below such registration statements, amendments,
post-effective amendments, exhibits, applications and other documents with the
Securities and Exchange Commission or any other regulatory authority as may be
desirable or necessary in connection with the public offering of shares of
Kemper Adjustable Rate U.S. Government Fund.
Signature Title Date
/s/ Stephen B. Timbers Trustee November 20, 1996
- ---------------------------
<PAGE> 2
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen B.
Timbers, Charles R. Manzoni, Jr., and Philip J. Collora and each of them, any
of whom may act without the joinder of the others, as his attorney-in-fact to
sign and file on his behalf individually and in the capacity stated below such
registration statements, amendments, post-effective amendments, exhibits,
applications and other documents with the Securities and Exchange Commission
or any other regulatory authority as may be desirable or necessary in
connection with the public offering of shares of Kemper Adjustable Rate U.S.
Government Fund.
Signature Title Date
/s/ David W. Belin Trustee November 20, 1996
- ---------------------------
<PAGE> 3
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen B.
Timbers, Charles R. Manzoni, Jr., and Philip J. Collora and each of them, any
of whom may act without the joinder of the others, as his attorney-in-fact to
sign and file on his behalf individually and in the capacity stated below such
registration statements, amendments, post-effective amendments, exhibits,
applications and other documents with the Securities and Exchange Commission
or any other regulatory authority as may be desirable or necessary in
connection with the public offering of shares of Kemper Adjustable Rate U.S.
Government Fund.
Signature Title Date
/s/ Lewis A. Burnham Trustee November 20, 1996
- ---------------------------
<PAGE> 4
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen B.
Timbers, Charles R. Manzoni, Jr., and Philip J. Collora and each of them, any
of whom may act without the joinder of the others, as such person's
attorney-in-fact to sign and file on such person's behalf individually and in
the capacity stated below such registration statements, amendments,
post-effective amendments, exhibits, applications and other documents with the
Securities and Exchange Commission or any other regulatory authority as may be
desirable or necessary in connection with the public offering of shares of
Kemper Adjustable Rate U.S. Government Fund.
Signature Title Date
/s/ Donald L. Dunaway Trustee November 20, 1996
- ---------------------------
<PAGE> 5
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen B.
Timbers, Charles R. Manzoni, Jr., and Philip J. Collora and each of them, any
of whom may act without the joinder of the others, as his attorney-in-fact to
sign and file on his behalf individually and in the capacity stated below such
registration statements, amendments, post-effective amendments, exhibits,
applications and other documents with the Securities and Exchange Commission
or any other regulatory authority as may be desirable or necessary in
connection with the public offering of shares of Kemper Adjustable Rate U.S.
Government Fund.
Signature Title Date
/s/ Robert B. Hoffman Trustee November 20, 1996
- ---------------------------
<PAGE> 6
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen B.
Timbers, Charles R. Manzoni, Jr., and Philip J. Collora and each of them, any
of whom may act without the joinder of the others, as his attorney-in-fact to
sign and file on his behalf individually and in the capacity stated below such
registration statements, amendments, post-effective amendments, exhibits,
applications and other documents with the Securities and Exchange Commission
or any other regulatory authority as may be desirable or necessary in
connection with the public offering of shares of Kemper Adjustable Rate U.S.
Government Fund.
Signature Title Date
/s/ Donald R. Jones Trustee November 20, 1996
- ---------------------------
<PAGE> 7
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen B.
Timbers, Charles R. Manzoni, Jr., and Philip J. Collora and each of them, any
of whom may act without the joinder of the others, as such person's
attorney-in-fact to sign and file on such person's behalf individually and in
the capacity stated below such registration statements, amendments,
post-effective amendments, exhibits, applications and other documents with the
Securities and Exchange Commission or any other regulatory authority as may be
desirable or necessary in connection with the public offering of shares of
Kemper Adjustable Rate U.S. Government Fund.
Signature Title Date
/s/ Dominique P. Morax Trustee November 20, 1996
- ---------------------------
<PAGE> 8
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen B.
Timbers, Charles R. Manzoni, Jr., and Philip J. Collora and each of them, any
of whom may act without the joinder of the others, as such person's
attorney-in-fact to sign and file on such person's behalf individually and in
the capacity stated below such registration statements, amendments,
post-effective amendments, exhibits, applications and other documents with the
Securities and Exchange Commission or any other regulatory authority as may be
desirable or necessary in connection with the public offering of shares of
Kemper Adjustable Rate U.S. Government Fund.
Signature Title Date
/s/ Shirley D. Peterson Trustee November 20, 1996
- ---------------------------
<PAGE> 9
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Stephen B.
Timbers, Charles R. Manzoni, Jr., and Philip J. Collora and each of them, any
of whom may act without the joinder of the others, as such person's
attorney-in-fact to sign and file on such person's behalf individually and in
the capacity stated below such registration statements, amendments,
post-effective amendments, exhibits, applications and other documents with the
Securities and Exchange Commission or any other regulatory authority as may be
desirable or necessary in connection with the public offering of shares of
Kemper Adjustable Rate U.S. Government Fund.
Signature Title Date
/s/ William P. Sommers Trustee November 20, 1996
- ---------------------------
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER
INFORMATION IS COMBINED FOR ALL CLASSES. THIS SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FROMT HE 1996 ANNUAL REPORT TO SHAREHOLDERS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000814955
<NAME> KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
<SERIES>
<NUMBER> 001
<NAME> CLASS A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 99,994
<INVESTMENTS-AT-VALUE> 99,900
<RECEIVABLES> 9,028
<ASSETS-OTHER> 1,028
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 109,956
<PAYABLE-FOR-SECURITIES> 15,168
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 311
<TOTAL-LIABILITIES> 15,479
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 105,477
<SHARES-COMMON-STOCK> 10,578
<SHARES-COMMON-PRIOR> 12,348
<ACCUMULATED-NII-CURRENT> 718
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11,624)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (94)
<NET-ASSETS> 94,477
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,561
<OTHER-INCOME> 0
<EXPENSES-NET> (1,364)
<NET-INVESTMENT-INCOME> 6,197
<REALIZED-GAINS-CURRENT> (20)
<APPREC-INCREASE-CURRENT> (928)
<NET-CHANGE-FROM-OPS> 5,249
<EQUALIZATION> (272)
<DISTRIBUTIONS-OF-INCOME> (5,802)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,210
<NUMBER-OF-SHARES-REDEEMED> (8,043)
<SHARES-REINVESTED> 500
<NET-CHANGE-IN-ASSETS> (35,280)
<ACCUMULATED-NII-PRIOR> 904
<ACCUMULATED-GAINS-PRIOR> (11,598)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 627
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,364
<AVERAGE-NET-ASSETS> 114,502
<PER-SHARE-NAV-BEGIN> 8.30
<PER-SHARE-NII> .45
<PER-SHARE-GAIN-APPREC> (.09)
<PER-SHARE-DIVIDEND> (.44)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.22
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER
INFORMATION IS COMBINED FOR ALL CLASSES. THIS SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FORM THE 1996 ANNUAL REPORT TO SHAREHOLDERS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000814955
<NAME> KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
<SERIES>
<NUMBER> 002
<NAME> CLASS B
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 99,994
<INVESTMENTS-AT-VALUE> 99,900
<RECEIVABLES> 9,028
<ASSETS-OTHER> 1,028
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 109,956
<PAYABLE-FOR-SECURITIES> 15,168
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 311
<TOTAL-LIABILITIES> 15,479
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 105,477
<SHARES-COMMON-STOCK> 765
<SHARES-COMMON-PRIOR> 683
<ACCUMULATED-NII-CURRENT> 718
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11,624)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (94)
<NET-ASSETS> 94,477
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,561
<OTHER-INCOME> 0
<EXPENSES-NET> (1,364)
<NET-INVESTMENT-INCOME> 6,197
<REALIZED-GAINS-CURRENT> (20)
<APPREC-INCREASE-CURRENT> (928)
<NET-CHANGE-FROM-OPS> 5,249
<EQUALIZATION> (272)
<DISTRIBUTIONS-OF-INCOME> (258)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 338
<NUMBER-OF-SHARES-REDEEMED> (182)
<SHARES-REINVESTED> 27
<NET-CHANGE-IN-ASSETS> (35,280)
<ACCUMULATED-NII-PRIOR> 904
<ACCUMULATED-GAINS-PRIOR> (11,598)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 627
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,364
<AVERAGE-NET-ASSETS> 114,502
<PER-SHARE-NAV-BEGIN> 8.31
<PER-SHARE-NII> .40
<PER-SHARE-GAIN-APPREC> (.09)
<PER-SHARE-DIVIDEND> (.39)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.23
<EXPENSE-RATIO> 1.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER
INFORMATION IS COMBINED FOR ALL CLASSES. THIS SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FROM THE 1996 ANNUAL REPORT TO SHAREHOLDERS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000814955
<NAME> KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
<SERIES>
<NUMBER> 003
<NAME> CLASS C
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 99,994
<INVESTMENTS-AT-VALUE> 99,900
<RECEIVABLES> 9,028
<ASSETS-OTHER> 1,028
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 109,956
<PAYABLE-FOR-SECURITIES> 15,168
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 311
<TOTAL-LIABILITIES> 15,479
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 105,477
<SHARES-COMMON-STOCK> 144
<SHARES-COMMON-PRIOR> 196
<ACCUMULATED-NII-CURRENT> 718
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11,624)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (94)
<NET-ASSETS> 94,477
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,561
<OTHER-INCOME> 0
<EXPENSES-NET> (1,364)
<NET-INVESTMENT-INCOME> 6,197
<REALIZED-GAINS-CURRENT> (20)
<APPREC-INCREASE-CURRENT> (928)
<NET-CHANGE-FROM-OPS> 5,249
<EQUALIZATION> (272)
<DISTRIBUTIONS-OF-INCOME> (57)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 126
<NUMBER-OF-SHARES-REDEEMED> (122)
<SHARES-REINVESTED> 6
<NET-CHANGE-IN-ASSETS> (35,280)
<ACCUMULATED-NII-PRIOR> 904
<ACCUMULATED-GAINS-PRIOR> (11,598)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 627
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,364
<AVERAGE-NET-ASSETS> 114,502
<PER-SHARE-NAV-BEGIN> 8.32
<PER-SHARE-NII> .40
<PER-SHARE-GAIN-APPREC> (.09)
<PER-SHARE-DIVIDEND> (.39)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.24
<EXPENSE-RATIO> 1.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.485(b)
December 13, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Kemper Adjustable Rate U.S. Government Fund
To The Commission:
We are counsel to the above-referenced investment company (the "Fund")
and as such have participated in the preparation and review of Post-Effective
Amendment No. 14 to the Fund's registration statement being filed pursuant to
Rule 485(b) under the Securities Act of 1933. In accordance with paragraph
(b)(4) of Rule 485 and in reliance upon the oral approval of the staff of the
Commission, acting on behalf of the Commission, under Rule 485(b)(ix) for
certain of the disclosures to be contained in the amendment, we hereby
represent that such amendment does not contain disclosures which would render it
ineligible to become effective pursuant to paragraph (b) thereof.
Very truly yours,
/s/ Vedder, Price, Kaufman & Kammholz
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
